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Why Apple Inc. Stock Is Way Too Expensive to Even Consider


If you’ve been long Apple Inc. (NASDAQ:AAPL), life is looking pretty swell for you. For starters, the AAPL stock price is up over 30% from this January’s opening session. This easily makes Apple one of the best performing names in the Dow Jones index. Furthermore, excitement is brewing over the upcoming iPhone X, with shares driving up 6% over the past few days.

For any other investment, this would be considered an all-around positive sign. And I’m not necessarily suggesting that bad times are looming for AAPL stock. Certainly, Apple has been one of the best buys in this century. At the same time, dominance, especially in the volatile consumer-electronics sector, is incredibly difficult to maintain. A misstep could put you quickly behind, and it could take years to make up the deficit.

So far, the winds are shifting favorably for the AAPL stock price. Early indications for iPhone X demand is “off the charts,” to borrow a phrase from InvestorPlace contributor Bret Kenwell. Apple is pushing the current consumer economy’s boundaries, testing the appetite for four-digit price-tagged smartphone. Pre-order numbers apparently justify bullishness towards company shares.

And have no doubt: people are climbing aboard the Apple train. For at least the last several months, no covering analyst was bearish on the AAPL stock price. Furthermore, the allocation of bullish analysts to fence-sitters improved from 73% in July to 81% in October. Many investors will apply the logic that if professionals love it, so should everyone else.

Maybe that’s true. But in an environment as fickle as electronics, the elevated AAPL stock price is a tad too risky to engage.

Don’t Expect the iPhone X to Keep Lifting AAPL Stock

First, I’m not the smartphone market’s biggest fan. Whether the latest device comes from Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), Samsung Electronics (OTCMKTS:SSNLF), Nokia Oyj (ADR) (NYSE:NOK) and everything in between, it’s all the same thing after a while.

The industry’s sales growth tells you all you need to know. Since 2015, U.S. smartphone sales have only grown by single-digit percentage points. Contrast this image with the years 2010 and 2011, when smartphone revenues gained a 53% year-over-year average.

Proponents of AAPL stock will claim that the iPhone is different. Is it? Last time I checked, the iPhone 8 doesn’t look too hot because it’s a rehash of the iPhone 7. The bulls will then say, it’s the iPhone X, stupid! But is the “ocho” really supposed to underperform?

Let’s back up here and think logically. Why would Apple invest in a throwaway product when they can simply go with what works? Even if the purpose was to hedge iPhone X sales, it’s a mighty big production risk. I’m fairly certain people wouldn’t want to justify the AAPL stock price if the company isn’t making legitimate efforts to move all their products.

Furthermore, weak iPhone 8 sales should concern investors. Apple is a special company, but it’s not that special. The highest-priced product typically offers the most profit margin, but it attracts the least volume. The lowest-priced product sacrifices margin for increased volume. That’s economics 101.

However, AAPL stock bulls want to convince you that low volume for the company’s cheapest smartphones is a positive development. Somehow, the iPhone X is supposed to be both margin and profit leader, all the while overcoming the inventory costs of dust-collecting iPhone 8s.

I agree that the X’s pre-order sales are encouraging. I disagree that demand is a panacea for Apple’s broader problem.

Apple is Rudderless without Steve Jobs

What exactly is this problem? Frankly, without Steve Jobs, Apple has lost its vision. They’re merely rehashing old ideas and hoping that consumers don’t notice. Every new product is a little bit faster, a little bit lighter, and maybe more attractive; however, the improvements are marginal as the price tag keeps rising. Eventually, this dynamic will negatively impact the AAPL stock price unless the company can forward genuinely new innovations.

Unfortunately, I don’t really see anything changing. Moreover, I doubt that the consumer market will support a four-digit smartphone. At a certain point, a smartphone needs to do three things: make calls, take pictures, and access the internet. Beyond that, the limitations of the smartphone platform make it not ideal for intensive applications.

AAPL, iPad sales
Source: Source: JYE Financial, unless otherwise indicated
Apple’s tablet started off the gate on fire, but global sales eventually peaked in the first quarter of 2014. Since the third quarter of 2015, iPad sales have largely flat-lined. No wonder. Tablets are novelty items. They look cool, they perform a few nifty functions, but at the end of the day, they’re gimmicks.

While the smartphone’s fundamental core isn’t a gimmick, the incessant marginal improvements are. When Apple first introduced their i-series of smart devices, they shaped the consumer market. In hindsight, we see that investing in AAPL stock was a brilliant move. Now, they’re chasing the market with different iterations of yesterday’s ideas. The entire story is rear-end backwards.

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

Article printed from InvestorPlace Media, https://investorplace.com/2017/11/aapl-stock-way-expensive/.

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