Apple Inc. (AAPL) Stock: Time To Consider the Bear Case

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Apple Inc. (AAPL) has been back to its winning ways.

Apple Inc. (AAPL) Stock:  Time To Consider the Bear Case
Source: Apple

The new iPhone appears to be a huge hit and the company has been entering new categories, like payments and wearables. Consider that during the year Apple stock has clocked a juicy  gain of 42%. This is actually higher than other hot tech operators like LinkedIn Corp (LNKD), Yelp Inc (YELP) and even Facebook Inc (FB).

But is the run in Apple stock getting overdone? Might it be time to get cautious?

Well, I think so. In fact, there are some nagging issues that could easily put Apple stock into reverse.

iPad Woes

First of all, there is the iPad. For the most recent quarter, sales dropped by 13% on a year-over-year basis. It was the third consecutive decline.

Yet this may be only the start of the problems for AAPL. Just look at a recent report from Ming Chi Kuo, an analyst at KGI Securities. He forecasts that sales of the iPad will plunge by 40% in the first quarter!

While this may seem excessive, there are solid reasons for why AAPL could be vulnerable. In the company’s last earnings call, CEO Tim Cook addressed the slowing of iPad sales, noting that the iPad upgrade cycle may be longer for consumers than for the iPhone.

Let’s face it, there are fewer uses for the iPad. Try making a call with it? Use it to take photos?

But there is also much more competition as well.  The market is flooded with many tablet alternatives at much cheaper prices. At the same time, the phablet-style AAPL devices are probably cannibalizing sales of the iPad.

It’s true that the successful iPhone launch should help take up the slack. But this will not be a cure-all for Apple stock. For the most part, the company will have a tough time finding large revenue sources.

The China Factor

True, this is a massive opportunity. But there are some big hurdles for AAPL. China has shown that its tech operators have innovative chops. Perhaps the most notable example of this is Xiaomi, which is known as the “Apple of China.” Not only is the company gaining market share for smartphones but is often selling its models at more than half the prices of comparable iPhones. So when it comes to winning in China, AAPL may have little choice but to get into a price war. Oh, and Xiaomi is also aggressively moving into India, which is certainly a critical market.

Watch Out For the Apple Watch

A report from RBC forecasts that Apple could sell 20 million of its new Apple watches in one year.

But this is really dicey. For a completely new product, there is a good chance that there will be snags and bugs that could stunt the momentum.

Besides, it will take time for consumers to understand the benefits of the Apple Watch. And so far, they look very limited (there’s simply not much room to do anything useful on such a small form factor). Basically, you will be able to track your health vitals, get notifications and make payments. But then again, all these things can be easily done with your phone.

Valuation

Keep in mind that the average price target — from 42 Wall Street analysts — is about $117. This compares to the current price on Apple stock of $115.

What’s more, the price-to-earnings ratio is also at 18X, which is not in bargain territory. The dividend yield is also at a meager 1.6%.

For the most part, investors have already done a good job of factoring in the good news. But then again, there is little allowance for any negatives. And again, there are some major potential landmines, such as a plunge in iPad sales or a flop of the Apple Watch.

In other words, with bullishness almost at universal levels, it’s probably a good idea to consider the bear case right now.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/apple-inc-aapl-stock-bear-case/.

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