Dow component Apple Inc. (AAPL) is trading lower about 4% in Friday's pre-market despite beating fourth quarter 2020 top- and bottom-line estimates by small margins. Consolidated revenue rose 1.0% year over year, while the iPhone's $26.4 billion in revenue missed the mark, more than $2.0 billion under consensus and $7.0 billion less than the same quarter in 2019. The company offered no first quarter guidance but stated that iPhone revenue will "grow" and other categories will grow in "double digits."

Key Takeaways

  • Apple stock is trading at a six-week low after a "sell-the-news" earnings reaction.
  • iPhone revenues in the fiscal fourth quarter failed to meet expectations.
  • Investors will now turn their attention to the just-released iPhone 12.
  • Political controversy marks a potential 2021 headwind.

The iPhone miss isn't a big deal because many customers have delayed purchases, waiting to upgrade to the 5G-enabled iPhone 12, which was released on Oct. 23. However, the four-figure price tag complicates sales predictions because it's more costly than rival smartphones at a time of high unemployment and economic uncertainty. Even so, Apple's 50% return so far in 2020 is probably the real culprit in the sell-the-news reaction.

Political controversy poses a growing risk for the company and its mega-cap peers, with the Department of Justice recently filing a lawsuit against Alphabet Inc. (GOOGL), alleging an anti-competitive deal with Apple in which Google becomes the exclusive search engine for iPhones and other devices in exchange for billions in annual fees. Although filed by a Republican administration, both parties have raised threats to derail growing big-tech monopolies.

The earnings release hasn't spawned the usual wave of analyst commentary, but Wall Street was very vocal after the iPhone release event earlier this month. Consensus now translates into a modestly cautious "Moderate Buy" rating based upon 26 "Buy," 8 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $66.60 to a Street-high $150, while the stock is set to open Thursday's session about $16 below the median $126.76 target.

Antitrust laws are statutes developed by governments to protect consumers from predatory business practices and ensure fair competition. They are applied to a wide range of questionable business activities, including market allocation, bid rigging, price fixing, and monopolies.

Apple Daily Chart (2018 – 2020)

Chart showing the share price performance of Apple Inc. (AAPL)
TradingView.com

A multi-year uptrend topped out at a split-adjusted $58.37 in October 2018, giving way to an intermediate correction that found support at an 18-month low at year end. A modest recovery wave completed a round trip into the prior high in the fourth quarter of 2019, yielding a breakout that stalled in the low $80s in February 2018. The stock tested breakout support successfully during the pandemic selloff and bounced strongly, returning to the first quarter peak in June.

An immediate breakout attracted momentum buying interest, lifting to an all-time high at $137.98, just one session after the four-for-one split. It sliced through the 50-day exponential moving average (EMA) a few weeks later and remounted that level at the month's end, ahead of a bounce that failed at the .618 Fibonacci selloff retracement on Oct. 13. The stock has now undercut the moving average once again, potentially breaking a trendline going back to March. Without a strong bounce into the weekend, the stage is set for continued downside into the September low at $103.

In the longer term, the correction could reach the 200-day EMA and fill the July 31 continuation gap between $96 and $102, offering a potential buying opportunity ahead of a larger-scale recovery effort. As with everything else right now, a lot depends on the outcome of next week's election and the market tone established after the event. A prolonged contest would mark the worst possible scenario, placing the U.S. economy and investor spirits in limbo for up to three months.

A continuation gap occurs when trading activity skips sequential price points, usually driven by intense investor interest. In other words, there was no trading, defined as an exchange of ownership in a security, between the price point where the runaway gap began and where it ended.

The Bottom Line

Apple stock is selling off after a mixed quarter while investors turn their attention to the iPhone 12 rollout.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.