Based on the momentum so far this year, Apple Inc. (NASDAQ:AAPL) should hit the magical $1 trillion market capitalization level soon. Not bad considering AAPL stock almost went bust during the mid-1990s.
But there are good reasons for the optimism for AAPL stock. For the most part, iPhone 8 should be a standout offering (note that this is the 10th anniversary of the launch of the device). What’s more, the company has been bolstering its services business, which has helped to pump up the revenues.
In light of all this, Wall Street analysts are certainly getting more bullish on AAPL stock. Since early May, 29 analysts have increased their price targets.
Yet I think there should be some caution. Let’s face it, Apple shares can be streaky. So then, what are some of the risk factors? Well, let’s take a look at three:
AAPL Stock Risk Factor #1: The Rally Is Overdone
The spot-on trade for this year has been the tech sector. Although, the focus for investors has been primarily on the mega operators, such as Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) and Netflix, Inc. (NASDAQ:NFLX). These companies have logged returns in excess of 30%. By comparison, the Technology Select Sector SPDR Fund (NYSEARCA:XLK) is up nearly 17%.
Given the big run-up, it does seem reasonable that there could be a cool-off period, or even a correction. Many investors are probably wondering what is the next category to pour their money into. As for AAPL — which is up 32% for the year — the valuation is a bit toppy. For example, the consensus price target is $155, which implies a return of a mere 1%. According to InvestorPlace’s Dana Blankenhorn:
“[I]t should be noted that this is the highest P/E that AAPL stock has enjoyed since its go-go days early in the decade, and that the whole market is at a stretched valuation. A forward P/E of nearly 15 and a price/earnings-to-growth ratio of 1.5 seem similarly digestible in a bubble, but on the high side for Apple, historically speaking.”
AAPL Stock Risk Factor #2: China
China is turning into a mess for AAPL. During the latest quarter, the revenues dropped by 14% to $10.7 billion on a year-over-year basis and its market share fell from 13.6% to 9.6%. This is certainly worrisome since Apple gets about 25% of its profits from China.
What’s going on here? Essentially, Apple has not kept up with the competition — both in terms of features and pricing. The fact is that Chinese operators like Huawei and Oppo Electronics have proven to be strong innovators. And yes, Samsung Electronics (OTCMKTS:SSNLF) has shown lots of traction as well, despite the issues with the Galaxy Note.
Something else to consider: China represents the biggest market for Apple’s App Store. But this could be vulnerable if the company continues to see declines in unit volumes of iPhones.
AAPL Stock Risk Factor #3: Politics
A big part of the story for AAPL is the huge cash balance, which is at $256.8 billion. But of course, much of it is stashed overseas. Because of this, the company has had to borrow huge sums in U.S. markets.
For the most part, Wall Street is betting that the Trump administration will push for an effort to allow repatriation, which would allow Apple to bring back the capital at much lower tax rates. But this appears to be in jeopardy. So far, the Trump Administration has gotten off to a rocky start, such as with the Russian investigations and the challenges with the proposed healthcare law.
In other words, if repatriation does not go into effect, this could adversely impact Apple’s ability to do things like buy back shares and pay higher dividends.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
