Apple’s profits and revenue have seen unprecedented growth over the past few years, but covering all that ground so quickly is now doing more harm than good. The company’s stock has plummeted more than 40% over the past seven months as Wall Street continually reminds investors that Apple’s growth is slowing and rivals are gaining ground. This time last year, we couldn’t go a day without a dozen Apple bulls pounding the table and coming up with new reasons to buy Apple shares. Now, however, the biggest bulls that remain seem to be making the same case over and over again.
Apple shares are undervalued! Apple has a massive stockpile of cash! The stock is only trading at 9 times the fiscal 2013 EPS consensus! A cheaper iPhone is coming! An iWatch is coming! A China Mobile iPhone is coming! An iTV is coming!
While these statements are certainly true in several cases — and would likely send another company’s shares soaring skyward — Apple bulls rehash them over and over again to no avail. The company’s stock continues to tumble. And according to Sector & Sovereign Research analyst Paul Sagawa, repeatedly harping on the same bullet points will get the stock nowhere.
“It must have been tough being an Apple Bull this past quarter – publishing that same call for the umpteenth time and subjecting yourself to yet another perp walk performance on CNBC,” Sagawa wrote in a research note on Monday evening. “Still, at some point, the national nightmare will have to end, Apple will hit bottom and the bulls will be right again. However, no amount of cheerleading is going to hasten the coming of that day, and in fact, the cheerleaders may, in fact, be their own worst enemies. Buy-side sentiment is indeed bad, but sell side estimates are nowhere near bad enough.”
While Sagawa acknowledges that Apple shares will indeed reverse course at some point, the catalysts Apple analysts repeatedly point to likely won’t be responsible for initiating the rebound. Even more troubling, the analyst says, is that Apple’s biggest money-maker is showing signs of age.
“Apple’s highest margin product, the iPhone is under assault by companies with arguably superior products at lower prices, while carriers begin to push back on Apple device subsidies that have been 40% higher than those for its competitors,” Sagawa wrote. “Apple’s unit volumes have stagnated, with even bullish projections targeting 5% YoY unit growth. At the same time, the mix of iPhones, which drive nearly 60% of Apple’s overall profits, is shifting toward the cheaper and less profitable older models. Apple may fight back by introducing new models, such as the widely rumored low-end iPhone, but while these products may buttress the company’s market share as the industry growth turns increasingly toward emerging markets, it is very unlikely that they will have a positive effect on overall margins.”
The analyst states bluntly that negative trends with Apple’s key products aren’t going to reverse simply because analysts want them to. “If Apple manages to stem its sharp margin erosion, it will come at the expense of market share and growth, and if it looks to reaccelerate its top line, then margins will continue to fall. Nor will the introduction of an Apple iTelevision or iWatch save the day,” Sagawa noted. “The sales of iPhones and iPads are simply too big for these wish list products to make a difference to Apple, particularly given the product launch costs and slow ramp that would be associated with either gambit.”
Before Apple stock has any chance of rebounding, Sagawa says that consensus numbers have to come down “A LOT” because earnings misses will only hurt the stock even more.
“Ironically, the only way for the biggest Apple bulls to be right is to stop being so bullish,” Sagawa concludes.
