Over the last few days, as the COVID-19 outbreak has progressed, we have seen some companies reduce their revenue and earnings expectations for the current quarter and some for the current year. Microsoft was the latest after hours today to announce that it would miss its guidance for its Personal Computing Unit due to supply chain constraints. Some in the eye of the storm (such as Marriott, for instance) have kept their forecasts intact suggesting it is too early to quantify the impact. For the most part, and somewhat paradoxically, companies that have been more specific have seen their stock prices suffer more.
As we understand it from Wells Fargo Securities, some companies have been moving production out of China since the trade skirmishes began in earnest in January 2018. For instance, Adidas and Samsung are two companies that Wells Fargo noted have embraced Vietnam as a China hedge. The computer and electronics sector has been a notable exception. Why? Because, even after the potential dislocations to supply chains that started to take hold during the trade war, they stubbornly ignored the risks and went forward with business as usual. During the trade war, Apple decided to focus on lobbying the President to exclude their products from tariff threats rather than pro-actively working to reduce its dependency on Chinese production. In the short term it worked – Tim Cook was able to whisper in the Administration’s ear to ensure that they would be receiving special treatment and remain unscathed. At the time, Apple and others said that global supply chains were too hard to unwind and blamed globalization for the situation, as if they had been an unwitting victim. And now as the COVID-19 virus spreads, impacting their supply chains, causing them to reduce and/or suspend their forecasts, they want investors to give them a pass – “it’s a black swan event, no one could have prepared for this.” Shame on them. We always hear how “well-managed” and brilliant these companies are, but in this case, they collectively put their head in the sand and assumed the storm would pass them by without impacting their businesses.
In short, the writing was on the wall and they ignored it. In our opinion, the market should take them to task for it.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of February 2020 and are provided for informational purposes only. Investing involves risk, loss of principal is possible. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.