COVID-19, the novel coronavirus, had already emerged as a serious concern in the days before Apple's last earnings call three weeks ago. CNBC reporter Josh Lipton and I always talk before the quarter to flesh out our thoughts about the most important metrics to watch and forces to consider.
I told him I was concerned about the virus' effect on Apple for two reasons: The virus epicenter in China is a nexus in Apple's supply chain, and delays in the movement of components could hamper Apple's ability to assemble iPhones. Also, if Apple had to close stores, it could stifle demand for iPhones, and it's not clear to me what happens to demand for a luxury good like that once it's stifled. If you're in an environment where you're on furlough from work, your paycheck is uncertain, and you have new virus-related costs, are you still going to buy an iPhone? Maybe not until the situation has stabilized for a few months.
The key question was how Apple would forecast its results based on a volatile situation with an unknowable outcome. Apple could have chosen not to give guidance at all. It could have guided as though the virus would have a muted effect. It could have taken an approach that factored in the possibility of a multibillion-dollar impact.
It chose the third option — estimating the impact. Apple reported, and Wall Street cheered its forecast. Guidance for the current quarter was wider than usual because of the uncertainty attached to virus fears, but still strong. The stock matched the excitement.
Until now. Apple stock is trading this week for the first time since the company announced that its sales this quarter would fall short of forecasts, because the impact of COVID-19 is more serious than the company's worst-case scenario three weeks ago. It turns out the two factors I worried about three weeks ago are having a greater impact than seemed likely to Apple's management on Jan. 28. Apple's stock was down more than 2.4% Tuesday morning. (Here's the latest on COVID-19 impact.)
This latest Apple announcement comes as observers worldwide remain uncertain about how to even count the virus toll. Is China double-counting some deaths, or under counting them? China's new method for counting infections last week caused the overall number to skyrocket, but the country might still be under counting people who tested positive for the virus but aren't showing symptoms.
The developments of the last month also give us a rare look at the decision-making at one of the most valuable technology companies in the world with one of the most complicated supply chains. Apple plans for the manufacture, assembly, distribution and sale of millions of iPhones a week. It has to plan for all kinds of eventualities and predict the likelihood of those things happening. It planned through a trade war, a short holiday season and the murkiness of an iPhone 11 launch, all at the same time.
And yet Apple, the global logistics champion, was stumped by COVID-19. That should tell us something about how little we still know about how long this threat will last, and how serious its impact will be on global workers, companies and trade.