While the stock market has experienced some roughness lately, Apple Inc. (NASDAQ:AAPL) stock has largely bucked that trend. AAPL stock is up more than 22% year-to-date against the S&P 500 which is up less than 5%.
AAPL stock had a big first-quarter catalyst at the end of January which underscored growth in the company’s important Services segment, but more than ever, investors are flocking to Apple Inc. because they view it as safe. Apple is a household name with a bunch of institutional support, lots of cash on the balance sheet, tons of cash flow, a much-hyped iPhone set to launch later this year and promising new business growth.
It’s hard not to be attracted to AAPL stock in that lighting.
But Apple is stretched now, and there are major risks to the current rally. I think it’s time to exercise caution, and here’s why.
Why Apple Stock Could Head Lower
Everyone is getting excited about the iPhone 8 super-cycle, and analysts are telling investors to buy the stock. But there are some serious risks to the super-cycle living up to the hype.
The iPhone 7 benefited from Samsung’s exploding phone debacle. With the Galaxy Note 7 exploding, getting banned and being recalled, the iPhone 7 was the obvious smartphone upgrade during the holiday season in 2016. That significantly helped Apple Inc. set a quarterly record for iPhone sales in the first quarter of 2017.
But that “lack of competition” tailwind won’t continue. Samsung (OTCMKTS:SSNLF) just unveiled its Galaxy S8 and S8 Plus, and response has been better than expected, according to the chief of Samsung’s mobile division.
In other words, early reads on Galaxy S8 sales are that the exploding Note 7 debacle isn’t having much of a dent on Samsung’s brand. If that continues to be the case, the Galaxy S8 could sell quite well and SSNLF could take back smartphone market share. With so much hype built into the iPhone 8 super-cycle, a Galaxy S8 success story is a serious risk to AAPL stock.
Apple Inc. Has a Great Long-Term Story
Despite the risks inherent to the iPhone 8 super-cycle, Apple Inc. has several other, longer-term tailwinds.
The Services business continues to impress, and that speaks to Apple’s ability to create a sustainable ecosystem. The Services business generates higher margins than the hardware business, and is also more steady, which should result in multiple expansion for AAPL stock.
Apple is also making some noise in the healthcare space. Recently, one of the hottest trends in healthcare is developing a method to monitor blood sugar levels without drawing blood. Life sciences companies are increasingly turning towards optical sensors to do so. Apple Inc. now has a team working on this, and the payoff could be quite large. The blood glucose monitoring devices market is expected to reach more than $12 billion by 2020.
AAPL stock is also delving into the self-driving market. While that has attractive long-term growth potential, it feels a little early to bake financial implications into the stock price.
Bottom Line on AAPL Stock
Apple is a great company, but AAPL stock is due for a pullback.
At 17.1 times trailing earnings, AAPL stock is trading at a premium to its trailing five-year price-to-earnings multiple of 13.5X. In fact, the last time Apple was this richly valued was in late February of 2015. Apple Inc. was a $130 stock then.
Apple stock closed 2015 at $105, a precipitous decline of nearly 20%.
While I do not think AAPL is due for another 20% pullback, it is highly vulnerable at these levels. That is especially true considering the amount of bullishness surrounding the iPhone 8 super-cycle. It feels like Apple Inc. is going to have a very difficult time meeting those hyped up expectations.
At a near-all-time-high valuation, failing to meet expectations means AAPL stock could fall quite a bit. I think investors should exercise caution, and considering taking some profits off the table.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
