Apple Inc. (NASDAQ:AAPL) has been in a tailspin for the last month, off 16% or so in the last 30 days vs. only about 5% for the S&P 500. Worse, shares of AAPL stock are now down about 25% from their July highs and dangerously close to new 52-week lows.
And these declines in Apple stock could only get worse from here.
For starters, let’s keep in mind that the trend in Apple is just as disappointing over the long-term, despite some of the rabid bulls out there. AAPL stock has underperformed the market since the end of 2012, when first signs of momentum at the tech giant started to wane.
Apple management tried to prop things up with buybacks and dividends, but even nearly $250 billion in capital didn’t deliver outperformance; baking in dividends and adjusting for splits, Apple stock has a total return of just 10% or so since Sept. 1, 2012.
And the reason for this is the iPhone.
Yes, the iPhone is dominant. But it’s also the only thing Apple has going for it.
Apple iPhone Sales, By the Numbers
AAPL stock reports show the dominance of the iPhone as a share of revenue for the company. In fiscal 2015, which ended in October, Apple recorded $234 billion in total net sales. Of that figure, the iPhone tallied $155 billion, or 66%. The next biggest category, the Mac computer segment, accounted for a little over 10% of sales.
What’s more, the iPhone’s share of Apple’s revenue has only grown. In 2014, the smartphone was worth 56% of sales, and in 2013, just 53%. That means the iPhone is more important than ever before.
In a world where the iPhone is king, any decline in the outlook for this smartphone in 2016 could be brutal for AAPL stock.
That’s exactly what we’re facing in reports that Apple is expected to slash its planned iPhone 6s production by 30% for the first three months of 2016. Inventories have apparently built up at retailers, and the initial demand spike caused by the launch of the bigger-screened iPhone 6 Plus in late 2014 tapped into the majority of pent-up demand.
At the same time, competitor Samsung Electronics (OTCMKTS:SSNLF) is also warning that global demand will be soft in 2016 as software is now the big thing for consumers as hardware and the need for upgrades has pretty much plateaued.
That’s all very bad news for Apple, with its heavy reliance on iPhone hardware to drive its top and bottom lines.
Making matters worse, one bombastic analyst referred to Cook as “completely clueless” and said the “bozos” running Apple are actually running it into the ground — to the tune of destroying almost half a trillion dollars in shareholder value, by his math.
I’m not sure I buy the argument that Apple should trade for a price-to-earnings ratio over 20 today, but it’s true that management has made plenty of errors in the supply chain in the last few years. Since there’s not exactly a Steve Jobs level of innovation at Apple, making sure production and forecasts are on target is really all that matters.
Throw in fears of a China slowdown and rough iPhone sales comps in Q1 and it could be an ugly go for Apple in the coming months. The reality is that the iPhone 6 launch in 2014 saw a longer tail as Apple tapped into pent-up demand, but the persistent demand of a year ago won’t last.
As for sequential comps, the iPhone 6S launch just a few months ago was the first same-day event for mainland China — drawing existing demand forward, not creating new demand.
Given all this, AAPL stock need a smashing earnings report in a few weeks to counteract current negativity, and with all the reported problems in China and with the iPhone 6s, that seems nearly impossible.
I wouldn’t necessarily sell Apple if you’re a long-term investor with a good cost basis, but I certainly wouldn’t be adding to my position at a moment like this.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
