Have We Really Reached Peak Apple Inc. (AAPL) Stock?

Advertisement

Apple Inc. (NASDAQ:AAPL) cannot seem to catch a proper break nowadays. Apple stock has tumbled 5% two weeks after the company released fourth-quarter earnings that exceeded Wall Street expectations, but failed to deliver the expected blowout quarter thanks to shrinking iPhone sales.

Have We Really Reached Peak Apple Inc. (AAPL) Stock?

Long-suffering investors, however, got a glimmer of hope when the company issued somewhat upbeat Q1 2017 revenue guidance of $76 billion-$78 billion and gross margin range of 38%-38.5%.

That revenue represents small, but significant, year-over-year growth, and will mark the first time Apple returns to positive growth territory in four quarters. If things actually pan out this way, it would help to dispel fears that peak iPhone is now behind us and give a nice boost to Apple stock.

Not So Fast

But now a kill-joy analyst has warned investors to quit doing the victory dance. KGI’s Ming-Chi Kuo has warned that Apple might fall short of its Q1 estimates and could see weakness in Q2 as well. Kuo has modeled Q1 iPhone shipments of 40 million-50 million, which falls short of the 51.2 million units shipped during last year’s corresponding quarter. Given that iPhone ASP has fallen by more than 10% compared to a year ago, that would mean another dramatic sales contraction.

Kuo also warned that Q2 would face tough comps since it won’t have the benefit of the iPhone SE this time around. Apple is, understandably, not keen on an upgrade for the $399 model, which could cannibalize high-end models and dilute margins. Without the benefit of SE, Kuo expects Q2 iPhone shipments to clock in at just 35 million-40 million, compared to 40.4 million a year ago.

Kuo, though, says the upshot to this is that Apple will pressure its suppliers to cut prices, which in turn will help preserve margins. Apart from a select few companies, such as Samsung Electronic (OTCMKTS:SSNLF), most AAPL suppliers lack the bargaining power to negotiate better terms when the going gets tough.

iPhone 8 Super-Cycle?

This certainly does not bode well for Apple stock. The iPhone 7 was expected to stem the year-over-year revenue declines at the very least, but this might not happen. Ming-Chi Kuo has been consistently accurate at making iPhone sales projections in the past. In fact, he has been regarded as one of the best Apple analysts in some quarters.

If the guy’s estimates are within the ballpark this time around, it means Apple will string together six quarters of revenue declines, something that even perma-bulls will have a hard time dealing with. If things play out this way, it’s going to become incredibly hard to brush aside the bears with their ”peak-iPhone-is-history” meme.

Maybe we can chalk this up to a saturation problem, together with growing competition. After all, when growth in China, erstwhile Apple’s fastest-growing and most promising market, is no longer forthcoming, there’s reason to be worried.

The iPhone 7 has not been very well-received in China: only 43% of consumers have expressed interest in the smartphone, compared to 64% for the iPhone 6. This situation is perfectly understandable. After all, it probably does not make a lot of sense to buy an iPhone in China when you can get a device that is roughly comparable in looks and performance at half the price from Xiaomi and Huawei. And, with tens of millions of Chinese now toting an iPhone, you can bet the device is probably no longer the status symbol it used to be.

Many analysts remain optimistic that the iPhone 8 will usher in a super-cycle that will encourage mass upgrades. The next iPhone iteration is expected to sport exciting features such as wireless charging, an organic-light-emitting-diode (OLED) screen and a better camera. AAPL might even throw in a full-touch display without any physical buttons, just for good measure. The new iPhone is expected to hit the market sometime around September 2017. But, will powerful features alone suffice to entice users to ditch their old devices and rush to their nearest Apple Store?

Chances are that Apple’s user-friendly Upgrade Program might be enough to do just that. After all, the program has eliminated the financial cliff that consumers used to face during each upgrade cycle by replacing it with almost forgettable monthly bills. Ironically, iPhone 8 rumors might be partly responsible for lackluster iPhone 7 sales.

Bottom Line on Apple Stock

It’s not inconceivable that even the iPhone 8, with all its wizardry, might fail to do the job. Apple stock investors will then have to hope that one of AAPL’s several pipeline projects hits pay dirt, or that the company uses its huge cash pile to make a big strategic acquisition.

Despite its generous capital return program, Apple is still sitting on a cash hoard north of $200 billion, though most of it is stashed in overseas accounts.

However, with Donald Trump in the Oval Office, AAPL might be able to repatriate some of that cash without taking a huge tax hit. Trump had promised a repatriation holiday of 10% for the more than $2 trillion parked in overseas accounts by American companies.

He even pledged to undertake the biggest tax revolution since Ronald Reagan’s presidency that would see no American company paying more than 15% in corporate tax versus the current rate of 35%. Investors can only hope that this was not just another instance of campaign hyperbole.

If that happens, expect Apple stock to make a strong comeback.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities. 

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/peak-apple-aapl-stock-could-be-history/.

©2024 InvestorPlace Media, LLC