The Case for Shorting Apple
By:
Michael Molman
Apple is one of
the most recognizable companies on the planet, it has a market cap larger than the
GDP of most countries (nearly $800 billion), it brings in revenue of well over
$200 billion a year and its cash reserves alone are larger than most Fortune
500 companies (over $250 billion). Investors who bought Apple stock when it
went public in December 1980, would have made a 37,878.8% return at Apple’s
current price. These facts have made Apple stock a piece of virtually every
person’s portfolio, from Warren Buffet’s to the High Schooler who has just opened
his first brokerage account. However, many people, including the media and
analysts seem to be ignoring several key facts about Apple that could send the
stock falling over the next few months.
For the most part Apple has been a great
investment over the years as the stock remains in an upward long-term trend, but
there have been periods where the stock has gone through significant
corrections of 30-40%. I believe the stock may be nearing one of those
corrections now.
Apple stock
from 2011 to September 26th, 2017
By looking at the
chart above it easy to notice how Apple stock is at the top of the trend it has
kept since 2012, the last two times the stock was at the top of the trend, in
2012 and 2015, the stock proceeded to crash 40% and 30% respectfully. This on
its own means little to most people, the stock could continue to rally on
fundamental reasons and break the trend. However, Apple’s most recent rally,
which has seen the stock surge nearly 70% in the last year and a half, has been
powered by the expectation that Apple’s most recent products will be wildly successful
and usher the company into a new age of innovation.
Apple has recently released a new series of
products, including 3 new iPhones, a new smart watch, an improved T.V box and a
slate of new software features. The most important of these products is the
iPhone X, the phone which is meant to mark the 10-year anniversary of the
iPhone and represent the innovation that made the company what it is today. The
iPhone X is indeed a major upgrade over previous models, with features such as
facial recognition (which Apple calls Face I.D) and wireless charging. Unfortunately,
Apple’s stock price hangs entirely on the success of this specific model. There
have been few fundamental reasons behind Apple’s recent rally meaning markets have
mostly priced in the success of the iPhone X so any hiccup whatsoever could
have serious consequences.
The question is whether
the iPhone X is enough to keep Apple’s stock rally alive. The last two times
Apple stock took a serious tumble the main driver was lack of innovation and
new products. Apple has increasingly become a one product company, with the
iPhone being responsible for two thirds of the company’s revenue. This reliance
on one product has made Apple vulnerable in case of a slowdown in smart phone
demand, which is happening now. The smart phone market has matured, in markets
such as the U.S and Europe smart phone sales have plateaued and in growing
regions like China, Apple trails local competitors.
Chart showing forecasted smart phone
sales in millions.
Market growth has significantly
decreased.
Competition has
shrunk the company’s market share forcing Apple to jack up prices for its new
phones to maintain growth. The iPhone X will be the most expensive iPhone yet
with the cheapest model retailing for nearly $1,000. Analysts say that the
price will not hurt sales however early polls show that only 18% of people are
willing to pay $1,000 for a new smart phone. There have been concerns that
carriers like AT&T and Verizon will be unwilling to finance more expensive smartphones
since doing so hurts their already slim margins. Carrier incentives have been
one of the key reasons consumers started buying smart phones in the past, which
makes sense considering few people have $600-700 to spend on a new phone. Incentives
are decreasing while phone prices are increasing that on its own is not a great
sign for future sales but there will be no way to truly tell how big of an
effect this will be until the phone comes to market on November 3rd.
Chart showing Apple’s market share of
the global smartphone market (in percentage)
iPhone’s growth has been stagnating
The importance of
the iPhone X becomes even more apparent as reviews come out for Apple’s other
devices. The iPhone 8 has received mostly tepid reviews with most people saying
that although it is a decent smart phone there is little to distinguish it from
the iPhone 7 (which I point out was no one’s favorite iPhone). Demand for the
iPhone 8 has also been softer than many expected, the phone managed to capture just
.3% of the global IOS market in its 1st week out, which is lower than
the iPhone 7 which captured 1% and the iPhone 6 which captured 2%. Although the
iPhone 8 plus performed slightly better, the reviews for it were also not extraordinary.
The Apple series 3 watch, the 3rd iteration of the company’s first
new product in years, also suffered setbacks, with the device having problems
with its cellular connectivity feature, which was the devices main selling
point. These series of problems led to Apple stock having its worst week since
April 2016, with the stock falling over 5%.
Apple
bulls have said that these fears are overblown, pointing out that soft demand
for the iPhone 8 is due to strong pent up demand for the iPhone X, which is
supposed to lead the way to a 13% surge in sales over the next year. What the
bulls are forgetting is that a huge bump in sales from the iPhone X has already
been priced into the stock. For over a year investors have been looking forward
to this product release, expecting Apple to wow them like they used to be by
Steve Jobs. Having a smart watch that doesn’t work well, and 2 mediocre iPhones
does not strike me as the beginning of a new “super cycle”. Apple is boosting
prices for its newest phone to maintain growth, that would be great if the
company was marketing itself as a blue chip, but it hasn’t, it claims to be a
growth stock. To be a growth stock Apple must show that it can innovate. Competitors
like Microsoft, Google and Samsung have expanded into multiple high growth
fields such as Artificial Intelligence and self-driving cars. Meanwhile Apple has
been resting on its laurels and although it has begun investing into new
technologies it remains behind its competitors. This means Apple’s growth is
capped. If anything goes wrong with the launch of the iPhone X or even if
demand falls slightly below expectations Apple stock could get crushed. So,
with all the growth from its new products already priced into the stock it is
possible and even likely that Apple stock could see a significant pullback.
Image Source: https://www.statista.com/statistics/263441/global-smartphone-shipments-forecast/
Additional Source Information:
IDC
Wall Street Journal
Fortune
Bloomberg
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