Investors have rediscovered the sell button. The S&P 500 Index this week made its largest peak to trough decline in two months. Apple Inc. (NASDAQ:AAPL) hasn’t been spared from the selling. AAPL stock has fallen back to $156, almost 10 points short of its all-time high.
Is this dip worth buying? On the positive side, concerns about the iPhone 8 launch are overblown and miss the real story. And AAPL stock is still cheap, with the digital content strategy offering an additional means for getting sentiment moving in the right direction again. That said, the stock is facing real technical resistance and a sliding sector, in addition to the short-term iPhone launch cycle issues.
AAPL Stock Cons
Technically Overdone: AAPL stock has enjoyed a monstrous run over the past year. It has moved from $100 to as high as $165. However, the bullish move looks tired, and perhaps fully exhausted for now. Shares topped on Sept. 1, and since then, the stock has developed an increasingly bearish pattern with selling on increasing volume.
Apple stock doesn’t operate in a vacuum, either. Other FAANG stocks are showing increasingly tenuous charts. Amazon.com, Inc (NASDAQ:AMZN), for example, hasn’t made new highs since July, and lately can’t even hold the $1,000 a share mark. Tech stocks have massively outperformed the market over the past 18 months. Both the sector, as a whole, and AAPL stock look like they need a correction.
Where’s the Innovation? While the iPhone X seems exciting enough, Apple skeptics have concerns with the rest of the product line. While Apple’s tech titan peers are pushing ahead with all sorts of revolutionary new products and technologies, Apple seems to be largely out of ideas.
Yes, there have been new things, such as AirPods and upgrades to the watch. But all of this feels more like evolution than revolution. It keeps existing users in the Apple ecosystem, but it’s far from the sort of cultural moment that the introduction of the iPod or iPad caused, to say nothing of the iPhone. Apple can keep riding its phones for a long time, but it won’t deliver market-beating returns indefinitely without some new big thing.
Patent Dispute Drags On: Apple’s long-running patent fight with Qualcomm, Inc. (NASDAQ:QCOM) remains a potential issue for investors. While it may seem old news at this point, Qualcomm is far from abandoning its efforts to make Apple pay up.
Earlier this month, Qualcomm filed a lawsuit in China that seeks to ban the fabrication and sale of iPhones in the country. While unlikely to succeed, the threat is serious indeed. A Qualcomm spokesperson said: “Apple employs technologies invented by Qualcomm without paying for them,” referring to three specific, essential patents. Assuming the company eventually settles these legal claims, it could lead to a hit for AAPL earnings in the short-term.
AAPL Stock Pros
Apple’s Digital Content Strategy: In June, Apple brought on veteran Sony managers Jamie Erlicht and Zack Van Amburg to head up its original programming efforts.
After a few months of quiet on that front, Apple made a big announcement earlier this month: Steven Spielberg will produce 10 episodes of original content for Apple. The episodes will be a reboot of his 1980s series Amazing Stories.
Everyone is getting into content these days. To stand out against the likes of Walt Disney Co (NYSE:DIS) and Netflix, Inc. (NASDAQ:NFLX) Apple needs to make a splash, and Spielberg is just the sort of larger-than-life presence that can do it. We don’t know what Apple’s plans are in terms of monetizing their content, but with deep pockets, they can certainly compete with peers with their digital content strategy.
Cheaper than the Market: Even after its huge run, AAPL stock remains cheap compared to the market. Apple stock is selling at 18x earnings, and 14x next year’s earnings. That looks attractive in comparison to the S&P 500, which is trading in the mid-20s on an earnings basis. Compared with the rest of the big-cap tech stocks, AAPL stock looks even cheaper by comparison.
And digging in past the headline earnings numbers, things get even better.
Apple has a huge cash hoard. The proposed tax overhaul would free up this cash, allowing Apple to return it to shareholders via the AAPL dividend or invest in other useful purposes as opposed to sitting in low-yielding marketable securities. RBC Capital markets analysts suggest that the cut in a corporate tax rate would also add $4 or more a year to Apple’s earnings. This, they say, would pave the way for AAPL stock to reach a $1 trillion market cap.
Don’t Fret iPhone 8 Worries: The iPhone 8 is off to a slow start. It’s roll-out has generated significantly less consumer activity than last year’s cycle for the iPhone 7. The stock has slid on concerns about this. In fact, surveys have indicated that even the iPhone 6S series is still outselling the 8 at this point.
However, that’s to be expected. Price-conscious consumers are drawn to the older cheaper models. And the upcoming release of the iPhone X is keeping the company’s most loyal high-end consumers from upgrading now. The iPhone X may launch slowly, due to various supplier problems.
Source: Statista
That said, 2017’s loss on that front should set the stage for a strong first half of 2018 for Apple. Investors worrying about any one quarter are missing the bigger picture. Don’t judge the whole generation of new product launches just on the 8 underperforming out of the gate.
Bottomline on AAPL Stock
Don’t expect miracles from AAPL’s stock price today. You’re unlikely to get another 50% run higher next year, like it did last year. The company’s long-term strengths remain in place.In the short-term though, AAPL stock looks worn out, and ready for a break. Throw in an absence of innovation and ongoing patent disputes, and long-suffering Apple short sellers could enjoy a prosperous end to the year.
At this time of this writing, the author owned QCOM stock. He had no position in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.
