The Worst Is Yet to Come for Apple Stock

The owners of Apple (NASDAQ:AAPL) stock should not be very encouraged by the company’s fiscal second-quarter results. The company’s operating income and its iPhone sales both sank meaningfully, while its revenue was basically flat year-over-year.

Apple Stock Looks Too Cheap Here for Investors to Pass Up
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Although the record revenue of its Wearables, Home and Accessories category was a silver lining for AAPL stock, the company’s growth outlook continues to be weak.

iPhone’s Growth Continues to Be Anemic

Apple’s situation over the last couple of years can continue to be summed up in one sentence. Specifically, iPhone revenue is either stagnant or contracting, and the company’s newer products haven’t generated enough growth to meaningfully move the needle for Apple’s results.

It was the same story last quarter,  as iPhone sales came in at nearly $29 billion, down from $31 billion during the same period a year earlier. Undoubtedly, closures of Apple stores in China in February and in Europe and North America in March hurt iPhone sales.

But there are a few points to keep in mind. First, of course iPhones can be ordered online. Secondly, Japan has not implemented a lockdown, and I couldn’t find any evidence that Apple Stores in the country were closed. Nonetheless, Apple’s revenue in the country fell to $5.2 billion last quarter from $5.5 billion the same period a year earlier.

Finally, as I reported in January, Apple’s iPhone revenue fell 9% during its  quarter that ended in December versus the same period two years earlier. Taken together, these points indicate that the decline of Apple’s iPhone revenue last quarter was part of an ongoing trend, not a temporary phenomenon caused by the iPhone crisis.

Other Categories and the Overall Q2 Results

Discouragingly for Apple and the owners of Apple stock, the growth of the company’s Services revenue again failed to accelerate. Its Services revenue rose 16.5% YOY to $13.35 billion. In the company’s quarter that ended in December, its Services sales increased about 17%. In the quarter that ended in December 2018, its Services revenue increased 18%.

So despite the fact that Apple TV was launched late last year and that people trapped in their homes should be very eager to watch shows, use new apps, and play video games, Apple’s Services revenue growth still didn’t accelerate. As a result, the unit’s revenue rose by less than $2 billion, which is not sufficient to move the needle for Apple.

Similarly, the revenue of the company’s Wearables unit increased about $1.15 billion YOY, which also isn’t enough to meaningfully  impact the company’s results. So even though it’s impressive that the Wearables unit set an all-time record during the coronavirus crisis and in an off-peak quarter, its growth did not boost the overall’s company’s results.

Indeed, the company’s sales rose less than 1% YOY and its operating income fell 4%. Apple’s operating income reflects the actual profits of its business, while its earnings per share is greatly boosted by its repurchases of AAPL stock.

The Worst Is Yet to Come

Of course, the lockdowns and the resulting economic downturn didn’t begin in the U.S. until the second half of March. So the impact of the weak economy was not reflected much in the company’s Q2 results. Meanwhile, the U.S. and China blamed each other for the coronavirus outbreak in March, but tensions between the two nations rose tremendously in April.

In my column published on March 13, I predicted that Apple, with its $1,000 iPhones, “is likely to be hit hard by a recession.” I also warned that anti-American sentiment in China is likely to meaningfully hurt its sales in the Asian country. Both of those phenomenon intensified in April, likely hurting Apple’s results.

The Bottom Line on AAPL Stock

Given Apple’s strong negative catalysts and the fact that the shares are down only 1% this year, I continue to recommend selling the stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.

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