As much as I was eager to recommend that investors ignore the growing pessimism around Apple (NASDAQ: AAPL) stock and follow Warren Buffett’s famous quote about being “fearful when others are greedy and greedy when others are fearful,” I just can’t do it, at least not for now.
The red flags around Apple stock are just too numerous to ignore. For one thing, some of Apple’s biggest suppliers such as audio chip maker Cirrus Logic (NASDAQ:CRUS); Lumentum (NASDAQ:LITE), which supplies components for the iPhone’s facial recognition technology; and Japan Display, which sells screens, have reduced their financial guidance. Though these companies haven’t explicitly blamed AAPL for the slowdowns of their businesses, it’s hard to imagine any other company being responsible for their woes.
Moreover, AAPL will no longer disclose how many iPhones it sold each quarter. Apple CFO Luca Maestri argued that the “number of units sold during any quarter has not been necessarily representative of the underlying strength of our business”, but that’s just an excuse. Indeed, the company would be singing a different tune if iPhone sales were beating expectations instead of lagging them, as they did last quarter. Apple’s decision to withhold the data isn’t a good sign for owners of AAPL stock.
Weakening iPhone Demand
Another (closely related) bad sign is weakening demand for iPhones. A recent UBS survey found that the number of U.S. consumers who intend to buy AAPL’s marquee product had reached a five-year low. The number of Chinese consumers who intend to buy iPhones has also plummeted. China is a key market for AAPL. The UBS poll of 6,900 consumers was conducted after the latest iPhones were launched, indicating that AAPL badly needs a new hit iPhone.
The Shaky Conventional Wisdom on Apple Stock
To be sure, AAPL has been underestimated in the past. One of my relatives has bought and sold AAPL stock at the wrong times over the years. I have lost count of the number of articles that I have read arguing that the company’s best days are behind it. Ditto for the unfair columns which contend that CEO Tim Cook is not as effective as his venerated, late predecessor, Steve Jobs.
I think that AAPL still makes the best smartphones, tablets, laptops, and smartwatches. The tech giant’s Services business looks promising and could generate $50 billion of revenue by 2020. Even so, the sentiment towards Apple stock is so negative that even a slight hint of negative news will send it into a tailspin. That includes events beyond AAPL’s control, such as the simmering trade war with China and President Trump’s threat to impose a 10% tariff on iPhones imported from the Asian country.
Finally, there’s the valuation of Apple stock. With a price-earnings ratio of 14.2, Apple stock trades at a discount to other tech giants including Facebook’s (NASDAQ:FB) 21.5 and Amazon’s (NASDAQ:AMZN) 92. AAPL stock, however, isn’t cheap in light of its own historical trends. For example, AAPL traded at a multiple of 10.75 in 2016.
My advice to investors is to wait for the next pullback of Apple stock before adding to their positions. Given the many issues the Cupertino, Calif.-based company is facing, it’s only a matter of time before a better buying opportunity will present itself.
As of this writing, the author has a small amount of Apple stock.
