Market Has Misread Apple Stock
Investors went stir crazy after seeing the fiscal third-quarter results reported by Apple Inc. (NASDAQ:AAPL) last week. While the stock market may have been giddy, I was not jumping up and down, buying up shares of AAPL. There were some positives in the results, sure; however, overall, there were more negatives. I’m still waiting for the actual game changer to happen.
For those who saw their AAPL stock jump from the $96.00 level on July 26 to $104.55 last Friday, now may be the time to consider lightening your load, as Apple isn’t really shining in my books.
Chart courtesy of www.StockCharts.com
Now many Apple bulls will argue that Apple will get a boost when its next-generation “iPhone 7” debuts later this year—as early as next month, according to some.
I’m not feeling it. Unless the iPhone is a game-changer smartphone that can do my laundry, drive my car, and make my meals, I simply don’t see why the majority of “iPhone 6” owners would want to fork out another $700.00 or more to maybe have just a sharper-looking device. I know I wouldn’t.
Apple Needs iPhone 7 Sales to Be Great
Let’s take a look at the recent 3Q16 results released by Apple.
On the surface, the media talked about how the company sold more “iPhones” and “iPads” than Wall Street had expected. That sounds great, but after taking a closer look at the financials, I wasn’t that impressed.
So, Apple beat on revenue and earnings per share (EPS) with $42.4 billion and $1.42 per diluted share. The results were still down year-over-year on both accounts. (Source: “Apple Reports Third Quarter Results Services Revenue Grows 19% as App Store Hits All-Time Record,” Apple Inc., July 26, 2016.)
Plus, the report indicated the declines were not simply due to the negative impact of a stronger dollar. Rather, declines in unit sales were seen across the board in three major geographical regions. The bulls are probably now saying unit sales were down because everyone was waiting for the iPhone 7. Let’s hope so, especially if you are long AAPL stock.
Unfortunately, if you’re bullish on Apple, you may also want to consider a recent article by Forbes that referred to a Quartz-run survey that’s results revealed just one out of every 10 current iPhone owners are “very likely” or “extremely likely” to buy the iPhone 7, particularly if it doesn’t offer a new look. (Source: “9 In 10 iPhone Owners Aren’t Keen On Upgrading To iPhone 7,” Forbes, July 29, 2016.) Those survey results aren’t very bullish for increased iPhone sales or a boost in AAPL stock.
Apple sold 40.4 million iPhones in the third quarter and 166.37 million in the nine-month period this fiscal year. These appear to be huge numbers but they are down 15% and nine percent, respectively, year-over-year.
The same goes for iPad sales, which declined nine percent and 19%, respectively, for the Q3 and nine-month period.
The only positive is that iPhone sales as a percentage of Apple’s total sales declined to 57% in the Q3 from 62% a year earlier. Why is this decline good news? The lower dependence on the iPhone is what you really want to see, as it suggests Apple is diversifying its revenue streams. At the end of the day, though, the iPhone continues to be the driver for AAPL stock.
Apple’s Key Chinese Market in Decline
Apple also recorded year-over-year (yoy) sales declines for its third quarter in the company’s three major regions:
- The Americas declined from $20.21 billion to $17.96 billion yoy
- Europe was down $9.64 billion from $10.34 billion yoy
- China dropped from $13.23 billion to $8.85 billion yoy
Note the big decline in Apple’s Chinese market from 27% of total sales to 21% in the 3Q2016 quarter. China is where Apple needs to do really well in order to expand its sales. Increasing competition from cheaper and improved Chinese-made handsets, such as those from Xiaomi, is making things difficult for Apple in the region.
Looking ahead to fourth quarter, which will likely include sales of the iPhone 7, Apple is predicting a sequential rise in revenue to between $45.5 billion and $47.5 billion. The seven percent or so sequential rise is encouraging, but what happens when the iPhone 7 spike fades?
The Bottom Line on Apple Stock
Apple cannot simply keep depending on its next iPhone to debut to save AAPL stock. As I have said on numerous occasions, Apple needs a game changer. With $160 billion in free cash, CEO Tim Cook should be looking at more ways to grow Apple, rather than just adding the next iPhone model when sales start to lag.