At 30% year-to-date gains, you’d assume Apple Inc. (NASDAQ:AAPL) is one of the most loved stocks on Wall Street this year. But most of the stock’s gains came in the first quarter of 2017; shares have plateaued for a couple months. Meanwhile, while 33 analysts rate AAPL stock a “Buy” right now, a dozen consider it a “Hold” — which can be interpreted as a fairly bearish reading considering how often Wall Street’s pros default to the bull side.
And again, while a consensus price target of $159 does imply upside, there’s only about 6% of it left. So how bullish is Wall Street, really?
I have warned about buying Apple stock at such elevated levels before, and while shares are down since my last call, I remain cautiously on the sideline.
You should, too.
What’s Going on With the iPhone 8?
The iPhone 8 is coming under increasing heat of late.
Bank of America Merrill Lynch lowered its iPhone shipment estimates for this year after visiting Apple suppliers in Asia. Their conversations with the suppliers suggest that iPhone 8 shipments will be delayed by three to four weeks due to tech issues with fingerprint and 3D sensors.
Bank of America is not the only AAPL stock analyst is worried about iPhone 8 delays.
- RBC Capital Markets suggests the high-end iPhone 8 will be delayed by one to two months due to OLED production ramp issues.
- Cowen and Company believes the iPhone 8 will be delayed by 4 to 6 weeks because of production issues with the fingerprint reader.
- KGI analysts think the iPhone 8 won’t launch until October or November.
- Drexel Hamilton says the iPhone 8 launch will be delayed by several weeks due to challenges around the 3-D sensing technology.
Its not just analysts, either. Fast Company reported that the there is a “sense of panic” among Apple team members as they try to fix glitches related to wireless charging and 3D sensing capability. Bloomberg also reported that the iPhone 8 may face up to a two-month delay due to supply constraints.
It increasingly looks like AAPL may have overextended itself in trying to make the iPhone 8 the best upgrade yet. Apple must fix these tech problems because it can’t afford to launch an iPhone 8 that doesn’t have wireless charging or 3D sensing. Why? Well, Samsung includes both of those on its new Galaxy S8. Apple needs to rectify those problems just to match the competition.
At the same time, it can’t rush the iPhone 8, or it could risk a Galaxy Note 7 catastrophe where exploding phones sink sales.
More to the Apple Bear Thesis
Production issues aside, Deutsche Bank put out a note saying that Wall Street’s expectations for Apple are too high. Analysts at Deutsche think that the “super-cycle” hype is overdone. Despite all the fanfare, the iPhone 8 will just be a normal upgrade cycle, according to DB analysts.
They point to the super-sized iPhone 6 and 6 Plus cycle as the “super-cycle,” and do not think another one will follow so soon.
Thats a big problem.
Right now, Apple investors are so focused on the potential for a big iPhone 8 upgrade cycle that they are ignoring the ongoing risks in the smartphone market. There are reasons iPhone sales growth has slowed dramatically. Smartphone markets in developed countries are saturated, so mature market growth is tapped out. And as phones get better and better, consumers are keeping them for longer and longer. That lengthens refresh cycles and hurts Apple’s sales.
And again, competition is back in full force thanks to Samsung’s Galaxy S8.
Bottom Line on AAPL Stock
Despite all this bad news, Apple shares really haven’t retreated much. The stock sits less than 5% lower than its all-time highs from May, and it trades at 17 times trailing earnings, which historically is a pretty high reading for AAPL.
Investors’ enthusiasm for the iPhone 8 super cycle hasn’t wavered much, in other words, despite supply issues and warnings from analysts about too-high expectations.
But the fact that AAPL stock remains at a valuation peak regardless is making short positions look all that much attractive. Signs are starting to accumulate that Apple is ripe for a big disappointment, and that makes shares particularly risky at these elevated levels.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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