I’ve been very bearish on Apple (NASDAQ:AAPL) stock for a very long time. And, judging by the company’s stock price, my predictions about Apple could not have been more wrong. But, as I’ve pointed out in the past, from a fundamental standpoint, I’ve been more right than wrong.
In line with my predictions, Apple TV Plus failed to move the needle for the company, and the growth of its Services revenue hasn’t accelerated much if at all, leaving that business’ sales increases largely immaterial to its overall results.
iPhone revenue has vacillated between year-over-year stagnation and declines. Apple’s operating profit, which is basically its bottom line excluding tax changes and share buybacks, has likewise either dropped or stagnated versus the company’s peak, which was attained in 2018.
Let’s explore why I’ve been wrong about Apple stock so far and why I think the situation could change with the company’s fiscal third-quarter results which are due to be reported on July 30.
Why AAPL Stock Has Gone Up
I think there are a few reasons that explain the resilience of Apple stock despite the issues that I described above. First, using share buybacks, the company has managed to keep generating healthy increases in its earnings per share. As a result, most retail investors believe that the company’s profits are increasing.
Also, many retail investors who are fans of Apple’s products believe that the company can do no wrong and are happy to keep buying its shares no matter what.
On the institutional side, investors are enthralled by the company’s huge cash pile and large share buybacks. And investment managers likely know that, even if AAPL stock falls meaningfully, no one will fire them or even blame them for buying shares of the company that inspires the most respect in the entire tech sector.
Finally, sell-side analysts have promised that the company will benefit tremendously from the 5G revolution. For example, Wedbush analyst Dan Ives, an Apple bull, wrote in a July 13 note that “5G {is} a key ingredient in Apple’s next chapter of growth.” Ives has a $450 price target and an “outperform” rating on the shares.
Why the Situation Could Change
Despite its strengths, Apple stock is not completely immune from downturns. In January 2019, the shares tumbled 10% after Apple cut its Q3 guidance, with the shares reaching their lowest level in about 17 months.
Meanwhile, as I pointed out in a previous column, the recession is likely to meaningfully lower demand for Apple’s more expensive iPhones, and anti-American sentiment in China could also badly hurt demand for Apple’s products there. Interestingly, weak China results played a role in the stock’s decline in January 2019, with Apple CEO Tim Cook blaming weak demand in China for the guidance cut.
Using Chinese data, a Seeking Alpha columnist estimated that Apple’s revenue from iPhones in China tumbled about 16% year-over-year in May and sank around 18.5% YOY in June. According to the writer, Apple’s revenue from iPhones in China jumped around 45% YOY in April.
But he says that surge was “driven no doubt by the iPhone SE launch.” And the iPhone SE costs much less than other iPhone models, so it sounds like the company’s revenue from the iPhone in China almost certainly dropped meaningfully year-over-year last quarter.
Finally, there are signs that more voices on the Street are turning against Apple. In addition to the Seeking Alpha columnist whose data I cited above, Goldman Sachs cut its rating on Apple stock to “sell” in April, citing declining smartphone demand.
Meanwhile, well-known “value investor” Bill Nygren recently told CNBC that his fund had sold its entire position in Apple stock after owning the name “for more than a decade.”
The Bottom Line on AAPL Stock
Despite Apple’s lack of real profit growth amid the stagnation of iPhone demand and the failure of the growth of Services’ growth to meaningfully move the needle, Apple jumped 30% this year and 90% in the last 12 months.
Last quarter, however, Apple faced hurdles presented by the novel coronavirus, along with what appears to be declining iPhone revenue in China. Meanwhile, there are indications of increasing skepticism towards Apple stock on the Street.
Given these points and the fact that the stock did fall significantly amid the company’s struggles in China in January 2019, I think there’s a good chance of the shares declining meaningfully in the wake of the unveiling of Apple’s Q3 results.
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 Roku, 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.