More Pain for ETFs with Heaviest Apple Exposure

As if a gloomy guidance on future iPhone sales and analyst downgrades weren’t enough, there was more pain on Monday for shares of Apple and exchange-traded funds (ETFs) with the largest exposure to the tech giant. Lumentum Holdings, the company responsible for the iPhone’s face-recognition technology, reduced its outlook for fiscal second quarter 2019, causing both its shares and Apple shares to slide.
Apple declined over 4% while Lumentum shares sank a record 30% as of 12:15 p.m. ET. Lumentum’s reduced outlook came as one of its largest customers was asked to “meaningfully reduce shipments” for previous orders placed.
“We recently received a request from one of our largest Industrial and Consumer customers for laser diodes for 3D sensing to materially reduce shipments to them during our fiscal second quarter for previously placed orders that were originally scheduled for delivery during the quarter,” Lumentum President and CEO Alan Lowe said.
While Lumentum didn’t cite Apple specifically, analysts are quick to point at the iPhone maker.
“We think investors should consider Lumentum’s updated guide as reflecting as much as a 30% cut in Apple orders,” said Wells Fargo analyst Aaron Rakers.
Exchange-traded funds (ETFs) with the largest capital allocations to Apple were down–Technology Select Sector SPDR ETF (NYSEArca: XLK), Vanguard Information Technology ETF (NYSEArca: VGT) and iShares US Technology ETF (NYSEArca: IYW). XLK, VGT and IYW all fell almost 3%.

Analyst Downgrades Hurt Shares

Despite beating earnings and revenue expectations for its fourth fiscal quarter, murky forecasts for iPhone sales caused investment firm Rosenblatt Securities to downgrade the stock recently. Rosenblatt Securities was the second firm to issue a downgrade, changed their rating from “buy” to “neutral,” citing that higher iPhone prices won’t offset a weaker sales volume.

Bank of America Merrill Lynch issued a similar downgrade following the earnings report for “slower growth in app store revenue, especially in China; guidance for the December quarter that implies weaker-than-expected iPhone unit sale; investors will likely interpret ending iPhone unit sales figures as negative; and weaker growth in emerging markets because of the stronger dollar.”

“Calendar fourth-quarter guidance reflects our cautious view on weaker than expected sell-through and production reductions for iPhone XS/XR,” said analyst Jun Zhang. We “downgrade to neutral.”
Apple reported that it posted a quarterly revenue of $62.9 billion, which represented a 20% jump from the same time a year ago, as well as, a quarterly earnings per diluted share of $2.91–a rise of 41%.
“We’re thrilled to report another record-breaking quarter that caps a tremendous fiscal 2018, the year in which we shipped our 2 billionth iOS device, celebrated the 10th anniversary of the App Store and achieved the strongest revenue and earnings in Apple’s history,” said Tim Cook, Apple’s CEO. “Over the past two months, we’ve delivered huge advancements for our customers through new versions of iPhone, Apple Watch, iPad and Mac as well as our four operating systems, and we enter the holiday season with our strongest lineup of products and services ever.”

Apple Shares Overvalued After Hitting $1 Trillion

Shares of Apple crossed the $1 trillion market capitalization mark during the thick of the extended bull run during the summer, causing investors to board the tech giant’s titanic boat party to rejoice, but Canadian businessman and “Shark Tank” television personality Kevin O’Leary shouted down the celebration with a warning of a potential iceberg ahead.

Apple was the first publicly-traded U.S. company to break through the $1 trillion market capitalization barrier, but in addition to O’Leary, some investors worried that its exorbitant valuation was a precursor to a significant drop ahead, which is now materializing. For O’Leary, a decline could rear its ugly head if Apple is unable to sustain innovation of its popular iPhone.

“You don’t have to innovate bleach. You have a brand, you maintain it in the customer’s head, but you have to innovate the phone every year,” O’Leary added.

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