Apple Inc. (AAPL): 5 Reasons To Be Bearish
Not all news is good news as they say. And the same is true even for the mighty Apple Inc. (NASDAQ:AAPL). While many in the market claim that Apple can do no wrong, a couple of bearish analyst reports in the last couple of days suggest that the AAPL story is more complex than it may first appear. We believe that these analysts have every reason to be cautious. Here’s why:
- Changing Consumer Behavior – as “incremental marginal improvement from new technologies is diminishing” consumers are more likely to keep their existing smartphone for three to four years rather than two to three years, says analyst Mark Moskowitz. “Our view is that customers are increasingly mixing down (IP6S in favor of IP7) and maturation of the device-centric consumer electronics adoption wave could weigh on both Apple and the smartphone market,” the analyst said in an investor report on Jan 24.
- Falling iPhone Demand – Back in October Apple announced its first decline in annual sales in the last 15 years driven by weak iPhone sales. Meanwhile a Nikkei report in December revealed Apple’s plans to cut iPhone production by 10%, the second consecutive year of production cuts in calendar Q1. And the most dangerous part: Apple is overexposed to the iPhone. As every 10 million iPhones contributes roughly $6.5 billion in sales then if iPhone sales suffer, Apple suffers too.
- iPhone 7 – much of the market hype about the iPhone is focused on the iPhone 8. Very little hype surrounds the iPhone 7 which was released back in September 2016. This isn’t surprising as the iPhone 7 doesn’t seem to be so different to the iPhone 6. It’s also possible that potential iPhone 7 buyers instead opted to buy iPhone SE (and vice versa). Most worryingly, the phone’s battery life still lags behind competitors. The iPhone 7 battery can sustain 712 minutes of call time or 615 minutes of internet use. The HTC 10 battery supports 1859 call minutes or 790 internet minutes. This is something users care about: in a 2014 UK survey 88%-90% of phone users said long battery life was an important consideration when buying a new phone.
- The Trumpflation Trade – analysts are wary that the dollar’s sharp rise to 14-year highs after the November election could hurt Apple. Despite recent dollar fallbacks, the tech giant has potentially seen a forex loss of a few hundred million or even a billion dollars in the last couple of months which could be the difference between a Q4 beat or miss. RBC Capital’s Amit Daryanani says “we have adjusted our Dec-qtr and FY17 revenue estimates to reflect currency headwinds resulting from USD strength since November, partially offset by local price increases and f/x hedges… Our Dec-qtr revenue estimate is reduced by ~70bps while EPS is lowered by ~0.05 vs. prior estimate.”
- Rising Debt – Apple’s debt position is rising much more quickly than its relatively stagnant net worth and falling profit margins. Since 2013, Apple’s long-term debt load has gone from close to zero to $75 billion. However, it is possible that repatriation of substantial funds under President Trump’s pro-repatriation policies will keep investors happy while debt continues to rise higher.
Out of the 32 analysts polled by TipRanks (in the past 3 months), 26 rate AAPL stock a Buy, while 6 rate the stock a Hold. With a return potential of nearly 13%, the stock’s consensus target price stands at $136.04 compared to the current share price of $120.08.
Disclaimer: The author has no positions in the stock mentioned. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.