Apple (AAPL) stock had a rough 2015, finding itself down 4% since the start and 22% off the 52-week high it set back in July. AAPL stock has not only had a bad year by its own standards, but also compared to the NASDAQ index.
Yet despite being beat down in 2015, investors are apparently betting that the worst is yet to come.
What I am referring to is the fact that short interest in Apple stock surged from 70 million to more than 108 million in November, an increase of 54%. That’s significant in understanding what investors expect for the year ahead, but the big question is why so many are apparently betting against the world’s most valuable company.
Why Short Interest Skyrocketed
There are three main reasons that short interest in Apple stock may have jumped so much.
First, AAPL stock has had a bad year. The next three largest technology companies by market capitalization, Google (GOOG, GOOGL), Microsoft (MSFT), and Facebook (FB) jumped 47%, 20%, and 35%, respectively, in 2015.
This underperformance likely has many worried.
Second, 2015 turned out to be a fantastic year for Apple’s business, but investors aren’t so sure about 2016. The company grew revenue 27.8% and its operating income soared 35.6%. However, AAPL is expected to grow just 3.7% in the coming year, which means that investors are likely looking ahead to a worse year.
Third, Apple stock owners still have 2012/2013 in their mind, vividly. This is the time when Apple’s margin fell significantly, and its company valuation was nearly cut in half. With there being a lot of questions surrounding iPhone shipments in the coming year, and how AAPL will innovate moving forward, Apple’s tremendous 2015 operationally means very little for investors looking at 2016.
Let’s Put This in Perspective
Anytime short interest jumps 54%, it is newsworthy, and must force investors to ask why. While it is definitely something that Apple stock owners should continue to monitor, it is far from becoming a problem because Apple has 5.5 billion shares outstanding. Therefore, 108 million shares short still represents a low-single-digit percentage for short interest.
While Apple stock did collapse to end 2012 on what seemed like an unexplained event, there was an actual cause. The company’s operating margin fell from a high of around 35% to near 29% in just one year, and there were legitimate concerns surrounding price power, product innovation, etc.
AAPL has answered those questions as its ecosystem continues to grow larger, and as Apple has innovated with new hardware via larger iPhones and the Apple Watch, along with countless software and service upgrades like Apple Pay and Apple Music.
With that said, Apple’s average selling price for iPhones continue to rise; Apple’s revenue continues to grow at a near triple-digit rate in China; and AAPL has a huge catalyst for growth in 2016 and beyond as smartphone usage soars in India.
As a result, the rise in short interest and decline in AAPL stock throughout 2015 will likely become an investment opportunity. In fact, short interest has already started to decline in December.
Apple’s short interest peaked at 108 million to end November, but as of Dec. 15, short interest has declined to 74.2 million shares. This signals that despite concerns, investors see value in the stock for 2016, and don’t want to bet against the company.
What to Expect From Apple Stock
What’s important to keep in mind is that Apple stock is very cheap, lacking the downside for another huge swing lower. Currently, AAPL stock trades at just 6.5 times next year’s expected earnings minus cash. That makes AAPL a clear value investment, a company with huge buybacks and a nice dividend yield that should keep Apple stock from falling too much lower.
In looking ahead, AAPL may not grow revenue or profits at a 20% clip, but India is a real catalyst, as is the continued completion of mobile networks in China. In retrospect, that’s why shorts will be proven wrong, and why Apple stock will reach $200 per share sooner rather than later.
As of this writing, Brian Nichols owned shares of Apple stock.
