Over the past three days, the SPDR S&P 500 ETF Trust (SPY), the biggest stock fund in the world, has seen nearly $13 billion in outflows. This marks its largest loss in a single week since February 2018, when uncertainty about the trade war between the U.S. and China caused negative signs in the market.
The primary reason for investors fleeing from the market is the new coronavirus, Covid-19, which has shut down much of China’s economy as the government tries to contain the outbreak. Companies and governments alike downplayed the danger to economies at first, but as many factories and stores have remained closed in China, investors are facing the reality that these shutdowns will affect profits for U.S. companies.
The businesses that rely heavily on China for the production or consumption of their goods and services will see the most negative impact. Below are four companies that have issued warnings that their next earnings reports may not live up to expectations due to the virus.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carnival” data-reactid=”19″>Carnival
With approximately 50% of the total market share for the cruise industry, Carnival Corp. (NYSE:CCL) is the largest publicly traded cruise company in the world. Thus, it stands to reason that it will face a drop in profits as people become more reluctant to board its ships.
On Feb. 3, the Diamond Princess cruise ship docked at Yokohama, Japan. Due to a coronavirus outbreak on the ship, the passengers were trapped aboard for the next two weeks, bored and rarely allowed to see sunlight as they were quarantined on the so-called “ship of doom.”
The cruise industry faces a unique and serious problem from the epidemic: the fear of entrapment. While it’s nearly impossible to quarantine everyone in a city during a virus outbreak, quarantining a ship requires a simple refusal to allow its passengers to step on land. To many potential passengers, the prospect of being trapped in a “petri dish” is a definite trip-canceller, while others may fear quarantine even more than the disease itself.
Since the beginning of the outbreak, Carnival has been forced to suspend all cruise operations leaving from ports in China and a significant portion of cruises leaving from other parts of Asia. If there is an outbreak of the virus on one of its ships, it will also need to compensate guests for the negative experience.
“While not currently planned, if the company had to suspend all of its operations in Asia through the end of April, this would impact its fiscal 2020 financial performance by 55 cents to 65 cents per share, which includes guest compensation,” said a company representative in a statement.
On Feb. 27, shares of Carnival traded around $32.31 for a market cap of $23.51 billion. This marks a 36.21% drop since the end of January, when news of the virus began spreading like wildfire.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Tesla” data-reactid=”37″>Tesla
Orders for Tesla Inc.’s (NASDAQ:TSLA) vehicles in China were predicted to reach approximately 6,400 during the first quarter of fiscal 2020 following the Jan. 7 groundbreaking ceremony of the company’s new Gigafactory in Shanghai.
However, deliveries were delayed through early February as the Chinese government kept factories closed to contain the virus, which will keep Tesla’s Shanghai Gigafactory closed “until the outbreak subsides.”
“We are also in the early stages of understanding if and to what extent we may be temporarily impacted by the coronavirus,” Chief Financial Officer Zachary Kirkhorn said in the fourth-quarter earnings call. “This may slightly impact profitability for the quarter but is limited as the profit contribution from Model 3 Shanghai remains in the early stages.”
While Kirkhorn remains optimistic about a quick rebound for sales once the factory gets back up and running, the shutting down of an entire economy may impact the number of potential customers more than management expects.
New cars already come with a high price tag, and Teslas are the luxury vehicles of the electric vehicle market. Even before coronavirus outbreak, Fitch ratings estimated that the Chinese car market would see an 11% decline due to a variety of factors, including the reduction of government subsidies for electric vehicles and the economic impact of the trade war with the U.S.
On Feb. 27, shares of Tesla traded around $696.33 for a market cap of $131.18 billion. This marks a decline of 21.50% since the end of January.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Microsoft” data-reactid=”59″>Microsoft
In late January, when Microsoft Corp. (NASDAQ:MSFT) reported earnings for its second quarter of fiscal 2020, the company guided for third-quarter sales of $10.75 billion to $11.15 billion. The estimates “included a wider-than-usual range to reflect uncertainty related to the public health situation in China,” the company said in a statement.
Microsoft reassures investors that demand for its products has not waned in the slightest. However, as the government keeps factories shut, its supply chain in China “is returning to normal operations at a slower pace than anticipated.”
As of 2019, Microsoft’s largest and most complete subsidiary and research and development center outside the U.S. was in China. Despite the company’s global reach, enough of its products are produced in China that the epidemic-related hold placed on the Chinese economy will cut into profits. Moreover, approximately 6.25% of the profits earned by subsidiaries in China go directly to Microsoft. Economic slowdown from the virus thus has the potential to negatively impact demand for the company’s products.
The only concrete guidance Microsoft has issued is that its PC business will fall short. Upgrades to Windows 10 have been slipping as factory closures in China delay the building of business computers that come with the operating system. Microsoft stopped supporting Windows 7 in January, which has been a key driver of new hardware sales, but it’s difficult to sell computers that aren’t built yet.
On Feb. 27, Microsoft shares traded around $162.88 for a market cap of $1.26 trillion. This marks a 4.3% decline from the end of January.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Apple” data-reactid=”76″>Apple
Another tech giant with a significant number of factories in China is Apple Inc. (NASDAQ:AAPL). Apple has 26 suppliers and four major corporate customers in China, making it more vulnerable to the virus than Microsoft.
Factories that manufacture iPhones and other Apple devices have been shut down for the time being, and the company has considered the possibility that the delayed production could cut into inventory availability throughout the year.
CEO Tim Cook named the outbreak as the reason for “wider-than-usual revenue range” of $63 billion to $67 billion in the company’s guidance for its second quarter of fiscal 2020. On a call with market analysts, Cook said:
“We’re working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations as of last week. The situation is emerging, and we’re still gathering lots of data points and monitoring it very closely.”
In mid-February, Apple said that it no longer expects to meet its previously stated revenue guidance for the next quarter. The company’s main revenue driver is the iPhone, and every week, it plans and executes the manufacturing, assembly, distribution and sale of millions of iPhones. With the outbreak continuing to slow or halt the production of key iPhone components, Apple is already feeling the pressures of a supply shortage.
Store closures in China may also cut into demand for the iPhone, which is a luxury smartphone. While in the U.S., the price difference between iPhones and other top smartphones is mostly insignificant, the price gap widens in the Chinese market, where an iPhone costs consumers about twice as much as a Huawei phone. Thus, economic slowdown may further reduce demand for the more expensive mobile device.
On Feb. 27, shares of Apple traded around $279.93 for a market cap of $1.23 trillion. Since the end of January, shares have dropped 11.88%.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article first appeared on GuruFocus.
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