Apple Inc. (AAPL) has thus far defied gravity in 2015 despite a rough market all around; AAPL stock is up slightly while the S&P 500 is off about 7% since Jan. 1.
However, the last few months have been characterized by underperformance for Apple stock, with shares of AAPL down over 15% since a peak of around $132 in late July vs. a roughly 11% decline for the S&P in the same period.
Since we’re approaching a crucial Apple earnings report that will reveal iPhone sales since the launch of the newest smartphone models, this recent downtrend is particularly disturbing.
And smart investors won’t wait for AAPL stock to decline further before punching out of this fading tech stock.
Here’s why an iPhone sales letdown is in order — and why AAPL stock is in trouble.
China’s Problems Sap AAPL Stock
While Apple was happy to trumpet another record iPhone launch, it’s important to remember that this was the first release date where mainland China was included in the party.
And by all reports, China iPhone sales haven’t been much to write home about.
Sure, Apple reported 13 million iPhones moved in the first weekend of availability this year versus about 10 million last year, but AAPL stockholders have been eager to see more significant growth out of China.
In June, for instance, Greater China sales soared 112% on the quarter … and the tech stock didn’t really budge.
And according to calculations by Apple blog 9to5Mac, we could be seeing not just unrealistic expectations but also the risk of a decline in China sales — which would be a disaster for AAPL stock.
Here’s the math, from Ben Lovejoy:
“Apple sold 13M iPhones worldwide in its opening weekend. Taking 28% of that number to be in China (based on a similar share in the previous two quarters), that’s 3.64M. Take that from 13M and the like-for-like comparison with last year is 9.36M – a drop from last year’s 10M.”
This is all speculation of course, but even if the math is off by a bit, it shows the serious trouble that Apple stock is facing given high expectations in China and the very real impact of a slowdown there.
Furthermore, even if the 30% jump from 10 million to 13 million helps spackle over some of these greater concerns for now, the comps compared with the flood of iPhone 6 and iPhone 6 Plus upgrades a year ago will make upcoming quarters look far less impressive.
The bulls will now trot out the fact that AAPL stock has a forward price-to-earnings ratio just north of 11, a mountain of cash and an aggressive stock buyback program. And I’ll concede that those factors will keep Apple stock from crashing dramatically to the tune of 30% or 40% in short order and keep the company quite relevant long-term.
And from a consumer perspective, let’s face it: Google (GOOG, GOOGL) Android phones are at best peers with the iPhone to many users, and Microsoft (MSFT) is still lagging dramatically behind both. This is not a company in danger of a serious breakdown.
However, it’s important to acknowledge the big downside risks for AAPL stock in the short term, particularly given the weakness in the stock market writ large.
I wouldn’t be holding Apple into the end of the year unless you’ve got a great cost basis and are more interested in the dividends than a swing trade.
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 [email protected] or follow him on Twitter via @JeffReevesIP.