Apple (NASDAQ:AAPL) earnings didn’t go too well last week.
Maybe you heard.
Those of you waking up from a coma can review Apple earnings here. The rest of you are probably wondering how to trade this massive meltdown that has shaved more than $140 billion in market capitalization off Apple.
As I said in early January, I remain realistic that the short-term momentum is decidedly downward and your two choices are to either sell Apple now or hold for the very long-term. (In full disclosure, I am in the latter camp of holding for at least 18 months — despite a slight paper loss in my shares now that Apple stock has dipped to around $450.)
My take: The selling will continue in the near-term because nobody is willing to touch Apple shares — particularly the many, many hedge funds and institutional investors who had been overweight for so long and are in the midst of a four-month process to bail out of AAPL. But just as the “nobody left to buy Apple stock” argument was true last fall at $700, there will be “nobody left to sell Apple stock” eventually — presuming there is no shock to the fundamentals in the next year or so as positions get wound down.
The trade, then, is to target a bargain buy under $425. I personally have an open order for around this price — though I admit I’m getting skittish and might move it lower if things get ugly again this week.
But that’s just my take. Here’s what others are saying:
Bullish Signs for Apple Stock
Hyperbole: This Pando Daily post from Bryan Goldberg last week had me rolling, because it sums up over-the-top negativity quite nicely. A great excerpt: “Apple will never innovate again. They are all done. This one Christmas is symbolic of all Christmases now and forever. They have created at least four earth-shatteringly revolutionary products since I was in college, but that ends now. No more.”
It’s Not Like Samsung Is Soaring: For all the talk about Samsung (PINK:SSNLF) smartphones coming into their own, the numbers are eerily similar for the fast-growing tech giants. Slower growth and pinched margins characterize both businesses, and Samsung stock actually has been a bit under pressure lately as a result. So if you think investors are trading one for the other … think again.
Apple Earnings Weren’t That Bad: Check these charts from Dan Frommer of SplatF. Since Apple has reclassified its report by product segment, there are a number of bright spots, including record revenue and rapidly growing iPad shipments. Another breakdown from Quartz writer Ritchie King also shows how impressive revenue growth has been in some pretty charts — such as this one.
Realistic Expectations: For those of us on the conference call, there were some cryptic but surprising and important allusions to the long-accepted practice of Apple lowballing its earnings estimates to prompt a “surprise.” In short, Apple will be putting forward a more modest forward-looking forecast — which is ultimately more honest and better for the market, but will be a painful evolution, as Herb Greenberg of CNBC points out. Furthermore, this Apple’s valuation must live in reality now, without the benefits or the pressures of being a sure thing. Another painful shift in mind-set, but ultimately a good one for investors and for the stock — Business Insider’s Jay Yarrow riffs on that idea here if you want to dwell on this fact.
The iPad Mini and a “Hungry” Apple: As Adam Lashinsky of Fortune points out, Apple is not afraid to move where the market leads it. And now that the company is “hungry” after this recent negativity, you can expect more fireworks as it moves to prove itself as the still-reigning king of personal electronics.
Customers Still Love It: Remember, Apple continues to maintain that it has a supply problem and not a demand problem. And as Zachary Karabell points out in The Atlantic, it’s important to understand the difference between sentiment in financial media and the brand power with customers — which remains strong, and could eventually provide stability.
Bearish Signs for Apple Stock
Another iPhone or iPad is Unlikely: The share price meltdown has some panicked, looking for the next iPhone or iPad lest Apple prove itself an uncreative tech company doomed to get fat and lazy like Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO). Robert Cyran of Breakingviews postulates that Apple needs to run “faster and faster simply to stand still” and wonders if Apple would be better served by changing direction with “payments, TV or some other secret project” to keep the growth going. If a money-minting iPhone and iPad line isn’t enough to make investors happy, that’s a dangerous scenario … because creating another device that is as revolutionary as these two is a tall order.
The Ghost of Microsoft: Speaking of MSFT, the similarities are enough to have some calling “peak Apple.” From nosebleed market caps that crashed to incredible growth that flatlined to an increasingly cautious corporate culture, many think Apple is rapidly becoming a mirror image of its much-maligned tech partner to the north. That the Apple-Microsoft comparison is so widespread right now is a damning enough assessment that even if it’s false, the guilt by association is enough to act as an anchor.
Reluctance to Pander: Aforementioned iPad Mini success aside, a very interesting part of the Apple earnings call to me was that, when asked if he would sacrifice quality for market share, CEO Tim Cook categorically said that he is only interested in making great products — and while the two goals aren’t mutually exclusive, he won’t sell just for sales’ sake. That might sound noble, but as Jeff Matthews points out, “at some point, people want something different.” Refusing to budge on things like screen size could keep loyal Apple fans happy, but limits growth and appeal. As long as margins hold up, that’s fine, but evidence shows that scale matters.
Tech Stocks Aren’t Value Plays: Josh Brown at The Reformed Broker shrewdly points out that tech stocks are not made for value plays, since typical balance sheet arguments do not apply. Back out the cash and you have a P/E of about 7. Meanwhile, Research In Motion (NASDAQ:RIMM) is still posting losses but has almost tripled in a few months. It’s about innovation and momentum, both of which can change in a heartbeat.
Ugly Estimate Cuts: As is Wall Street’s wont, the trouble at Apple has resulted in sliding forecasts — for earnings, for price targets, for everything. If you need a painful lesson in the obvious reasons for this, than consider this CNBC clip from Will Power of R.W. Baird, which now has a rather modest target of just $465 at a rating of “neutral.” In short, Power said “We think there is a real downside to estimates, and it’s going to be tough for the stock to outperform over the next several months.” Understatement of the century, eh?
Gundlach Was Right — and Now Likes $300 for AAPL: Bond guru Jeff Gundlach is looking like a Rhodes Scholar for his $425-area target for Apple stock a few months ago. Judging by the charts, it looks like resistance is at $425 at best … and as low as $400. But rather than take a victory lap, he has doubled down with a new downside target of $300 for Apple stock. Not good.
China Trouble: As early as last summer, before the run to $700, I riffed on the fact that China remains a big risk for Apple. After this earnings call, it appears that China remains a sticky subject for Apple. As Eric Jackson of Forbes pointed out, the percentage growth in China belies the problem of playing catch-up to Samsung and to Google‘s (NASDAQ:GOOG) Android OS. This remains a big long-term risk for Apple stock.
As you can see, I tally more bearish reasons than bullish ones — and the bear ones are immediate while the bull case is long term. That’s why I think further declines are in order before we see any stability.
So what do you think? Share your thoughts or some links below.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff held a long position in Apple stock.