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AAPL Stock – 5 Reasons to Sell Apple on Post-Earnings Pop

Apple (AAPL) impressed Wall Street this week with strong quarterly earnings. As a result, shares of AAPL stock have popped over 8% in short order last week.

apple buyback aapl stockIt 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.

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Furthermore, 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 editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Comments
  • Matt

    Are you implying that Apple won’t release a new product category even after Tim Cook has stated that they will be releasing new product categories in the near future?

    • Green

      another Slant disaster!

  • S_khan

    some of these analyst talk complete nonsense. Apple hit its one year high yesterday. your article is wrong. stop reading half way.

  • Plexigl

    Of course the author Jeff reeves ran a virtual trading contest where he came in at the bottom losing a whopping $30k of his starting position of 100k over the course of a year

    Obviously he still doesn’t understand the markets based on this article

    I sure hope you don’t have a wife and kids relying on your stock picks

  • RahulPrasad2012

    Question to author: Now that AAPL has broken the range to trade at 595, does that change anything?

  • Scott

    The MP3 player and tablet computer were niche tech categories before the iPod and iPad, and Nike laid off its Fuel Band team because Nike is working with Apple on the iWatch. The fact that you fail to realize the potential of wearable tech discredits this entire article.

    Poor attempt at stock manipulation.

    • Plexigl

      Unfortunately I don’t think it’s an attempt at manipulation – that would at least explain the ridiculous list of five. This is plain and simple : he’s clueless when it comes to AAPL – I’m sure there are people out there who sold their stock after reading this garbage and missed out on the massive gains yesterday.

  • Lionel Mandrake

    I love all these experts with an agenda. Has the guy not thought about the Apple TV that could revolutionize the way we get home entertainment? No money in wearables? Are you kidding me? “Only a measely” 8 percent dividend increase? What a jerk.

  • rossmunch

    Grasping is all I see. It’s getting very amusing to watch these analysts try to put a negative spin on Apple even after the reality of it’s performance was revealed in the last week.

    • GregorySays

      Why no mention anywhere about the announced 1 for 7 stock split rumored for June 1st? This is why the stock jumped, we are all holding stock at a high mark now, that will appear much more affordable after the split… only have to wait a month or so, but that concept is WELL beyond most of these “market predictors” who look minute by minute rather than the long haul.

  • AppleWatcher

    I’ve in/out of Apple for 10 years now…mainly at the right times. The recent pop and followup, coming off a P/E of 13 (which seems to be inherently priced for zero growth), was reminiscent of early 2000′s. I love Apple in the long term, but especially in the short term leading up to the iPhone 6 release.