Citi's Jim Suva on Apple: some demand is "being destroyed" because of COVID-19

Citi Research Analyst and Managing Director Jim Suva joins Yahoo Finance’s Zack Guzman to discuss why he recently slashed his price target on Apple and how the coronavirus is weighing on demand for the tech giant.

Video Transcript

ZACK GUZMAN: Meantime, though, that's spilling over into the way analysts are looking at a lot of companies in regards to how business might be impacted moving forward. Some of those big names we have heard from, Apple closing stores across the globe, reopening stores in China after it made its way through the worst of coronavirus cases over there. And one analyst just slashed his price target on Apple, down to $310 a share, down from about $375 a share.

I want to bring him on, Jim Suva from Citi Research, analyst and managing director. And Jim, when we look at this, Apple is not alone, but we'll start with them in the way that they might be impacted months, years down the line, when we think about coming back. Why do you think that it might be the case they don't see everything come back completely when we think about lost demand for a lot of their tech products here?

JIM SUVA: Well, Zack, that's a great question. And you are correct. We did change our target price and remove it and take it down to 310, with still a buy rating. But importantly, originally, we thought that the demand would just be pushed out a few weeks or months, and now we're actually seeing the demand and people are using their smartphones even longer. They're learning to work from home, work remotely, and kind of do with what they have.

Now we still believe long term, Apple is a good buy stock here. But we do believe some of this demand is being destroyed because the coronavirus is causing these store closures to be much, much longer than expected. People, when they go into an Apple store, have a great purchasing experience.

Often, they say, well, hey, your friends and your family and loved ones are so beautiful. Don't you want to buy more memory in your smartphone? They're so beautiful. Don't you want to take more videos of them? And people leave this store typically spending more money than what they intended, and importantly, feeling very good about that purchase.

We believe the demand for Apple will improve in the second half of the year. But near term, with these store closures now going global, we believe expectations are still too high. And that's why, Zack, we removed our higher target price and took it lower to $310.

But we think long term, Apple is a buy here. Simply across all the technology, technology is a problem solver for the coronavirus as far as the way people work and communicate, and it's not being completely destroyed or set aside.

ZACK GUZMAN: Yeah, but that's the other interesting thing, too, though, because, you know, it's one thing to cut your price target. But it's another to cut your earnings per share estimates, not just in 2020, '21, but also 2022, when you look at how long this might last, even below current consensus levels on that front.

So why do you think it might last that long? I understand the destruction of demand in the short term, but you're kind of spilling this out over the course of two more years here. So what's the reasoning behind why it could last so long?

And also, I guess, as an extension, we've heard them talking so much about services being so important. But I guess, it is still hardware that matters when you think about just sheer amount of revenue for them.

JIM SUVA: Yeah, you're right. For Apple, it's still very much about an iPhone story. And the services, which are now getting closer to 20%, are important. But what we do believe also, this coronavirus, with people working directly from home, whether it be yourself, your viewers here on Yahoo Finance, or myself being, you know, a work-from-home environment, that is going to slow down research and development.

The innovation where the smart people get together and innovate and figure out these newer iPhones, 5G iPhones, AirPods, all these new things that are coming out, it's going to take longer than expected now. Anyone who says that, oh, it's just business as usual, I think that they aren't realizing the full truth and magnitude. Working from home takes more effort, more corroboration, more communication. And it does slow down the process of how things are developed.

So we believe that Apple's products, they'll still have a 5G phone coming out in September of this year, but we believe, just overall, technology is going to see a slow down slightly in innovation, as everybody works from home. That's why we see this being pushed out longer. We believe that the supply chain is going to have to be restocked and refilled.

And companies are going to sit back and say, is it good to have a full concentration in China, or should we spread our manufacturing footprint to other places like India, Vietnam, South America, other parts of Europe to help mitigate, whether it be a future virus breakout or political, geo uncertainty, or also simply earthquakes, you know, typhoons and weather or political worker unions and unrest with workers.

We believe that all this is going to cause technology still to be important, but slow down some of the innovation. And this will have a long term impact on Apple of simply reducing expectations of the hyper. We don't see a hyper supercycle phone coming back again.

HEIDI CHUNG: Hey, Jim. It's Heidi Chung here. So I want to get your thoughts on Apple TV Plus. Because the company already had a very small content library, but with production essentially at a standstill here, what's the future for that, especially as we have Disney Plus launching in key European markets today?

JIM SUVA: Well, hey, Heidi, thanks for the question. And for a father myself of twins that are eight years old, there's no shortage of them wanting to watch TV. And yes, our family are subscribers to that, as well as all the other streaming services out there. And right now, to be honest, my family is overwhelmed with the amount of content that's on TV.

That being said, with the coronavirus, actors, actresses, the people that really entertain our lives or some of these movie production things, you know, they don't want to go back to work. They don't want to risk their livelihood and their health on this coronavirus right now. So the slowdown in production of content is not going to be a positive for Apple TV Plus.

Remember that everybody who's buying a new iPhone right now, the newest phones, not used or refurbished ones, are getting Apple TV Plus for one free year. In about six months from now, we'll learn are those people now in love with it and subscribing to pay for it, or do they just simply use it because it's free?

It's a big decision when you get it free for a year to then are you going to start paying up for it. And right now, I don't believe the content is enough to really draw in new users to it. But they do have some time, but the coronavirus is going to slow things down. And so far, Apple's TV program and progress that has rolled out hasn't been as great as some of the hardware.

Now their App Store with games and purchasing and stuff like that has been fantastic. But their TV showing has not been great so far. And the coronavirus is a negative on that front also.

ZACK GUZMAN: All right, there you go, the latest on Apple from Jim Suva, Citi Research analyst and managing director. Thank you so much for taking the time, Jim. Appreciate it.

JIM SUVA: Great to hear from you. Thank you.