After enjoying a sizzling start to the year and hitting an all-time high, the rally in Apple (NASDAQ:AAPL) appears to be cooling off. Shares of Apple stock have been slipping over the past week, probably as investors begin to worry that they’re fast approaching nosebleed territory.
After all, AAPL has already exceeded five-year highs on common valuation metrics including price-to-earnings and price-to-book.
Those concerns have not been helped by recent Wall Street sentiment regarding the upcoming iPhone 8. Wall Street appears to be deeply divided regarding whether the iPhone 8, to be launched later this year, will spur a mega-buying cycle or simply a good-enough one.
The latest analyst to express its reservations is Susquehanna, which reckons that Apple will only ship 100 million iPhone units during H2 vs.110M-115M previously estimated. FBN’s Shelby Sherafy has also sounded the alarm, saying that Apple stock’s one-way trip higher could come to an untimely end because iPhone 8 will only drive a ”good” upgrade cycle and not a ”supercycle” as is widely expected.
iPhone 8 Supercycle or Bust?
The iPhone 8 is expected to sport pretty cool features, including an OLED screen, 3-D sensors and wireless charging that will supposedly prove too alluring for the throngs of Apple fans.
Indeed, bullish analysts might be right on the money if a recent Piper Jaffray survey on teenage consumer trends is any indication. The survey found that 81% of teens expect their next smartphone to be an iPhone — the highest level of AAPL love ever recorded.
Bearish analysts though have countered by pointing out that Apple’s track record when it comes to new product launches is nothing to write home about. Apple has already delayed the launch of numerous products in the past, the most recent being iPad Pro 2 by months. Some analysts are a bit optimistic the new iPad could arrive in April, while others are far less sanguine and expect an October launch.
A September launch had initially been chalked in for iPhone 8 — now it appears eager buyers won’t be getting their hands on the iconic smartphone till much later. There are reports that the new iPhone could be delayed by weeks or even months. The delay appears to be in connection to the use of curved OLED screens that eliminate the bezels. Why that should be a major issue considering that Samsung Electronics (OTCMKTS:SSNLF) has been using them on its smartphones for years is anyone’s guess.
All that hullabaloo about iPhone 8 delay is not hard to fathom. Buyers of tech hardware are notorious for delaying their purchases when a new iteration is due to hit the shelves. The longer AAPL delays the iPhone 8 launch, the more H2 sales are bound to suffer … which in turn could see Apple stock take a big hit.
Could Trump Come to the Rescue?
In reality, though, it would take a really bad delay — maybe a month or more — for Apple’s top line to get dinged. AAPL is set to enjoy easy comps thanks to last year’s awful sales, especially during the latter part of 2016.
Apple endured double-digit sales contraction after posting revenue declines of 12.8% for Q1 FY16, 14.5% for Q2 FY16 and 8.9% for Q4 FY16 before returning to growth during Q1 FY17, when it posted modest growth of 3.3%. Apple sold a mere 45.5 milllion and 78.4 million iPhone units during the third and final quarters of 2016. I believe the company can easily top that figure even in the event that iPhone 8 is delayed for two to three weeks.
In any case, investors have already been warned about a possible delay, so the bad news is probably already baked into Apple stock.
It’s more likely that developments in Washington will play a bigger role in determining the trajectory for AAPL.
Both President Donald Trump and House Speaker Paul Ryan have proposed broad tax cuts in a bid to entice American companies to bring back home at least part of the $2 trillion they have stashed in overseas accounts. Apple has more than $240 billion in cash and investments, most of which is parked in offshore accounts. Bringing home at least part of that bounty could help the company hunt for growth companies and stop over-relying on the iPhone.
Moreover, CEO Cook has already indicated a willingness for the company to ditch its timid M&A policy.
Tesla (NASDAQ:TSLA), anybody?
Bottom Line on Apple Stock
Steve Mnuchin recently said that Trump’s administration has a target to pass the new tax plan before Congress goes on recess in August. The last comprehensive tax reform of 1986 took more than a year to complete, so it’s going to be tough for the administration to pull off the feat in a matter of months. Investors will no doubt also be apprehensive after the Republican gridlock that stymied the proposed American Health Care Act.
The good news though is that there’s much more agreement on tax reform than there ever was on the healthcare bill.
An iPhone 8 supercycle certainly would be great for Apple stock. But AAPL could still receive another adrenaline shot if the proposed tax reform sails through.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
