AAPL Stock Drops – With Good Reason – After Apple Earnings

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Apple, Inc. (NASDAQ:AAPL) reported quarterly numbers this week and it was another doozy. Apple earnings showed record iPhone sales, record revenue for the quarter and 40% earnings growth year-over-year.

AAPL stock appleNot bad for AAPL stock holders on paper. But why are shares of Apple stock actually trading down this morning after such impressive earnings?

It can all be drawn back to the continued strength of Apple iPhone sales, really, and the concern that the strong launch of the iPhone 6 and iPhone 6+ might not have much staying power … and that year-over-year comps are about to get much harder.

As a result, it appears that some AAPL stock investors are content to take some of the profits off the table as the gadget giant appears to be fully valued.

Apple iPhone Sales Drive Earnings

Headline numbers were undeniably strong; AAPL stock posted quarterly revenue of $58 billion and quarterly net profit of $13.6 billion, compared with revenue of $45.6 billion and net profit of $10.2 billion a year ago. Gross margin improved to 40.8%, and international sales continue to grow briskly to account for 69% of total sales.

Unfortunately, the details aren’t as encouraging. Apple provided guidance for its fiscal 2015 third quarter (that’s the current period) that showed almost zero growth sequentially. Specifically, revenue should come in between $46 billion and $48 billion, and gross margins will fall to 38.5% and 39.5%.

That’s including the vaunted Apple Watch, which recently launched and started recording sales.

But as I’ve said before, Apple is a story of iPhone sales — and little more. The gadget accounts for well more than half of Apple’s revenue consistently, and at margins that generate as much as 69% profit on those sales.

And the fact that iPhone sales have already been front-loaded by the admittedly shrewd decision to super-size the iPhone 6 is cause for concern.

It was wise to target consumers who were using Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Android phones and even Windows Phones from Microsoft Corporation (NASDAQ:MSFT). But after a surge in sales and a more than 50% run for AAPL stock in the last year … that can’t last forever.

AAPL Stock Is Fully Valued

This is the reason that Pacific Crest Capital recently said the stock has “little room for error” and is fully valued after a string of impressive results.

Remember, AAPL stock now boasts a forward price-to-earnings ratio of about 17.8 after this run. Furthermore, the stock is valued at a staggering $750 billion — and since the Nasdaq 100 is a market-cap weighted index, Apple stock represents about 12.5% of the entire index.

This is great if you bought in a few years ago and are sitting on big gains, but the sheer size and scale of Apple means that this company is going to have a lot of trouble keeping up brisk growth rates and meeting expectations going forward.

Taken with a market in general where valuations appear stretched and growth is harder to come by, the rather ho-hum guidance for the current quarter and the end of the iPhone momentum could weigh on Apple stock in the second half of the year as investors are reluctant to bid this stock higher.

Should You Sell AAPL Stock?

So, should you sell Apple?

Well, that depends. If you’re a long-term investor who is interested in the tens of billions of dollars that AAPL is spending on dividends and buybacks, then there is a lot of incentive to stand pat.

This is particularly true if you have a great cost basis. Consider that while the current dividend yield is a disappointing 1.5% or so, if you bought just two years ago during the 2013 lows, you may have a cost basis of 3% or better.

And if you bought five years ago? Well, you could be 5% or better based on your cost basis for AAPL stock.

If you’re in Apple for the long haul and willing to deal with some short-term volatility, the stock is certainly worth keeping in your portfolio.

However, if you’re swing-trading the momentum and don’t have a lot of desire to stick it out, consider the run-up to earnings and the sell off in Apple stock today as a sign that most of the gains have been had.

Take the money and run. Especially if rumors that Apple is talking with damaged goods like BlackBerry Ltd (NASDAQ:BBRY) … no good can come of that.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/apple-iphone-sales-aapl-stock/.

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