(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his client’s own shares of AAPL.)
Apple Inc. (AAPL), once a market leader, has fallen about 30% since its peak in October, more than triple the decline of the S&P 500. And for good reason. CEO Tim Cook essentially told investors in early January that the company's uninterrupted revenue growth streak was over due to weakening iPhone sales. That news has turned once bullish investors and analysts into skeptics as they look forward to the company's fiscal first-quarter report out next week, January 29.
The message, for the short term, is clear. Apple is unlikely to offer investors an easy or quick answer regarding how to fire up growth given its dependence on the iPhone for about 60% of its sales.
Slashed Estimates, Bearish Outlook
As of now, analysts are forecasting revenue to fall nearly 5% in the fourth quarter to $84 billion, a dramatic reversal from a previous forecast of a 3% gain. That's a massive 8 percentage point change. The coming fiscal year doesn't look much better. Analysts see revenue falling by 2% to $260.5 billion this year, while earnings are expected to rise just 2%. Those estimates have fallen sharply over the past several weeks.
The outlook for 2020 and 2021 doesn’t get much better. Analysts’ projections are for revenue growth of 4% in 2020 and 2% in 2021. That slow growth may be one reason why Apple’s P/E ratio for 2020 has fallen to 11.6, its lowest valuation in some time.
The iPhone's slowing growth is putting increasing pressure on Apple management to quickly find new offerings and innovations to grow revenue from its services and wearable products businesses.
Services and Wearable Products
Services revenue has been increasing in recent years and reached $10.8 billion in the first quarter. Since the first quarter of 2017, service revenue has been growing at an average pace of 24% per quarter, reaching record revenue in the first quarter of 2019. Additionally, services have become a more significant part of the company’s total revenue. At the same time, sales have jumped for wearable products such as the company's Apple Watch series.
But the reality is that these areas contribute only a small share of profits and sales for Apple right now.
Apple’s Shares May be Poised To Rise
At the moment, the options market may be indicating that investors feel most of the big news is already discounted in the stock after Cook's January warning announcement. The options market is not expecting a significant price movement from Apple following its results. The long-straddle options strategy suggests the stock rises or falls 7% from the $155 strike price by February 15. It places the stock in a trading range between $144 and $166 by expiration.
There are a few positive signs for Apple. The number of bullish call bets outweighs the number of bearish put bets by a ratio of nearly 2 to 1, with approximately 13,000 open call contracts to 7,000 open put contracts at that strike price.
Bullish Technical Charts
The technical chart also suggests that the stock may be on the rise as the shares increase above a downtrend that has been in place since October. Should the price rise above a technical resistance level at $163, it could go on to increase to $172, 10% higher than its closing price of approximately $157 on January 18. Additionally, the relative strength index has started to trend higher once again, suggesting bullish momentum is now moving into the stock.
The options and technical charts may be simply indicating that Apple's stock has fallen so far that it faces a modest boost short term if Apple announces no more bad news than expected for the latest quarter. But longterm, Apple may have entered a new era. Slowing iPhone sales will sharply rein in the company's overall growth until it can dream up a new handset to excite consumers - or develop new business lines that generate major sales.
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. Information 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.