What China’s COVID-19 outbreak means for Apple iPhone production

Wedbush Securities Analyst Dan Ives joins Yahoo Finance Live to discuss supply chain issues, Apple supplier Foxconn halting operations in Shenzhen, Docusign earnings, the state of Big Tech, and the outlook for tech M&A.

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BRIAN SOZZI: One of Apple's biggest suppliers Foxconn is suspending operations in Shenzhen as the government locks down the region for a week due to fresh COVID-19 outbreaks. So what does this mean for Apple? Wedbush Tech analyst Dan Ives joins us now. Dan, how concerning is this, or should this be for Apple shareholders?

DAN IVES: That's concerning because that's a core hub in terms of iPhone production. I mean, really, the vast majority of production comes out of that factory. Look, if this lasts longer than a week, then it starts to become a concern.

For right now, they could pardon to other production, factories across China. But it puts gasoline on the fire. It's the last thing is an investor you want to see in what I'll call the Silicon Valley of China to see a shutdown, especially in this jittery market.

JARED BLIKRE: And Dan, great to have you here. Can you expand on maybe some numbers, throw some ideas of where exactly does this go from here?

DAN IVES: Yeah, I mean, this isn't also in the backdrop of just massive shortages across the board that we're starting to moderate. I mean, what I'd say is that if this lasts for another two to three weeks, that could probably crimp production overall for the quarter probably by 1% to 2%, especially if it goes into the end of March.

And this is for a company just launched the SE, got iPhone 13 where numbers, demand continues to, I'd say, outstrip supply by about 20%. So I'd call it, OK, a week, it's nerve wracking, but containable.

Goes past a week, starts to hurt numbers. And I think most of my conversation from last night to this morning with investors is trying to quantify that. I'd say 1%, 2% looks like short of the production hit for the quarter.

BRIAN SOZZI: Dan, does this hurt the rollout of the SE? It doesn't hurt it, initially. But if this goes to the end of March, then supply is going to be an issue going into that first half of April, because Apple thought they were done with this.

So and it couldn't-- if you look at Foxconn, they'll be able to sort of play over the next week in terms of passing to other production factories, but that's the whole issue. If this starts to last two, three, or four weeks, really starts to become an issue, especially in the midst of this iPhone SE launch, which we believe is 30 million units out of the gates. And of course, in this market, this is exactly what you don't want to see, especially in this type of environment, where tech investors are obviously fearful.

JARED BLIKRE: And Dan, I want to broaden this out. I want to show everybody the YFi Interactive. I'm looking at one of our software heat maps here, and we're seeing a lot of green today.

But you turn on the year-to-date button and it just gets nasty. Microsoft down 15%. Adobe down 25%. When do you start picking up, scooping up some of these beaten down names on a valuation basis?

DAN IVES: Yeah. I think software is oversold, as I've seen this since 2015. I mean, there were pockets in 2018 as well. Look the high flyers in terms of the work from home, the Zooms, the DocuSigns. I mean, those are, at this point, I'd say catching a [INAUDIBLE].

But when you look at core software, the Oracles, the Microsofts, the Adobes, the Salesforce, either as a safety blanket names, demand continues to be robust in terms of move to the cloud. And I think those are names as we look into the rest of the year, will be significant outperformers.

But the investors, look, they paint it all with the same brush in terms of software. But look at this transformation into the cloud-- look at cybersecurity as a massive pocket of strength. And I also think M&A is going to be on the horizon if these stocks continue to stay in these levels.

BRIAN SOZZI: Dan, what did you make about that Doc-- from that DocuSign core? Now, we had CEO Dan Springer on the show on Friday. And he said he's likely to come out this week and be a buyer of his own stock. Are you a buyer?

DAN IVES: I mean, I wouldn't touch with a 10-foot pole, because the problem is-- I mean, you know, he's a buyer. But I mean, if you look at the communication, you look at the guidance, you look what's happened to that business, it's a Friday the 13th situation for DocuSign.

And I think that's-- and that's part of the problem in this market is that there is a feeling from the street that these management teams just don't have their arms around what's going on in the demand environment. And I think that's the problem with DocuSign. They could talk forever. Results speak and that's why the stock continues to get crushed.

BRIAN SOZZI: Dan, one--

JARED BLIKRE: I wanted to circle-- go, Brian.

BRIAN SOZZI: No, go ahead, Jared.

JARED BLIKRE: Go, Sozz.

BRIAN SOZZI: Go ahead. No, I was--

JARED BLIKRE: Yeah, I want to circle back to something-- [LAUGHS]. I'm sorry I'm just going to go. I, want to circle back to something that you said a couple of minutes ago, Dan. You were talking about M&A.

I'm just wondering, because you have some interesting speculation from time to time about some deals that could go down. Anything on your horizon that's peaking your interest at these valuation levels?

DAN IVES: I think it's cybersecurity, because when you look at Google Mandiant, that's speaking to this broader trend. More and more cybersecurity intertwine the cloud. And that was a shot across the bow of Microsoft, at Oracle, at AWS, IBM.

So then you look at some of these names like a Tenable, a Varonis, Qualys, a Ping, among others. And I think you're going to see more cybersecurity M&A from cloud players because it goes back to-- like public investors, they'll sell these stocks.

But this strategics in the financials, they're going to look at them hard, you know, especially given some of these valuations, and they have tons of cash. That's why I think cybersecurity, M&A in particular, is where you'll see it.

Now, it seems like DocuSign and others, I mean, those stocks and other miss. They could continue to get the natural split, get cut by another 50%. No one's going to buy those strategic financial. Cybersecurity totally different.

BRIAN SOZZI: Dan, a new tweet from Tesla CEO Elon Musk warning about inflation. I guess this is a broader issue. It's not just a Tesla thing, of course. Warning about inflation impacting his business. Do you think, just this inflation, whether it's steel workers, you name it, is going to ruin the year for Tesla on the bottom line?

DAN IVES: I think Tesla's unique because-- and I think they'll announce probably in the next two weeks another price increase. So they still have the ability to pass that through the consumer, very similar to Netflix, Amazon Prime, and obviously some other sort of stalwarts.

So I think for Tesla, they could continue to pass it along. And right now demands outstripping supply by about 40%. So I don't think that really necessarily impacts Tesla to the extent. What Musk is talking about it's become a real issue, you know, especially in terms of what we're seeing on cost.

And that's something that these companies are not going to absorb it. They're going to pass that forward, which just speaks to this environment, especially on auto, in a supply-constrained environment that continues to be more supply-constrained. Even when you look what's coming out of China with Shanghai province, I mean, Tesla obviously has a huge part of their production. But then you look-- that's why it's so important with Giga Berlin, as well as Austin. You know, they continue to flex their muscles and diversify, which is important.

BRIAN SOZZI: Well, speaking of supply, Dan, another automaker that has been hit because of the inability to get the supply needs is Rivian. Really, not a good quarter from this company last week the stock has been down a lot. Do you feel the same way about Rivian as you do about DocuSign?

DAN IVES: Look, I think Rivian's another example of communication has been horrific. And supply chain's and issue. But their ability to get their arms around and communicate has been an unmitigated disaster.

I mean, since the IPO this has really been a black-eye story for the overall sector. And I think that's the frustration with Rivian is that we stay positive long term, because what I believe that they could ultimately broaden this out into in terms of really a category changer in EVs and pickups, especially on sport utility going 2023.

But if you look, I mean, step by step, from the quarters to the price increase, oh, actually, mea culpa, but no we're actually not going to increase the prices. It's been the JV team. And in this type of market, that's not what investors want to see, which is why the stock where it is.

We still have comments that could get through. This it's a fork in the road. One more blunder, one more major hiccup. You know, RJ and team could potentially ruin the Rivian story before he even started.

BRIAN SOZZI: All right, well clearly, Rivian is no Tom Brady. Wedbush tech analyst, Dan Ives, always good to get some time with you. We'll talk to you soon.

DAN IVES: Thank you.