The old adage on Wall Street is to “buy the rumor and sell the news.” Something similar appears to be happening in regard to Apple Inc. (NASDAQ:AAPL) stock. AAPL stock had a torrid start to 2017, climbing over 40% ahead of the highly-anticipated launch of the iPhone X. The AAPL share price hit an all-time high just shy of $165 in late August.
Since then, however, AAPL stock has weakened, falling some 9%. The decline since the reveal of the iPhone X (and the Apple Watch 3) isn’t much of a surprise — in fact, a month ago I predicted exactly this type of pullback.
But the falling AAPL stock price could be more than just a short-term issue. The news over the past month — and the market’s reaction to that news — suggest that AAPL stock could fall even further.
Is ‘Cannibalization’ Reflected in AAPL Stock Price?
AAPL stock looks cheap, trading at about 11 times fiscal 2018 earnings per share estimates, plus its nearly $30 per share in net cash. But on an earnings multiple basis, AAPL stock pretty much always looks cheap.
There are two reasons for this. The first is the cyclical nature of iPhone sales, which still drive the majority of Apple revenue. Bear in mind that iPhone revenue declined 12% year-over-year in fiscal 2016. The iPhone X and 8 will help FY17/FY18 revenue, but Apple can’t release a revolutionary phone every year.
The second is the mid- to long-term fear of cannibalization. As processing power increases and becomes cheaper, the differentiation between Apple’s high-end products and those of cheaper rivals narrows. Just as Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) undercut HP Inc (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) in personal computers, so might overseas competitors undercut Apple in smartphones.
That fear is baked into the AAPL price to some extent. But early reviews of the iPhone 8 and the X raise the question of whether Apple’s ability to maintain high-end pricing is petering out. Most reviews suggest the 8 is something closer to an “incremental update” and, as InvestorPlace columnist Brad Moon pointed out, initial demand appears low.
The iPhone X, meanwhile, is suffering from production delays, meaning it won’t be available for the holidays. In reviewing the product, Forbes wrote that “The iPhone X could be the greatest leap forward in technology simply for the sake of having the technology.”
The question with the X, in particular, is: what’s really left to offer most consumers? Other than a bit more speed, modestly better battery life and wireless charging (already available on a number of Android models), it’s harder and harder for the iPhone to stand apart from past versions, let alone competitors. That’s a major problem for AAPL stock.
Pricing, Competition and AAPL Stock
One of the big concerns for Apple is pricing. Historically, the company has been able to maintain premium pricing, which helps margins and, thus, the AAPL share price. But the headline price of the iPhone X at $999, requires a notable jump in performance to attract not just Apple loyalists, but US and foreign consumers who aren’t nearly as tech-savvy.
That jump is difficult to make — and getting more difficult every year. Competition is intensifying. Alphabet Inc (NASDAQ:GOOGL) is pushing its Pixel line. Nokia Oyj (ADR) (NYSE:NOK) has re-entered the smartphone space, albeit by outsourcing production, and has a lot riding on its new model 8. Samsung is recovering from its Note 7 debacle last year.
Increasingly, non-iPhone products are starting to look “good enough,” particularly with a $200-$400 pricing gap. If that continues, iPhone sales could slow as the upgrade cycle lengthens. At the very least, Apple won’t be able to take pricing the way it has been. That, in turn, will hit margins and profits and could send AAPL stock back in the direction of 2016 lows.
A Lower AAPL Share Price Is Coming
There’s reason to see further near-term pressure on AAPL stock from iPhone concerns. The iPhone X almost certainly isn’t going to ship in bulk until 2018. Sales of the iPhone 8 are likely to be overshadowed by the headline-grabbing X. Beyond this cycle, Apple will have a tougher time protecting margins.
And the broad problem for AAPL stock is that there still isn’t enough in the rest of the business to drive much growth. Non-iPhone sales have been flat for years. True, they have risen 6.5% through the first three quarters of 2017, but the iPhone still accounts for 64% of revenue and a likely higher share of profit. Mid-single-digit growth elsewhere isn’t offsetting much, if anything, in the way of phone weakness.
That problem isn’t going to change. Apple Watch is part of the “other products” category, which generates roughly 5% of total sales. Even a win against rivals Fitbit Inc (NYSE:FIT) and Garmin Ltd. (NASDAQ:GRMN) this holiday season isn’t going to move the AAPL price. Apple remains hugely reliant on the iPhone. And the launch of the X and the 8 highlights short- and long-term concerns stemming from that reliance.
As of this writing, Vince Martin has no positions in any securities mentioned.
