When it comes to Apple (NASDAQ:AAPL) stock over the past several years, I’ve worn many hats — including both the bear’s hat and the bull’s hat.
Today, though, I choose not to wear either hat. The risk-reward profile on AAPL stock at current levels seems balanced. That is to say, there are some things to like about Apple stock. There also some things not to like about Apple stock. The things to like largely cancel out with things not to like, and net net, neither the bull nor the bear thesis on AAPL stock looks all that compelling to me at the current moment.
To be sure, long term, Apple stock will go higher. But, the near term will probably be choppy, and that choppiness isn’t something I’m too interested in buying into.
Without further do, then, let’s dive into five pros and five cons about AAPL stock, and see how the risks and rewards balance each other out here.
5 Pros About Apple Stock
In no particular order, here are five pros about Apple stock right now.
The Secular Growth Narrative Remains (Largely) Robust. Apple remains the Western world’s favorite consumer technology company, with its products dominating the smartphone, laptop and smartwatch worlds. Sure, unit growth in those consumer hardware arenas is maxing out. But, Apple is successfully pivoting towards a software-driven growth narrative wherein Apple monetizes its extensive hardware install base with multiple subscription software services. Consumers are buying these services, and will continue to do so for the foreseeable future because they are addicted to the iOS ecosystem. In the long run then Apple’s revenues and profits should grind higher, as should AAPL stock.
China Headwinds Are Easing. China has been a big problem for Apple because: 1) Apple’s big growth engine is the China market, 2) China’s economic growth is slowing, and 3) elevated trade war tensions between the U.S. and China create increased pricing risk for Apple’s products. But, there are signs emerging that China’s economy is starting to stabilize, and it appears elevated trade tensions are now cooling. Currency headwinds are also moderating. As such, Apple’s China numbers should improve in the back-half of 2019.
Big Services Catalysts Are on the Horizon. Apple has a few very big services catalysts on the horizon, including the launch of Apple TV+ and Apple Arcade in the last few months of 2019. If those services gain widespread traction quickly — and they should, given that they have been hyped up and that Apple is pouring billions of dollars into them — then investors will grow increasingly bullish on the long-term growth prospects of Apple’s services business as we head into the close of 2019. That investor sentiment boost should provide a lift to AAPL stock.
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The Chart Looks Pretty Good. In late 2018, Apple stock put in a multi-year bottom. Ever since, the stock has been a solid uptrend, forming a healthy multi-quarter support line which the stock has tested and held multiple times. So long as the stock keeps holding this support line, its technicals remain favorable for AAPL stock to stay in an uptrend.
The Stock Is Cheap Relative to its Peer Group. AAPL stock presently trades at a forward price-to-earnings ratio of 16.6. That is about as cheap of a forward earnings multiple as you will find in big tech. Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) all trade over 20x forward earnings.
5 Cons About Apple Stock
Also in no particular order, here are five cons about Apple stock right now.
Some Cracks Are Starting to Form in the Secular Growth Narrative, Especially on the iPhone Side. The secular growth narrative of Apple pivoting into software growth as hardware growth has maxed out looks good. But, it’s built on this idea that Apple will maintain a huge hardware install base. There are signs that Apple’s hardware install base is already shrinking, though, as multiple reports (see here and here) point to the iPhone actually losing global market share over the past several quarters. If this trend accelerates — admittedly, a big “if” — then Apple’s secular growth narrative could weaken dramatically.
China Is a Wildcard With More Turbulence Coming. Apple’s China headwinds are easing right now. But, the U.S.-China trade war is cyclical. It goes from “things are progressing,” to more tariffs, to “things are progressing, again” — and cycles through those phases back and forth. As such, there is another shoe waiting to drop here, and when it does drop, AAPL stock could get hit.
Holiday iPhone Sales Will Likely Be Weak. Apple’s 5G iPhones are set to launch next year. What about this year’s new iPhone? It won’t incorporate 5G, and that’s big because other smartphone manufacturers are launching 5G phones in 2019. Thus, this holiday season, the smartphone landscape will include non-5G iPhones, and 5G “other smartphones.” That isn’t a favorable backdrop for healthy iPhone sales.
Antitrust Risks Loom Large. I mostly subscribe to the idea that the legal fight against big tech amounts to just noise. Nonetheless, noise creates uncertainty, and investors tend to shy away from uncertainty. Thus, antitrust risks are an optical negative for AAPL stock.
The Stock is Expensive Relative to its Historical Standard. While AAPL stock may be cheap next to its peers, it’s also expensive relative to its historical standard. Specifically, Apple stock’s five-year-average forward earnings multiple is about 14X — roughly 25% below the current forward earnings multiple. The premium is being warranted by this idea that Apple’s new software-driven growth narrative is higher margin and has more stability. Thus, if this software-driven growth narrative deteriorates at all, AAPL stock could be due for a sizable valuation pullback.
Bottom Line on Apple Stock
There are things to like about AAPL stock here — good growth, easing headwinds, big catalysts, favorable technicals and a relatively cheap valuation. There are also things not to like about AAPL stock here — cracks forming in the growth profile, wildcard trade and antitrust risks on the horizon, weak iPhone sales expected this holiday season and an above-average valuation.
Putting all that together, it becomes fairly clear that the risk-reward profile on Apple stock is balanced. Until it tips one way or the other, I’m content on watching the Apple show from the sidelines.
As of this writing, Luke Lango was long FB, GOOG, AMZN and NFLX.
