Right now, it looks like Apple Inc. (NASDAQ:AAPL) bulls are right. Over the past several months, AAPL stock has been weighed down by concerns that the iPhone 8 would be delayed. But management delivered a strong fiscal 2017 guide in its Q3 report, implying that the iPhone 8 is set for a on-time launch in September.
That sent Apple stock up more than 5% in trading on Wednesday.
But all this jump really does is make AAPL stock even riskier ahead of the overly anticipated iPhone 8 launch.
AAPL Stock: The Good
There was a lot of good to glean from Apple’s third-quarter report. Perhaps most notably, this was the first quarter the iPhone, iPad and Mac all saw positive unit growth since the first quarter of 2014.
iPhone unit shipments rose 2% year-over-year in the quarter. While the overall growth is modest, it’s important to note that the iPhone 7 Plus is currently selling at a far higher rate than the iPhone 6s Plus was selling at in the June quarter last year. The strong demand for AAPL’s more premium priced iPhones is bringing up the average selling price and is additive to the company’s margins.
One of the big headlines from Apple’s report is that the iPad is back. After 13 consecutive quarters of negative unit growth, the number of iPad units shipped last quarter actually rose 15% year-over-year. That is the iPad’s first positive unit growth quarter since the first quarter of 2014.
And the growth number (+15%) isn’t small. Last quarter actually represented the iPad’s highest global market share in 4 years. Notably, those market share gains are happening with tablet market newcomers. More than half of the units sold in China and Japan were sold to first-time buyers. That implies a strong pipeline of return iPad buyers over the next several years.
Given the iPad’s long and ugly negative unit growth ran from the beginning of 2014 to the middle of 2017, this new positive iPad growth trend will likely also have a long runway. Comps are just too easy for this trend to turn negative any time soon.
On the Mac side of things, Apple managed to post positive unit growth of 1% despite global PC market contraction of 4%. That means Apple is gaining market share. That is critical because, much like the iPad, the Mac has struggled, posting negative unit growth in four of its past seven quarters. Management sounded bullish about the Mac’s growth prospects in the upcoming back-to-school season.
Meanwhile, the Apple Watch continues to dominate the smartwatch market. Sales were up over 50% in the June quarter. Services revenue jumped 22% year-over-year to a record $7.3 billion as the App Store continues to dominate mobile commerce. Apple Pay is also growing nicely in the mobile commerce space.
All in all, there was a lot to like about AAPL’s third-quarter results.
But I’m still not a buyer of Apple stock.
AAPL Stock: The Bad
Nothing was said about the upcoming iPhone launch. That’s a problem because the run up in Apple stock is almost entirely dependent on a huge iPhone 8 upgrade cycle.
Yes, its great to see the iPad making a comeback. It’s also great to see the Mac bucking the broader negative trend in the PC market, the Services growth narrative continuing to gain momentum, and Apple Watch widening its lead in the growing smartwatch market.
Those are all great to see, but AAPL stock is a iPhone-dependent growth story. Last quarter, iPhone sales represented about 55% of net sales. And that is relatively small because it wasn’t an iPhone launch quarter. In the first quarter of fiscal 2015, following the launch of the iPhone 6, iPhone revenues represented nearly 69% of net revenue.
In other words, if the iPhone 8 launch doesn’t go as anticipated, the company’s operational results could plunge. Considering AAPL stock remains at a 5-year valuation peak, that means the stock has a lot to lose if the iPhone 8 disappoints, but not a lot to gain if the iPhone 8 meets expectations.
For reasons I have already discussed in depth, there are serious risks to the iPhone 8 “Super Cycle” thesis. That means there are serious risks to Apple stock, which just became more richly valued.
The Bottom Line on Apple Stock
The bulls are celebrating. The quarter was pretty good. But a pretty good third quarter doesn’t really mean much for a stock that’s trading at all-time highs in anticipation of a big upcoming product launch.
Despite the bullish guide, there remain significant risks to the iPhone 8 “Super Cycle” thesis. Meanwhile, the maxed out valuation means there really isn’t much upside in AAPL stock even if the iPhone 8 does meet expectations.
The risk/reward skews significantly to the downside when it comes to AAPL stock. Because of that, I remain bearish.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.