Apple Inc. (NASDAQ:AAPL) has fallen flat since early November after being a big winner for most of the year. What does this mean for AAPL stock in 2018?
Bulls naturally believe that the stock is just consolidating after a huge run higher in October. After all, Apple has done this multiple times before during its bull run in 2017. A huge run in the February through May period turned into weakness in shares in June. AAPL stock rallied big in July and August, but the rally ended with weakness in September. Then AAPL stock took flight again in late October/early November.
Now, we are just experiencing that normal weakness that comes after a big run in AAPL stock.
So maybe it’s best to just sit back and wait for the next rally. It could get jump-started as early as January — when holiday earnings are due. All reports signal that the iPhone X has continued to perform quite well, and Apple stock is an iPhone-driven story right now. Better than expected iPhone X sales numbers should send AAPL stock materially higher.
The bull thesis on AAPL stock appears well-established.
But bulls ignore one critical element of the Apple story: AAPL stock has been here before. From late 2014 through early 2015. Things didn’t go well for shareholders in the near term then, and they won’t go well for shareholders this time.
First, let me clarify that I am not bearish on AAPL stock in the long term. This is a secular growth company that has built arguably the most compelling ecosystem of products in the world.
And that ecosystem is only growing.
iPhone sales are on fire, and the company is selling about as many phones as ever. iPad sales have come roaring back with posting positive unit and revenue growth in back-to-back quarters after a multi-quarter run of declines.
After three consecutive quarters of 50%-plus unit growth, the Apple Watch seems to be the only device that matters in the burgeoning wearables market. This is likely because it fits seamlessly into the Apple ecosystem, which has already won consumers over with the iPhone. The high-margin Services segment is actually seeing its growth accelerate (34% last quarter versus 24% one year ago) and now accounts for over 16% over Apple’s total revenue.
Even Mac sales growth is positive. After four straight quarters of declines in 2016, Mac sales have posted four straight quarters of gains in 2017.
This growth will continue into the foreseeable future because Apple isn’t just a series of products. Its an ecosystem of connected products. Each one builds on and is connected to another, and consumers feel compelled to own all of them.
As such, AAPL stock will head higher in a multi-year window.
Stocks don’t go up in straight lines. There are always bumps in the road, and sometimes those road bumps result in fairly sizable pullbacks.
I think AAPL stock is due for a sizable pullback in 2018.
Why? Reality will catch up to valuation in the near term, and that will result in significant multiple compression.
At 19x trailing earnings and 12x trailing EBITDA, AAPL stock is trading at its richest valuation in five years. Clearly, investors are expecting big things from the iPhone X.
The only other time AAPL stock was close to being this richly valued over the past five years was in late 2014/early 2015. That was when Apple launched the iPhone 6, which had huge demand.
But even though the iPhone 6 was a huge hit and AAPL stock kept climbing higher in early 2015, the party didn’t last forever. By mid-2015, reality started to catch up to valuation. Analysts pumped up the stock and said the iPhone 6 would catalyze a multi-year super-cycle for iPhones, but that just never materialized.
By mid-2015, the market started to realize that huge demand for the iPhone 6 was a one-time thing, and that its success was not repeatable. Earnings estimates came down. The multiple compressed. And AAPL stock tumbled from $130 to $90 in a year.
A similar compression happened following the iPhone 5 launch.
The iPhone X is cool and is selling really well, but it won’t defy gravity.
AAPL stock is currently trading on assumptions that the iPhone X will catalyze a multi-year growth cycle, but history shows that this won’t happen. Consequently, reality will catch up to valuation in 2018, and AAPL stock looks susceptible to a sizable pullback.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.