I’ve been bearish on Apple Inc. (NASDAQ:AAPL) since May of this year.
Admittedly, I’ve been wrong so far. Back in May, AAPL was as low as $145. Now, it’s trading right around all-time highs and hugging the $161 level.
That is a pretty big move higher. It’s especially impressive because the S&P 500 has struggled for gains in that period, inching up just about 3%.
So, yes, AAPL stock hasn’t been a loser since May.
At all.
In fact, it has been a big winner. And maybe this storyline of the biggest tech company in the world getting bigger will keep playing out. After all, the smartest investor in the world does own quite a bit of AAPL stock.
But I think not. I’m sticking with my bear thesis on AAPL stock.
Here’s why.
The Downside Catalyst Has Yet to Hit AAPL
AAPL stock is trading at a lofty valuation because investors expect the iPhone 8 to spark this huge upgrade cycle, the likes of which we haven’t seen before.
The so called “Super Cycle” has received that name because of its robust feature set. The phone is expected to be materially different and better than its predecessor. It’s supposed to have a glass body and edge-to-edge OLED display. The home button is reportedly disappearing and being replaced by face recognition software. It’s even supposed to have wireless charging capability.
With so many upgrades, it makes sense that consumers would buy the iPhone 8 in droves. That is why AAPL stock is trading at roughly 18.3 times trailing earnings. That’s about as big as that multiple has been over the past five years.
But then you ask non-Wall Street folk and non-Apple enthusiasts what they know about the iPhone 8.
You might find what Piper Jaffray found. Consumers at large don’t really know much about the iPhone 8. Consequently, they aren’t planning to buy this next iPhone in droves like Wall Street expects them to.
According to Piper Jaffray’s survey of over 400 U.S. iPhone users, upgrade expectations this year are similar to upgrade expectations last year. Only 16% of iPhone users surveyed plan to upgrade this fall, compared to 15% last year. Meanwhile, only 24% will “maybe” upgrade this year, versus 29% last fall.
And as far as the “so many people have old iPhones that they will NEED to upgrade this time around” thesis goes, well, you can throw that out the window. The survey also found that the percentage of iPhone users who own a model that is 2 or more years old is 66%. That is basically the same as it was last year (67%).
So across the board, everything is basically the same as last year. AAPL bulls said the iPhone 7 sold poorly because everyone was waiting for the iPhone 8. If so, then upgrade expectations for the iPhone 8 should be huge (or at least noticeably larger than upgrade expectations for the iPhone 7).
But that isn’t the case.
Overall, Piper Jaffray’s survey seems to confirm what I’ve been worried about for a long time. This “Super Cycle” is being over-hyped by Wall Street. The reality is that the iPhone 8 will sell about the same or just marginally better than the iPhone 7.
Bottom Line on AAPL Stock
That is a big problem for AAPL stock. Apple has only traded near this valuation once before over the past five years. That was in late 2014.
But then over the next year, AAPL stock collapsed from $130 to $90. It didn’t get back to $130 until February 2017.
AAPL stock is due for a similar pullback soon. This stock may grind higher as Wall Street expectations for iPhone 8 sales continue to build, but when the numbers come out later this year, they will assuredly disappoint.
And AAPL stock, sitting at a five-year high valuation, will fall.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
