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Does Apple Inc. (AAPL) Stock Still Have Double-Digit Downside?

Bret Kenwell

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Many would consider the rally in Apple Inc. (NASDAQ:AAPL) a bit absurd over the past year. The stock is up 56% over the past 12 months, which is rather remarkable considering its now-$750 billion market cap. But AAPL stock could be cooling off.

Does Apple Inc. (AAPL) Stock Still Have Double-Digit Downside?

Source: Shutterstock

Shares are up about 1.5% over the last five trading sessions and off more than 7% from its all-time highs of $156.65.

AAPL Stock: Why We Want a Pullback

A healthy digestion of a massive move is always a good thing. Think of it like a cheesy — but true — saying, something like, “it’s darkest before dawn.” In order to go up, stocks must go down.

The summer has typically been a good time to buy Apple as it dips ahead of product refresh cycles and amid a few quarters of weak sales. The problem is, the iPhone is approaching what some are calling a super-cycle. There’s apparently strong interest in the new iPhone and that could drive huge financial results for AAPL over the next 6 to 12 months.

We would like to get in the stock before that happens, but so does everyone else. With the anticipation of strong results, will investors overlook the temporary weakness in iPhone sales and continue to buy ahead of the fall?

It’s Not Just the iPhone

Apple’s Services revenue is growing incredibly fast, up 18% last quarter. While revenues of $7.04 billion would make it a formidable standalone company, it’s quite small for AAPL. Thankfully, its margins are much higher, so it’s very profitable for Apple.

Inspired by Amazon.com, Inc. (NASDAQ:AMZN) and its Echo device, Apple recently introduced its own product, the HomePod. According to one survey, some 19% of Apple-product owners are interested in buying the HomePod. That works out to about 70 million customers paying $350 for a HomePod. A casual $24.5 billion in sales would certainly excite investors. Of course, that’s based on a lot of assumptions, but it’s a catalyst to be aware of.

I would worry about the HomePod’s pricing against a more reasonably priced product from Amazon or Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). But Apple has proven time and time again that price is not a big inhibitor for sales. Additionally, its growing services business shows that as the ecosystem becomes stickier and stickier, Apple can find incremental ways to boost its bottom line.

Most importantly though, Apple continues to innovate. Just like Facebook Inc (NASDAQ:FB) won’t become the next Myspace, Apple won’t become the next BlackBerry Ltd (NASDAQ:BBRY). Believe it or not, Apple’s eventual demise was a big concern at one point for some investors.

In other words, there are long-term reasons to be long AAPL stock. We just don’t know if we’ll get a chance to buy at the price we want.



Big Buyers of AAPL Stock

Apple just added $50 billion to its buyback plan last quarter. By the end of fiscal 2019, Apple plans to repurchase $300 billion of its own stock. Holy moly.

Apple, AAPL stock, AAPL

Click to Enlarge Source: Stockcharts.com

As if that weren’t enough, the famed Warren Buffett owns some 133 million shares. While the roughly $18 billion stake is a far cry from Apple’s position, it doesn’t make it a small one either.

So how do we trade it? For visual purposes, I am using a weekly chart here. The 40-week moving average (blue line) is at a similar price as the 200-day moving average (not pictured), around $127 to $128.

This level is more important than just a moving average, though. This area was previously heavy resistance for AAPL stock in 2015. In early 2017, the stock made a massive move through this level. The hope now is that shares will cool off a bit and pullback to this area. It would be a decline of about 13%, but AAPL stock should find big-time support and will allow for Apple to digest its massive rally.

From there, AAPL stock will hopefully enjoy a strong run to finish out the year. As of now, it’s finding pretty good support at the 21-week moving average. The stock finally lost its overbought reading, although its MACD (purple circle) is losing steam. This shows that Apple stock may be losing some of its bullish momentum.

What would be really healthy to see is a pullback to $127-$133. In that area, investors should feel comfortable scooping up some AAPL stock.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities. 

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