Roughly a month-and-a-half ago, Apple (NASDAQ:AAPL) made headlines around the world when it became the first $1 trillion company. Not only that, Apple stock has continued to impress Wall Street, gaining over 34% year-to-date. Who says that what goes up must come down?
Still, many investors are understandably leery about diving into such astounding momentum. Whether in analog markets or digital ones, high-flyers don’t stay elevated indefinitely. At some point, a correction just seems inevitable. If that does occur, the AAPL stock price has a long way to fall.
That hasn’t stopped bullish analysts from reiterating their longer-term case for the consumer-electronics giant. My InvestorPlace colleague Dana Blankenhorn believes that Apple stock is a buy once the bears leave town. That’s because the Apple Watch is likely to receive FDA approval as a health device.
Blankenhorn is excited about the explosive opportunities, as well as the life-saving potential. With the Watch, people with undiagnosed diseases would have a higher chance of receiving critical health news. Moreover, companies could start buying them in bulk to give to their key employees.
I love what Apple is doing here, but will it raise the AAPL stock price? I’m not 100% sure. For one thing, the company’s ambitions, such as a diabetes-detecting Watch app, may be impossible. I’m not a doctor, but I thought diabetes dealt with blood-sugar levels. If so, I’d question the accuracy of a diabetes app since it can’t analyze the blood.
Another point: companies are stingy. They’re not going to spend a dollar more for their employees than they must. Furthermore, Target (NYSE:TGT) already tried a similar approach with Fitbit (NYSE:FIT) products. It didn’t work, as wearable health devices don’t appeal to everyone.
Here are five more reasons to sell Apple stock:
Peak Smartphone Is Getting Worse
It’s no secret that the ultra-popular iPhone represents the biggest money-maker for Apple. It’s also no secret that we’re in the midst of peak smartphone. The soaring AAPL stock price demonstrates that the company has so far done a great job meeting this challenge.
But they’re not out of the woods, far from it. Last month, Bloomberg Businessweek detailed the alarming growth decline in international smartphone sales. Worse yet, no viable solution appears on the horizon.
The main reason is that smartphone manufacturers like Apple and Samsung Electronics (OTCMKTS:SSNLF) can no longer tap into fresh markets. The China story lacks bite now that most Chinese consumers possess a smartphone.
Another issue is user apathy. At a certain point, a smartphone is a smartphone. While some Apple fanatics will wait in line for the latest iPhone iteration, most people are content with their phones. That puts a longer-term damper on Apple stock.
Apple Stock to Suffer From Uninspiring Products
Source: Via Apple
Blankenhorn makes a great point about the Apple Watch. With FDA approval, the Watch will certainly make an impact. My hesitation focuses on the impact’s magnitude.
No need to send me hate-mail; just look at the raw numbers. We’re 75% into the company’s fiscal year, yet the iPhone still represents well over 60% of total revenue. In fact, this figure has increased despite peak smartphone. Last year, iPhone sales were barely above 60% of all sales.
And what about the other products? It’s not even close. On a year-over-year basis, quarterly growth for Mac computers dropped to 2% since 2013. For iPad, this metric has gone negative at a 6% loss. All other products combined averages 11% growth.
It’s still lower than the iPhone, which averages 14%.
While critics may counter that the other products category skyrocketed over the past six quarters, this segment has never achieved higher than 8.6% of total quarterly revenue since 2012. By the way, this 8.6% allocation was achieved in Q1 2012.
If Apple stock seeks a non-iPhone catalyst, the underlying firm is not getting the job done.
AAPL Stock Is a Commoditized Play
I’m already in deep water because I’m not perennially bullish on AAPL. And I’m about to make things worse by calling Apple a commoditized investment.
I realize this sounds blasphemous to many adherents, particularly because the company achieved the unprecedented $1 trillion market capitalization. But I’m not going to let emotions dictate my outlook: Apple Inc. is a consumer-electronics company, and that makes Apple stock necessarily commoditized.
It might not look like it today, but we have no guarantee that Apple will remain the alpha dog tomorrow. For instance, Samsung recently broke through the smartphone-innovation malaise with a genuinely exciting concept: a bendable phone.
I don’t really see that level of ingenuity from Apple lately. Instead, it’s churning out more or less the same thing every year. Which is a problem for two reasons: first, Apple products are generally more expensive than the competition, and second, rivals are producing more interesting, relevant products.
In this context, Apple stock appears overvalued.
Consumer Electronics Product Cycle Is Vicious
One of the major factors that keeps me away from Apple stock at this juncture is the industry’s product cycle. Every decade or so, a company will utterly dominate their product category. However, no one company has remained on the throne indefinitely.
The best example is Sony (NYSE:SNE). During the 1980s, no one could touch this company. The Walkman was synonymous with portable music for the simple reason that it practically invented the category. Apple simply made a far superior Walkman, and thus ended Sony’s reign.
I think it’s risky to believe the same couldn’t happen to Apple and AAPL stock. As we previously discussed, its rivals are producing more exciting products. In terms of results, Apple hasn’t found anything close to an iPhone alternative.
Plus, consumer electronics is chock-full of icons turned irrelevant. Don’t think for a second that any company is exempted.
Apple Stock Is the Obvious Trade
I can understand why so many investors want to pile in on Apple stock: this is the winning horse that everyone loves. At the same time, it’s become an obvious trade.
I’m just not sure that AAPL is worth the hype anymore. While the company has thrown everything and the kitchen sink to diversify its revenue stream, it’s still falling short. All it takes is for the iPhone to suffer a bad quarter or two, and shares could start falling in a hurry.
Recall that the Apple HomePod is a technically brilliant piece, but it’s not resonating with customers. This really drives home the point that management is running out of ideas. Again, everything hinges on the iPhone.
Would you then bet on an organization that’s levered toward a saturated market? You might want to, but you’d also be taking on more risk for limited reward.
As of this writing, Josh Enomoto is long SNE.