Apple Inc. (NASDAQ:AAPL) has proven bears wrong time and time again. Founder Steve Jobs built an organization with incredible resilience. And those who criticize Apple stock find themselves appearing like broken clocks — right only twice a day. Still, we might be heading towards one of those moments.
I know that it’s not the most popular opinion.
And judging from the Apple stock price today, it appears premature to doubt the fruit-logoed company. Shares may be a little bit lethargic at only 6.4% year-to-date. However, AAPL recovered remarkably well from the early February downturn. At one point, the consumer tech giant closed down 9% for the year.
Some technical analysts might argue that this year’s chart formation for AAPL stock resembles a cup-and-handle continuation pattern. To that I say… maybe. It wouldn’t be the first time that the company surprised me, and it likely won’t be the last.
At this juncture, however, you should ponder if the Apple stock price is getting a bit overheated.
Apple Stock Outpacing Its Flagship Product
Some analysts make the argument that Apple stock is more than just an investment in the iPhone. Fundamentally speaking, I agree. InvestorPlace’s Dana Blankenhorn lays out an excellent case, stating that the firm is competing against Alphabet Inc (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) in the cloud ecosystem.
Apple also making inroads into the healthcare sector. For instance, Blankenhorn points out that “Apple Watch can now detect early signs of diabetes with 85% accuracy.”
But let’s not get too far ahead of ourselves. In the most recent first quarter of 2018 earnings report, the iPhone represented 69.74% of total revenues. This stat is actually slightly higher than the year-ago quarter (.3% higher). You would think this number would drop lower given Apple’s diversified businesses. (It is however worth noting that Apple saw a 12.6% increase in revenue overall during this time.)
I’m sorry, folks, but Apple stock is as much of an iPhone investment as it’s ever been.
That’s bad news for two reasons: one, iPhone sales are stagnating, and two, AAPL stock is overvalued relative to those sales. Let me explain.
In the above chart, iPhone sales for the year are shown as an average of their reported sales across all four quarters. For statisticians, the correlation coefficient between the two data points is 0.93. For the rest of us, wherever iPhone sales went, so too did AAPL.
During the iPhone’s heyday, company shares were a no-brainer. In those rare times when smartphone sales jumped and AAPL slipped, you could make a legitimate case that the stock was undervalued.
Now, we have the opposite situation. Apple stock is breaking new ground while iPhone sales stagnate. Consider that phone sales are down 6% from 2015, while the stock is up 30%.
That wouldn’t be a problem if Apple was successfully diversified. Instead, they need their flagship product to carry them home.
Other Circumstantial Evidence causes Concern
The counterpoint to my argument is that the markets have their own logic. I concede that line of thinking. But at the same time, my counter-counterpoint is that AAPL stock is no longer trading the fundamentals, but emotions. And emotions are brutally tough things to trade.
But if you don’t buy into the math, then look at the circumstantial evidence. Blankenhorn mentioned that the iconic firm’s “other products,” which includes the Apple Watch, experienced rapid growth. Great, but where’s the net impact? If management doesn’t do something quick, iPhones will firmly represent 70% of total revenues.
Up until 2015, iPhone sales accounted for less than 59% of global sales, so this problem is getting worse rather than better for Apple over time.
Additionally, our Brad Moon reported on Apple’s “underwhelming” HomePod smart speaker sales. Marketing execs apparently overpriced their new product, which isn’t too much of a surprise. Personally, I’m seeing a company that sells a bunch of stuff, but none of them too well.
Except, of course, the iPhone.
But with so much competition, and the flagship showing its age, I’m not ready to jump on board Apple stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
