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Be Prepared for a Huge Pullback in Apple Inc. (AAPL) Stock

It seems reality has somewhat sunk into Apple Inc. (NASDAQ:AAPL) stock.

Be Prepared for a Huge Pullback in Apple Inc. (AAPL) Stock!
Source: Shutterstock

The cat is out of the bag, and it looks like Apple won’t sell many iPhone 8 models this year. That puts a lot of pressure on the revolutionary (and expensive) iPhone X to perform above and beyond expectations, but production delays and increased smartphone competition are starting to cloud the once rosy growth outlook for Apple’s latest and greatest phone.

Meanwhile, AAPL stock is off its recent $164 highs. In the week or so after Apple revealed the new iPhones, investor expectations cooled and AAPL stock shed $50 billion in market cap. For comparison, Target Corporation (NYSE:TGT), eBay Inc (NASDAQ:EBAY), and TJX Companies Inc (NYSE:TJX) all have market caps under $50 billion.

It was a classic “buy the rumor, sell the news” trade.

AAPL stock has bounced some since it shed that $50 billion and many bulls think this is time to get in ahead of explosive iPhone X demand, while the stock is cheap.

But bulls should be aware of two things:

1) AAPL stock isn’t cheap.
2) iPhone X demand won’t be nearly as explosive as everyone thinks.

Apple Stock Is Too Expensive and Baked With Unrealistic Expectations

Apple stock is far from cheap.

It’s up 35% year-to-date and trading near a 5-year valuation peak. The trailing earnings multiple (~18 times), trailing EBITDA multiple (~11 times) and trailing sales multiple (~3.7 times) are all as big as they’ve been since early 2015, shortly after the mega-popular iPhone 6 launched. Meanwhile, the trailing free cash flow yield (~6%) is far lower than where it was in early 2015 (~7.5%).

All this means that expectations for AAPL are as fully loaded as they have been since shortly after the iPhone 6 launch. But even though the iPhone 6 was a tremendous success, AAPL stock still fell from $130 early in 2015 to $90 by May 2016.

Why? Because expectations were too high. At such a premium valuation, Apple needs to show investors that consistent growth is still possible on such a large revenue base. The company didn’t do that back in 2015/16. A huge net sales increase in fiscal 2015 was followed by an 8% contraction in sales in fiscal 2016.

What is happening under the hood?

At the core of the problem is the fact that users don’t need a new iPhone every year, or even every 2 years. Surveys indicate that about two-thirds of iPhone users have a model that is two or more years old. This was true last year and it is still true this year. Consumers are holding onto their phones for longer periods of time.

That is a major headwind for the iPhone X. It means the phone likely won’t sell as well as many hope. It also doesn’t help that smartphone competition is ramping up and that production delays still hang over Apple’s latest smartphone. All together, there is just far too much risk to the “iPhone X saves the day” narrative.

If that narrative falls apart, so too will Apple stock.

Bottom Line on AAPL Stock

AAPL stock today looks a lot like the AAPL stock of late 2012 and early 2015. In other words, it looks like AAPL stock is nearing a peak due to fully loaded expectations.

I fully expect Apple stock to pull back in a pretty big way over the next several months. I think that dip will be a great buying opportunity, but I think the stock looks quite risky today.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/huge-pullback-apple-aapl-stock/.

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