A report that Apple Inc. (AAPL) might extend its big iPhone upgrade cycle to three years from two is the last thing anyone holding AAPL stock needs to hear.
If anything, AAPL needs more frequent major innovations in the iPhone platform to rejuvenate its bread-and-butter business — not less.
As things stand now, AAPL stock is in for an extended period of continued underperformance — the stock is off by nearly a quarter since last May — if this fall’s iPhone 7 doesn’t captivate customers.
So far, there’s little reason to think that it will. The last round of minor upgrades to iPhone 6 — the iPhone 6S — resulted in disappointing sales. Indeed, last quarter, iPhone sales declined for the first time in history.
And now rumors surrounding iPhone 7 say the new handset won’t wow anyone, either.
According to Nikkei Asian Review, iPhone 7 will include only minor upgrades over the disappointing iPhone 6S. The camera, water resistance and battery capacity will likely be improved, and the headphone jack will be removed. A high-end version of the model will give users better-quality photo capabilities via correction functions, Nikkei reports.
That means consumers and investors will have to wait until 2017 for the next leap forward in Apple’s smartphone segment. (And perhaps they’ll have to wait another three years after that.)
The risk is that iPhone basically is Apple. The company desperately needs regular hits in the smartphone segment. Time is a luxury Apple does not have right now. Market sentiment is decidedly sour on AAPL stock after it lost a quarter of its value over the last 52 weeks.
A Dark Time for AAPL Stock
Pessimism is running so high that Apple shares trade at forward valuations below those of plodding telecommunications and utilities stocks. On a technical basis, the 200-day moving average is in a pronounced downtrend — a broad indicator of a sick stock — and shares are languishing below key levels.
True, the bargain-basement valuation is one pillar of the bull case on Apple stock, but it’s buttressed by the critical assumption that iPhone hasn’t yet lost its mojo. In this argument, the smartphone only stumbled on a weak off-cycle refresh, and a new killer iPhone will put things on track.
But maybe that view is premature. If the next major upgrade is still more than a year away, what’s the catalyst for Apple shares in the near-term? The stock appears to have discounted the reality that smartphone sales will decline year-over-year, but that only helps them find a floor. What’s going to get the growth story rolling again?
Apple stock does appear to be overly beaten down on iPhone fears. It still has an enviable growth rate and stacks and stacks of cash that it’s adding to all the time. The stock is cheap.
However, the valuation play is only going to reveal itself over the longer term. AAPL needs something now to renew interest in its shares, but it appears we’ll all have to wait.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.