Apple Inc. (NASDAQ:AAPL) has captivated Wall Street once again, with an iPhone “miracle” in the words of Tom Taulli.
In case you missed it, the highlights of recent Apple earnings include:
- 74.5 million iPhones sold, destroying forecasts of 66 million
- A 30% increase in revenues to $74.6 billion, topping forecasts of $67.5 billion
- EPS of $3.06, easily beating AAPL earnings forecasts of $2.61
So what’s not to like about Apple stock?
Well, for starters, we have to remember the history of AAPL — particularly, the crash-and-burn that started in late 2012 after unrealistic investors started thinking Apple could do no wrong. The result was a roughly 45% drop in share price in just a few months.
We also have to remember that consumer electronics are much like the apparel biz, in that tastes can change in a hurry. While it’s all well and good to see Apple iPhone sales booming and AAPL on top of the world now… a little company called BlackBerry Ltd (NASDAQ:BBRY) once was on top, too.
It begs the question, then: Despite the enthusiasm after Apple earnings, is AAPL stock too risky to buy right now?
I don’t think so. In the short term, Apple stock should continue to power higher.
But in the long term, there are some risks worth considering.
Risks to Apple Stock
Victim of iPhone Success: Now that the strong iPhone sales have been priced into shares of AAPL, it’s worth asking what the catalyst will be that moves this tech stock even higher going forward. Sure, Apple smashed targets this time … but now it has an even higher hurdle to cross, and the initial appeal of a larger iPhone is gone.
China Growth Isn’t Guaranteed: Apple’s success in China with the iPhone lately is noteworthy, but is limited to the high-end part of the smartphone market. Companies like Xiaomi continue to see the biggest growth thanks to lower-cost options. This quarter, Apple was the beneficiary as competitor Samsung (OTCMKTS:SSNLF) was beaten at the top by the iPhone and at the bottom by low-cost competitors … but Apple doesn’t compete down-market thanks to its premium product lines, so all it would take is pressure from the top in China to create serious headwinds for global iPhone sales.
iPad Is Irrelevant: Lost in the details of happy-go-lucky earnings and revenue thanks to strong iPhone sales, however, was the continued decline of the iPad. Sales disappointed again, falling by 22% year-over-year thanks in large part to the bigger iPhone 6 cannibalizing sales. If the iPad continues to fall away, that makes the pressure on the iPhone all the more serious for the coming quarters.
Sky-High Hopes for Apple Watch: After iPhone sales killed it, analysts are now pretty enthusiastic for the upcoming Apple Watch launch in the spring. Predictions are for some 3 million units to be sold, and at $350 a pop that would be an extra $1 billion in revenue. Of course, those are just predictions now … and if the Apple hype machine keeps revving up, forecasts could march higher and leave the gadget company with an unrealistic target. Besides, even if the initial launch is strong, there are no guarantees that the device will have true staying power and be anything more than a fad. Investors need to be careful, then, when they consider how much faith Wall Street is putting in this new Apple smartwatch.
Of Course, Momentum in AAPL is Strong
To be clear, these are just risks — and none of them take away from the powerful Apple earnings report we just saw. Sure, Google Inc. (NASDAQ:GOOGL) continues to forge ahead with Android and there are plenty of other players hoping to cash in down the road.
But in the here and now, it’s hard to argue against Apple stock — especially considering its massive cash and investment stockpile, totaling some $178 billion, and continued buybacks and dividends to boot.
I wouldn’t be afraid of buying Apple stock at these levels, particularly given the challenging earnings environment elsewhere on Wall Street.
However, it may be worth keeping an eye on the above challenges to AAPL as we move through 2015 and run the risk of another phase of irrational exuberance in Apple.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
