Time to Bail on AAPL Stock?
Apple Inc. (NASDAQ:AAPL) is one of the most hotly contested stocks on the market. Every investor I meet has a deeply held opinion about where AAPL stock is headed.
Some of them think the stock is headed for a permanent crash. Others think Apple stock is destined to surge, driving the company to a market cap of $1.0 trillion.
Many bears think this fight is over. They point to Apple’s most recent quarterly earnings as proof that the smartphone maker is going down. Personally, I’m not yet convinced—I still think AAPL stock can rebound.
However, it’s important to consider both sides, so here’s what we’ll do: first, I’ll tell you what the bears are saying about AAPL stock, then I’ll tell you why they could be wrong.
Apple sold $32.9 billion worth of “iPhones” in the second quarter of 2016. On the surface, that seems really impressive, but it was actually 18% lower than sales from the previous year.
It’s no wonder that AAPL stock fell by 14% after the news broke. Investors were freaked out by the sudden drop in iPhone demand. It was confirmation that smartphones have pretty much reached the end of their growth cycle.
Think about it: everyone who can afford a smartphone already has one. That’s why Apple is switching to a three-year cycle for releasing new iPhones. The company knows that people can’t afford to keep upgrading laptops, tablets, and smartphones.
On top of all that, Apple might just be too big for continual growth. The company made $53.4 billion in profits last year. Even if it launches a new product that earns $100 million, the company’s bottom line wouldn’t look all that different.
It would be like pouring a bottle of water into the ocean. No one can tell the difference.
Those two arguments—iPhone sales and sheer size—are why AAPL stock keeps falling.
History Repeats Itself
While I understand the bearish arguments, I don’t necessarily agree with them. Apple stock has been in this situation before, and the bears were saying the exact same thing.
Just look at this chart from September 2012 to June 2013.
Chart courtesy of www.StockCharts.com
AAPL stock lost about 40% of its value in those nine months. The reasons given at the time sound oddly similar to what we’re currently hearing from Apple bears.
Here’s a snippet from Business Insider at that time: “The iPhone 5’s initial sales were disappointing. The first weekend’s sales number, five million, was significantly worse than the ‘worst case scenario’ put forth by Wall Street’s top Apple analyst.” (Source: “Why Apple’s Stock is Dropping,” Business Insider, October 9, 2012.)
Although that sounds really dramatic, Apple’s share price would eventually recover and lock in gains of 129.97%. In other words, investors overreacted to what was simply a bad quarter. They reacted too emotionally.
Here’s a separate clip from Business Insider after the recent crash in AAPL stock: “Shares of Apple…have dropped 11% in the past five sessions. Confidence in the Cupertino, California company has been shaken since posting its first-ever quarterly decline in iPhone sales and first revenue drop in 13 years on Tuesday.” (Source: “Apple’s stock suffers worst week since 2013,” Business Insider, April 29, 2016.)
It’s virtually the same criticism. The company didn’t sell enough smartphones, so we’re mad at Apple. That’s effectively what the market is saying through its sell-off. Is history repeating itself? Can Apple shake off the criticism like it did in 2013? It’s possible.
There are two reasons why:
- Although iPhone sales may not keep growing, Apple can squeeze more revenue out of each customer. In fact, it has already started doing that. Consider “Apple Music,” which is a Netflix-for-music style app that gives users unlimited streaming for a flat fee. That kind of service can add fuel to Apple’s bottom line.
- The firm has $216 billion sitting in a bank account. Besides handing some of that cash back to shareholders, Apple can also afford to buy some fast-growing startups. It’s unlikely any of those startups will be as successful as the iPhone, but several of them together could justify significant gains in AAPL stock.
Whether or not you agree with those reasons, it seems premature to say the debate is over. There are plenty of reasons to think AAPL stock can rebound.