Apple Inc. Wins in 2017 But Will Have a Tough Time in 2018

All is well in the Apple Inc. (NASDAQ:AAPL) kingdom. That is why AAPL stock is trading at all-time highs.

iPhone sales are on fire and the company is selling about as many phones as ever. Subdued iPhone 8 demand has been forgotten by investors, who are now focused on what analysts are dubbing “super-charged” demand for Apple’s latest and greatest, the iPhone X.

iPad sales are also on fire. Apple’s iPad segment has posted positive unit and revenue growth in back-to-back quarters, ending a multi-quarter run of declines. With iPad sales inflecting upward, it’s clear to see that the Apple is retaking tablet market shared from 2-in-1 devices.

Apple Watch sales are also on fire. The Apple Watch has posted unit growth of over 50% for three consecutive quarters. Apple is clearly running away with the wearables/smart watch market.

Mac sales are inflecting upward. After four straight quarters of declines in 2016, Mac sales have posted four straight quarters of gains in 2017.

The high-margin Services segment is doing really well, with growth accelerating to 34% last quarter from 24% one year ago. Services revenue now accounts for over 16% of Apple’s total revenue, up from 13.5% a year ago. That is important, because it’s additive to the overall margin profile.

With so much going right for Apple, what could stop AAPL stock?

Failure for Apple to repeat its 2017 success in 2018.

AAPL stock is an iPhone growth story, and right now, the iPhone growth story is all about super-charged demand for the iPhone X. But it actually looks like demand for the iPhone X isn’t as big as everyone thought — lead times are falling much more quickly than expected. Moreover, regardless of how big iPhone X demand is, it’s not repeatable next year.

But AAPL stock is trading on the assumption that not only is iPhone X demand huge, but that huge iPhone demand is something that is going to hang around forever.

It won’t. Smartphone demand cycles. Look at the iPhone 6 launch.

Consequently, AAPL stock looks dangerous in 2018.

The Risks to AAPL Stock in 2018

Firstly, it’s worth noting that regardless of which way you want to spin the AAPL growth narrative, this is an iPhone-first story. iPhone sales accounted for over half of total revenues last quarter.

That means there is a lot of pressure on iPhone sales to meet or exceed expectations.

Secondly, AAPL stock is trading at its richest valuation in five years. The only other time AAPL stock was this richly valued over the past five years was in late 2014/early 2015 when investors were bidding up the stock on huge iPhone 6 expectations.

That means there is a lot of pressure on iPhone X sales to meet or exceed expectations.

Thirdly, even though the iPhone 6 was a huge hit and AAPL stock kept climbing higher in early 2015, AAPL stock started to crumble in mid-2015.  The market realized that huge demand for the iPhone 6 was a one-time thing. The success was not repeatable. Earnings estimates came down. The valuation fell. And AAPL stock tumbled from $130 to $90 in a year.

That means there is a lot of pressure on new iPhone sales in 2018/19 to meet or exceed expectations.

Overall, there is a ton of pressure on AAPL stock currently, more so than at any other point over the past 5 years (save late 2014 / early 2015).

Indeed, the current situation draws eerie similarities to late 2014 / early 2015. Big valuation. Big expectations. A seemingly unstoppable growth narrative. The stock trading at fresh all-time highs.

By mid-2016, AAPL stock had collapsed. I think AAPL stock is due for a similar fall from grace soon.

Bottom Line on AAPL Stock

AAPL stock is near the end of what was a great 2017.

But 2018 will look much different.

I think now is the time to take some profits off the table.

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

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