It was a long-awaited vindication for the Apple bulls. But while it’s true that Apple beat revenue forecasts and profit predictions, AAPL stock still has some serious issues in both the medium term and the long term.
So while it’s nice to enjoy this immediate pop in AAPL stock, I advise investors to cut and run before the uptrend falters.
Here are five reasons I say it’s time to sell Apple stock after earnings:
1. AAPL Stock Still Rangebound
Sure, the 8% pop in AAPL stock has been nice… but year-to-date that gives Apple a gain of less than 2% to basically track the market.
Click to EnlargeFurthermore, Apple still hasn’t broken above $575, a level touched only briefly late last year.
While this pop may indeed start to push up Apple’s 50-day and 200-day moving averages and create a short-term uptrend, take a look at this chart and note that the stock price has been very much rangebound for the last six months. Separately, the relative strength index (RSI at the top of this chart) on AAPL stock shows the company in overbought territory.
News always has a chance to change sentiment and overwhelm the charts. However, AAPL stock has very much been stuck in a rut and seems unlikely to break significantly higher given recent headwinds.
2. iPad Sales Bode Ill for AAPL Stock
Last quarter, “weak” iPhone sales overshadowed an otherwise strong earnings report. This time, investors were pleased as the smartphone bounced back with a forecast-topping 43.7 million iPhones sold during the quarter, beating analyst estimates by over 5 million units.
But while the iPhone remains the biggest present driver of AAPL stock, with the device generating $26.0 billion of the $45.6 billion in total sales on the quarter for a huge 57% share of the top line, the iPad is the future of Apple… and iPad sales aren’t looking good.
Consensus estimates were for around 19.7 million iPads to be sold last quarter, up fractionally from the 19.5 million sold last year. But Apple sold just 16.35 million iPads for a more than 16% decline in iPad sales.
This is ugly given the fact that the broader industry trends are still very much in favor of growth. Even as the tablet market matures, research firm IDC still predicts a nearly 20% jump in device sales this year over last. The fact that Apple can’t even tap into the organic growth of this segment shows the big risk it faces from competitors in both the short-term and as AAPL stock relies on its product upgrade cycle to juice numbers via its loyal customer base.
3. Buybacks Won’t Last Forever
Last quarter, Apple boasted $158.8 billion in cash and long-term investments by my math.This quarter, that cash hoard dropped for the first time since the 2008 to $150.6 billion.
Now, it’s not like Apple is going bankrupt with that kind of bankroll. But it’s noteworthy that the drawdown in cash is almost exactly equal to the difference between cash flow and its “capital return” plan; AAPL stock buybacks and dividends totaled $21 billion last quarter, over cash flow of just $13.5 billion.
It’s very unlikely that Apple’s cash flow will grow $8 billion or so to cover that gap anytime in the near future. And also unlikely, given the grumblings of Mr. Icahn and other shareholders, that Apple will take the foot off the gas on its massive AAPL stock buyback and dividend scheme. After all, it was only April 2013 when Apple doubled its “capital return plan” via dividends and buybacks, pledging $100 billion through 2015. Not only did the company reaffirm that pledge to spend generously through 2015, but it actually just upped the price tag to $130 billion.
If you’re a long-term investor, you better start paying attention to the numbers here because the money for dividends and buybacks have to come from somewhere.
4. Apple Dividend Growth Won’t Be Impressive
On a related note, why do you think the company only inched up its dividend a measly 8% this time, from $3.05 to $3.29 per share, despite having $150 billion in the bank?
Answer: Because it can’t comfortably do much more than that based on the current balance sheet and cash bleed.
Folks who point to AAPL stock as a cash king with dividend growth potential forget that the stock buybacks are burning cash at a rate much higher than cash flow. Beyond that, over $50 billion of Apple’s cash is overseas and would be subject to big taxes if it was repatriated to pay dividends.
Furthermore, even if you overlook the cash stockpile you have to look at current profits and cash flow. The new $3.29 dividend is 30% of current profits, meaning that while there’s a little headroom there’s not the ability to double Apple’s dividend overnight. And even if the company did, the current yield is just 2.3% — so it has a long way to go before AAPL stock becomes known as a must-own for dividend investors.
I wont dispute that Apple’s dividend is sustainable. But whether you should ever expect a big dividend increase is an open question.
5. Apple Innovation Still in Question
Many of these issues can be solved with a fancy new product that opens up new revenue streams. But given the massive scale of Apple and the level of profit that would be necessary to move the needle, that’s an awfully tall order.
Everyone agrees that innovation is key to Apple’s future as it matures and growth slows. And with each passing quarter, that need to innovate and release new products gets even more pressing.
Will Apple finally break out the long-awaited iTV this year, bringing super-premium flat screens to the market? Maybe, but given the race to the bottom in profit margins among TV manufacturers it’s unlikely this will juice profits.
Will Apple will come out with its iWatch? But that’s likely an equally disappointing process given the niche nature of this tech category right now, and the fact that Nike (NKE) just canned its Fuel Band hardware team because it saw little profit potential in the wearables space.
Investors, then, are left with the same old fears they have been nursing since Apple crashed from above $700 a share in 2012.
Does Tim cook have another rabbit to pull out of the hat? Is there a next chapter for Apple beyond the iPhone and iPad?
Given all these other issues, the innovation question remains a big one… because while it could solve some of these other drags on AAPL stock, continued stumbles on the product front means investors will only get more restless.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.