Apple Inc. (NASDAQ:AAPL) stock has been on a tear this year, but that rally is significantly at risk when the company reports Q2 earnings after the bell on Tuesday. I have warned investors before that AAPL stock is something to beware of in 2017.
As we get closer and closer to the reporting date, I get more and more nervous about whether Apple Inc. will be able to justify its recent rally.
Here’s why.
Reality Won’t Match Expectations for Apple Inc.
The quarter was likely pretty good. The Apple Watch had a breakout holiday quarter, according to data from Slice Intelligence. Search interest data implies that this strong momentum carried over to start 2017, so it looks like the Apple Watch did have a strong quarter.
The quarter is seasonally weak for iPhone sales, so all eyes will likely be on Services and International growth. The Services business has been on fire, and I don’t see any reason that won’t continue. As the world continues to shift to mobile, AAPL’s app ecosystem (and the money they make from it) will continue to grow. Internationally, CNBC has pointed out that companies with a lot of international exposure have reported scintillating earnings growth this quarter.
It is also worth pointing out that fellow tech giants like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) posted very impressive quarterly numbers last week.Overall, Apple’s Q2 looks like it was decent to pretty good.
But that just won’t do it for AAPL stock at these elevated levels.
Since the last Apple earnings report at the end of January, Apple stock is up more than 20%. Some of that move was made in a big following-day earnings pop, but shares have gradually climbed higher even after that near-term pop. Since Feb. 1, AAPL stock is up about 13.5%.
That means investors have gradually become more confident in the Apple stock growth story. That also means investors have placed a great deal of confidence in the iPhone 8 Super Cycle.
But as I have pointed out before, there are serious risks to that Super Cycle. First off, whenever you label something a “Super Cycle”, it becomes very difficult for reality to meet expectations. I think that is the case here.
Secondly, the iPhone 7 benefited from Samsung’s exploding phone debacle. That helped Apple Inc. set a quarterly record for iPhone sales in the first quarter of 2017, despite the iPhone 7 being little changed from its predecessor. The “lack of competition” tailwind, though, won’t continue. Samsung (OTCMKTS:SSNLF) just unveiled its Galaxy S8 and S8 Plus, and response has been better than expected. If that continues to be the case, the Galaxy S8 will take back smartphone market share.
That is a serious risk when Apple stock is trading at 17.5X trailing earnings. Early in 2016, the stock was trading around 11X trailing earnings. Indeed, a 17.5X price-to-earnings multiple is near a five-year high for APPL stock. That last time the multiple was this big was in early 2015.
It was a $130 stock then. By mid-2016, AAPL stock traded under $100.
Bottom Line on APPL Stock Going Into Earnings
At a five-year valuation peak, Apple stock is downright risky.
Will Q2 make or break the stock? Likely not, because the expectations are all geared towards the back-half of 2017.
But without significant earnings growth, AAPL stock is still risky. The more it lounges at these elevated levels into the iPhone 8 launch, the riskier it gets.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
