Tech giant Apple Inc. (NASDAQ:AAPL) has been under the microscope lately as investors question whether or not the firm will be able to turn in a solid performance in the year to come. Apple came under fire recently after it admitted to intentionally making older iPhone models slower and the poor press added fuel to the bear argument that AAPL stock is overvalued and due for a correction in 2018.
The Bear Case
Earlier this week, InvestorPlace’s Luke Lango pointed out that AAPL stock price may be getting too big for its britches. The firm’s valuation is at multi-year highs with 19x training earnings and a lot of hype surrounding the iPhone X. Investors are expecting big things from the company’s latest handset and AAPL stock’s $175 price tag is proof of that.
Instinet, a division of Nomura, took a similar position on AAPL stock in mid-December and lowered its rating from Buy to Neutral, cautioning that iPhone X sales may not be quite as robust as traders were initially hoping. Instinet’s new price target of just $175 suggests that AAPL stock has reached a plateau.
A huge part of the worry about AAPL’s iPhone X performance is the fact that the phones cost $1000 a pop- uncharted territory for smartphone makers. Many are concerned that the lofty price tag is too expensive for the average consumer.
Apple released the iPhone 8 just six weeks earlier than the iPhone X, so there’s a chance that consumers may be willing to settle for the 8 rather than paying a premium for the X.
There are also rumors that pre-orders for the newest iPhone are weaker than expected, and that Apple is thinking about revising its pricing structure in order to boost demand. If the rumors are true, Apple is planning to revise its iPhone prices during the first half of 2018.
Of course, all of this is hearsay and hasn’t been confirmed by Apple itself, but it’s worth noting if you’re expecting to see an AAPL stock correction in 2018.
Still a Great Long-term Play
AAPL stock has gotten considerably more expensive over the past three months adding about $25 to its share price, so there’s a lot riding on the firm’s next earnings report and holiday sales figures. A poor iPhone X performance will almost certainly take the stock lower and the firm is unlikely to do much better than simply meeting expectations.
Then there’s the other side of the argument- which is that the iPhone X is doing just fine despite the negative press. Americans may be resistant to the higher price tag, but Chinese consumers appear to have no problem shelling out the extra cash.
In fact, consumers in China are not only buying iPhone X, but they’re willing to buy the highest priced models in order to get extra storage. Those that opt for the cheaper iPhone 8 are still paying a premium in order to get the maximum storage.
Waiting Out the Bumps
AAPL stock is the kind of investment you buy and hold on to, and a pullback in the coming months will make for an excellent entry point for long-term investors. As Chris Fraley put it- Apple is boring, but boring is good.
Gone are the days when new iPhones were the talk of the town and Apple product launches created momentum for AAPL stock. However, the company offers investors a solid long-term growth opportunity that can be difficult to find on Wall Street.
Apple has a wide moat because of its hugely popular ecosystem. Changing from Apple to a competing brand is cumbersome, so the company’s users tend to be loyal.
New Apple products don’t have the same wow-factor that they used to, but they’re playing well among consumers, bringing in new revenue streams, and building out the Apple ecosystem effectively.
Then there’s the fact that Apple has unparalleled cash reserves that might become available in the coming year if Trump’s tax reform plans play out.
There has been a great deal of speculation about exactly how Apple will use its $256.8 billion in cash if the tax code is amended, but it’s likely that at least part of the influx of cash will be returned to shareholders through dividend increases and buybacks.
The Bottom Line
Buying Apple stock now might not be your best bet because there’s a good chance that Apple is due for a pullback in the coming months. However, it’s not worth selling the Apple shares that you already own because the stock makes for a great long-term play.
Things might get turbulent over the next 6 months, but long-term investors will be rewarded for waiting out the storm.
As of this writing, Laura Hoy was long AAPL.