Apple Stock Got Kicked in the Teeth — Should You Buy Now?

Stocks to sell

While the technology sector suffered a brutal whiplashing last month, Apple (NASDAQ:AAPL) surprisingly held the fort. In October, AAPL lost a relatively modest 4%. Contrast that to competitors Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), which shed 7% and 21%, respectively.

Looking back, it’s easy to see why Apple stock has managed to retain investor sentiment throughout the broader selloff. In August, AAPL became the world’s first trillion-dollar company. I considered it an opportunity to get out of the consumer-tech firm. What better way to time the markets than at a key psychological level?

But I was wrong, at least for the time being. From the time it crossed the unprecedented threshold to right before its fiscal fourth-quarter 2018 earnings report, Apple stock jumped. We’re not talking about a garden-variety move, but rather a near-11% swing. With such a convincing strike after an obvious selling zone, Apple could do no wrong.

I give credit to our own Chris Lau, who called the breakthrough moment more than one year ago. Lau saw multiple factors driving AAPL stock into the stratosphere, including favorable valuations and a robust international-consumer landscape.

But in my opinion, his most convincing argument was the upcoming iPhone. Lau was so prescient with his trillion-dollar call that no non-Apple employee at the time knew whether the new flagship would be called the iPhone 8 or iPhone X. He believed what we now know as the iPhone X presented great opportunities abroad, especially in China.

The markets proved that Lau’s thesis was correct. However, nothing rises indefinitely without fresh catalysts. Unfortunately for Apple stock, even their iconic iPhone couldn’t deny reality, with Bloomberg Businessweek showcasing worrying smartphone-sales saturation.

If investors were looking for a firm rebuttal from AAPL, Q4 didn’t deliver the goods.

Apple Leaves a Mixed Message, Tanking AAPL stock

Now on paper, several bullish analysts felt the earnings results were impressive. I can’t disagree based on the key metrics.

Against a consensus forecast calling for earnings per share of $2.78, the tech firm produced an EPS of $2.91. In the year-ago quarter, AAPL delivered $2.07, or a nearly 41% lift year-over-year. That’s huge, especially considering that the difference between Q4 2017 and Q4 2016 was 24%.

The revenue offered more enthusiasm for the bulls. Analysts expected AAPL to hit $61.57 billion. Instead, the company rang up $62.9 billion, or a 2% surprise. In the year-ago level, Apple registered revenue of $52.6 billion.

The tricky part came with iPhone sales. Wall Street expected smartphone unit sales to reach 47.5 million. But actuals came in slightly under at 46.9 million units. While this is a modest miss of a little more than 1%, it really drives home the point that smartphone sales are indeed saturating. For investors to justify Apple stock, they must see more.

Proponents counter, though, that the iPhone’s average selling price stomped on analyst estimates. Forecasts called for an ASP of $750.78, but AAPL delivered $793. To put this into greater context, the estimate-busting ASP represents a 28% lift YOY.

A quick and completely unscientific assessment of the Yahoo commentary board revealed that optimists loved the ASP story. AAPL is making more money with fewer units: what better reason to buy Apple stock?

Extended-hours trading bolstered their contrarian thesis when AAPL shares bled 6.5%.

However, I’m not as enthusiastic. Apple isn’t selling exotic cars from Ferraris (NYSE:RACE) exclusive stable. Smartphones are everyday devices. If you lose nominal market share, you’re going to be in a world of hurt.

Guidance Did Apple Stock In

At this juncture, I believe it’s wiser to listen to the markets than to fight the tape. While many of the company’s performance figures impressed, the saturation effect is taking hold.

First, management delivered light guidance. For its fiscal Q1, Apple now anticipates revenue to fall somewhere between $89 billion to $93 billion. The prior guidance called for just a hair above $93 billion. Essentially, this tells us that Q1 won’t be so impressive, so approach AAPL stock cautiously.

Second, Q4 was the last time Apple will break down iPhone, iPad and Mac sales individually. Instead, management will bundle them as a single revenue item. If that’s not a sign that AAPL is giving up on revitalizing its moribund iPad and Mac sales, I don’t know what is.

It’s not all bad news for Apple stock. The tech firm’s “Other Product” category hit over $4.2 billion in sales. Services revenue delivered just under $10 billion. But even here, Apple needs product market share to sustain those service-related revenues.

Thus, I’m afraid the ASP enthusiasm isn’t going to cut it. AAPL had to offer a fresh, compelling reason to buy in. What we got, though, was more of the same.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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