Apple's Stock Sharp Decline May Be an Overreaction

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Apple Inc.'s (AAPL) stock has come back into the spotlight with worries about iPhone demand suddenly resurfacing. It has lead to analysts trimming their estimates for Apple and the stock falling nearly 7% and almost $60 billion wiped off its market cap since April 19.

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)  issued second-quarter revenue guidance that came in lighter than analysts had been forecasting, due to weak smartphone demand. The recent developments have caused shares of Apple and many of its suppliers to fall sharply. But the latest news out of Taiwan Semiconductor should not come as much of a shock, because analysts had already slashed revenue estimates for Apple's fiscal second quarter, and Broadcom Inc. (AVGO) had previously warned of weak smartphone demand in the middle of March. 

AAPL Price Chart

AAPL Price data by YCharts

Weak Demand

The evidence of weak smartphone demand predates Taiwan Semiconductor's results. Broadcom's conference call on March 15 noted the company was expecting a steep seasonal decline in wireless revenue as a result of a sharp decline from its most significant North American wireless customer. 

Analysts Cutting Estimates

Analysts have been slashing Apple's revenue estimates for the fiscal first quarter. Since the start of the of the year, analysts have cut estimates by more than 11.5%. Those estimates have declined from $69.2 billion to $61.05 billion, a significant decline. Revenue estimates for the full year of 2018 have also been trimmed to $261.46 billion from roughly $274 billion, a drop of nearly 5%. 

AAPL Revenue Estimates for Current Quarter Chart

AAPL Revenue Estimates for Current Quarter data by YCharts

More Questions Than Answers

The latest news from Taiwan Semi is leaving investors feeling uneasy. Before the most recent setback, shares of Apple were up by over 5%, beating the S&P 500's return of only 1.3%. But all of those gains have disappeared and left investors with more questions than answers. Investors will want to know whether the news from TSM is merely a confirmation of what Broadcom already reported or if demand has deteriorated even further since the middle of March. 

AAPL Chart

AAPL data by YCharts

Short-Term Memory?

It also entirely possible that investors with short-term memories merely forgot about the iPhone worries of a quarter ago. But then again, Apple did manage to surprise investors and analysts last quarter, beating earnings estimates by over 10% and revenue estimates by about 3.6%.  

It will be an issue that investors will be left to deal with until Apple reports results on May 1. At that time Apple will provide further color around the iPhone, and the outlook for quarters to come. It will either calm investors or make them more nervous than before. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.  

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