Apple Inc. (NASDAQ:AAPL) is due to report earnings on Thursday afternoon. Suddenly, investors are getting nervous. and for good reason. AAPL stock is due for a correction.

The market’s largest company has been on tear ever since summer 2016, AAPL stock has soared from below $100 to $180. The most recent surge was predicated on expectations that the new-and-improved iPhone X would catalyze an iPhone “Super Cycle”, the likes of which we have never seen before.

But now that they are about pull off the sheets and see how well the iPhone X is actually doing, investors are apprehensive. AAPL stock has simply tread water since early November. That sideways action has turned into a sizable sell-off in the week ahead of the Thursday report.

What is next up for AAPL stock?

More downside.

This stock got way ahead of itself on expectations that were unrealistically big. Apple will report earnings. The iPhone X numbers will disappoint. The March quarter guide will be below consensus. Investors will freak. The sell-off will continue. Valuation will compress.

This is simply a must-avoid situation right now. The Thursday earnings report will likely be the catalyst which sends AAPL stock into full-blown correction mode.

iPhone X Has Disappointed, And AAPL Stock Will React

There have been murmurs on the Street for some time that the iPhone X didn’t sell as well as everyone expected. Some news outlets have been citing sources familiar with the matter that weak iPhone X demand has caused Apple to slash production plans. Analysts have recently chimed in, saying that iPhone X numbers will likely be below consensus.

But the most damaging preliminary read on iPhone X demand came from the Nikkei Asian Review and Wall Street Journal. The Nikkei Asian Review said, and the WSJ later confirmed, that Apple is cutting its planned iPhone production for the March quarter in half from 40 million to 20 million units due to much weaker than expected demand.

That is really bad news for Apple stock.

AAPL stock has been bid up for the past year on expectations for the iPhone X to not only be the greatest selling iPhone ever, but to also catalyze a new era of must-have smartphones. The last time we heard this logic was with the iPhone 6 back in 2014-15. In both cases, investors bid up AAPL stock to an extreme valuation level (18-19 earnings multiple versus 5-year average of 14).

Back then, the iPhone 6 was a huge success, but AAPL stock still sold off big time because the iPhone 6’s success was not sustainable.

This time won’t be any different.

Watch Out For Earnings

Apple will report numbers on Thursday, and they won’t be very good. The iPhone X didn’t sell as well as everyone thought during the holiday quarter. And demand is weakening much more quickly than anyone anticipated.

Consequently, Apple management will guide down for the March quarter. That will force investors to reset expectations for iPhone demand over the next several quarters, which will spark a valuation reset on AAPL stock.

I don’t think Apple stock falls back to its 5-year average earnings multiple of 14 because things at Apple are better elsewhere. Investors should consider the rebounding iPad and Mac businesses, or the burgeoning Services business. Plus, tax reform will provide solid downside protection.

But if you assume that earnings estimates for this year will come down to $11 thanks to weaker than expected iPhone demand, and that the stock gets a slightly above average 15-16 multiple at the end of 2018, that gets you to a $170 stock in a year.

That implies essentially zero upside over the next 12 months.

Bottom Line on AAPL Stock

This is a sell-now, buy-later type of stock.

Right now, expectations need to come down and the valuation needs to reset. The Thursday report will give the stock an opportunity to do that.

Once the earnings multiple has compressed to around 14 to 16, that will be the time to buy.

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