In some ways, my predictions about Apple (NASDAQ:AAPL) in 2019 were tremendously off the mark. After all, I wrote in May that the shares could tumble below $100 by the end of the year. Instead, they ended the year near $300 and have since rallied close to $320. But my warnings about Apple stock having a bad year were, in some ways at least, quite accurate.
Specifically, the company’s revenue from its flagship product, the iPhone, sank 9% year-over-year in its last reported quarter, and its operating income for the 12 months that ended Sept. 30 dropped nearly 10% year-over-year. (The company has managed to increase its headline earnings-per-share totals by purchasing huge amounts of Apple stock.)
Furthermore, continuing a pattern of anemic sales growth in recent quarters, its top line rose by only 2% year-over-year in its quarter that ended in September.
Nevertheless, since Sept. 30, Apple stock has climbed nearly 50%, even though the company hasn’t yet reported financial data for any period after September.
I’d say that the tremendous divergence between Apple’s results and the price of Apple stock is largely unprecedented for tech companies. There may be two exceptions, though. First, companies that are likely to be acquired (due to its sky-high market cap, Apple definitely isn’t in that category) and, second, some stocks that were trading during the dot-com-bubble era.
Apple Has Some Bubble-Like Features
The fact that the stock has jumped in recent months even though Apple’s results have been (at best) lackluster makes Apple reminiscent, in some ways, of the dot-com bubble.
Investors’ decision to ignore very important but inconvenient facts has been a key feature of other bubbles. For example, during the housing bubble, investors ignored the fact that banks were offering and investing in hundreds of thousands of mortgages that borrowers could not afford. And during the bitcoin bubble, most people overlooked the fact that the opposition of most governments and big banks to the currency would probably prevent it from ever going mainstream.
Making wild, unsupported and large assumptions about the future is another sign of a bubble. During the mortgage bubble, investors assumed that housing prices would keep going up. Bitcoin investors assumed that bitcoin would become a widely used currency. And now, Apple stock bulls are assuming that 5G will result in tremendous demand for new iPhones.
There are other signs that Apple stock has become a bubble. Here are a few.
After One Bullish Prediction Fails, Just Latch Onto Another One
For many months, Apple stock bulls hung their hats on the idea that the company’s internet video-streaming offering, Apple TV+, would tremendously boost Apple’s results. (I argued that the service would not move the needle for Apple stock, citing, among other things, intense competition in the space, lack of access to most consumers’ TVs, lack of a definite content edge and the likely inability of the offering to move the needle for Apple’s financials.)
In recent months, it has become clear that the offering is not going to be meaningfully profitable this year. Moreover, it’s also obvious that Apple TV+ can’t compete with the likes of Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS).
“Even a few modest nods from the Golden Globes to the Hollywood A-list stars of The Morning Show like Jennifer Aniston and Reese Witherspoon didn’t do much to percolate interest (in Apple TV+) — at least, not in the shadow of Netflix, Hulu, and Amazon’s years of award-winning, streaming-only content.”
The website even seemingly questioned whether Apple TV+ can survive, as its article was headlined: “Apple TV+: Can it be saved before everyone’s free trials run out?”
But most Apple stock bulls have not batted an eye. As I noted earlier, they’ve already moved on to their next bullish assumption: their belief that 5G is sure to meaningfully boost Apple’s results and push Apple stock even higher. But, as I’ll detail below, at least one analyst does not expect 5G to provide such a huge boost for the stock.
The Smart Money Is Starting to Dump Apple Stock
In Q3, Warren Buffett’s Berkshire Hathaway sold over 750,000 shares of Apple stock. Reporters tried to downplay the reduction by saying that Berkshire’s ownership stake in Apple had risen (because Apple’s share count went down due to its share repurchases) or by speculating that Buffett himself had not carried out the transaction.
But the fact is that Berkshire — headed by Buffett who’s known for his buy-and-hold-forever philosophy — did dump around $150 million of Apple stock. And common sense suggests that, given the high-profile nature of the share sales, Buffett likely at least approved them. However, it should be noted that the stock sold amounted to just 0.3% of Berkshire’s total shares of the company.
More startlingly, the Harvard Management Company, charged with managing Harvard University’s $1.07 billion endowment, dumped 100% of its shares in Q3. Harvard Management had previously owned over $100 million of Apple stock. And Vanguard, a huge investment firm, sold nearly 4 million shares of Apple stock in Q3, although that represented just slightly over 1% of its AAPL shares.
More Analysts Are Getting Bearish on Apple
Until the last year or so, no analysts were really bearish on the company. A few analysts had “market perform” or “neutral” ratings on the shares, but even those analysts’ price targets were almost always slightly above the Apple stock price at the time.
Now many analysts are actually bearish on Apple. Specifically, out of 43 analysts, seven have “sell” or “underweight” ratings on the shares, and 11 have “hold” ratings. The average price target on the name now stands well below the stock price.
One important bear is Atlantic Equities’ James Cordwell, who last week cut his rating on the shares to “underweight” from “neutral,” according to Marketwatch. The analyst contended that “upside potential from the 5G cycle is now more than fully priced” into Apple stock. The multiple of Apple stock is now above the levels it had reached ahead of prior cellular technology upgrades, according to Cordwell. He added that “the extent to which 5G will ignite consumer demand is far from clear, particularly in the early stages of the technology’s rollout.” Further, service and wearables, the other growth areas now most commonly cited by bulls, won’t move the needle much for the stock, according to the analyst.
The Bottom Line on Apple Stock
Apple bulls are ignoring important bad news. They’re also making assumptions about 5G that may not materialize, even after their predictions about Apple TV+ turned out to be completely inaccurate. Meanwhile, analysts are turning bearish on the shares to an extent not seen in many years, and multiple large investors started selling Apple stock in Q3 of 2019. I’d recommend following in the Big Money’s footsteps.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
