The U.S. stock market is in a tizzy as the coronavirus could become a pandemic.
That means the economic shock may last longer than most of us expected. And that in turn hurts in the shorter term but could create favorable revenue and earnings comparisons for 2021.
This would be especially true for big tech. Institutional funds have been buying up big tech stocks, which is one piece of evidence that the sector has significant upside.
The coronavirus is threatening global supply chains, many of which originate in China and have been mostly shut down. The spread of the virus to Italy and other Asian countries is worsening the problem. This may bleed into the U.S. if and when American importers can’t access goods from abroad to meet demand at home.
Consumers are also staying home, another negative for corporate revenue.
Now, let’s zoom in on two of the biggest names in big tech, Apple AAPL and Amazon AMZN.
Even if things get worse before they get better, now could be a good time to buy Apple. Cupertino said on Feb. 17 that it did not expect to meet its current-quarter revenue guidance of between $63 billion and $67 billion, as its China stores are mostly closed and its manufacturing plants are reopening slowly.
Some analysts reduced their 2020 revenue and earnings estimates for Apple but largely maintained their 2021 projections. Even more optimistically, Goldman Sachs analyst Rod Hall reduced his quarterly revenue estimate by 5.5% to $61.5 billion but increased his fourth-quarter estimate by 3.7% and affirmed his full-year view.
Many analysts, including Hall, expect consumers who stay home early in the year to come out to buy hardware later in the year.
Hal maintained his $300 price target. Many analysts maintained their price targets because they are applying multiples on Apple’s 2021 EPS, which shouldn’t be hurt by the virus effect, assuming it’s eradicated this year.
For 2020, things indeed could get worse before they get better. Cowan analyst Krish Sankar cut his first-quarter iPhone production estimate to 37 million from 46 million and his shipments forecast to 33 million from 46 million. And “even with this 9 million reduction to our calendar year first-quarter build forecast, our field work suggests there is still some risk of additional downside,” Sankar wrote in a note.
The stock has fallen more than 11% from its record of $327, which it hit in mid-February.
On the other hand, if 2021 numbers remain intact, Apple is looking at 15% EPS growth in 2021 over 2020, according to FactSet. If that’s not reflected in the stock, which is trading at 19 times next 12 months’ earnings, the stock could rise considerably through the year.
Big investors were — and still may be — confident in that thesis. “Apple’s institutional ownership increased 5.2% quarter-over-quarter in the fourth quarter of 2019, according to Morgan Stanley analyst Katy Huberty.
At an average of 3.5% of institutional equity funds, “Apple’s institutional ownership at year end was at its highest level since Q3 2012,” Huberty said.
She added, “Apple’s stock has pulled back due to the Coronavirus outbreak, limiting the pace of iPhone 11 production; however, we’re buyers on weakness as we view the near-term impact as more of a timing issue than outright supply and demand destruction.”
As for Amazon, the shares are down 8.9% from their all-time high of $2,170, hit in mid-February.
Amazon hasn’t yet said it will be hurt by the virus in 2020, although conceivably the company could halt shipments of goods in areas that are affected.
Meanwhile, the stock is down and EPS estimates for 2021 are calling for 40% growth over 2020. The stock still trades at a rich multiple on 2020 earnings, above 80, higher than it’s been in recent years.
But the company’s recently proven ability to execute on one-day and same-day delivery is driving the stock. For years to come, Amazon may be once again expanding the market for e-commerce.
And [“large] jumps in average portfolio allocation to large-cap tech stocks increased in fourth-quarter 2019, driven mainly by AMZN and AAPL,” Huberty said.
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