Are Apple’s (AAPL) best days behind it?

2016-04-25_1130

Apple is set to report earnings tomorrow and the expectations aren’t good, at least to the Apple standard. Sales of the iPhone, which accounts for 60% of total revenues, is expected to show a year over year decline of 18%. What does this mean for Apple’s future? It’s too soon to tell.

I expect to hear arguments on both sides depending on what the final numbers come in as.  Expect to hear extremes on both sides ranging from:

Apple’s best days are behind it. Sell!

The stock already trades at a cheap valuation with tons of free cash. If they can’t innovate, they can buy five companies who can. Buy!

2016-04-25_1417

So just how much has been already priced in? The stock has been an underperformer but we know that markets are cyclical, and that reversion to the mean is common.

Personally I feel that the answer is somewhere in the middle. Apple’s best days of stock outperformance could be over for awhile. But it’s still a great company trading at a discount and deserves inclusion in a growth oriented portfolio (no overweight, everything in balance and moderation). I don’t think we can make any definitive statements about the future direction of the company based upon any one quarter. That being said, in terms of sentiment, this could be the most pivotal quarterly report for the company in quite awhile.

AAPL

What would have me change my mind on Apple? In this case I think it comes down to the technicals. The fundamentals of the company are widely known and analyzed to death. The above chart shows the split adjusted price of the stock off the 2009 lows. Going from $11 to $132 over those seven years.

RETRACE_1.png

Now Apple suffered a similar decline in price and sentiment in 2012-2013. The result was a stock price that fell back down to the midpoint of its 2009 lows to 2012 highs (white dashed horizontal line). At that point sentiment was quite low, the stock quickly went from being on the top of everyone’s buy list to being unwanted. There was a double bottom low around $57 that defined support and the price moved higher, with everyone jumping back on the bus in unison.

RETRACE_2_001

Fast forward three years and here we are again. The stock price fell back to the midpoint of the rally off the 2013 lows to 2016 highs, double bottomed off the $95 low and has attempted to move higher. Sentiment is again quite low and the current valuation has been really the only consistent argument from analysts for even owning the stock anymore.

It’s anyone’s guess whether this pattern will play out like it did in 2013-2016, it appears to following the same trajectory but that could change on a moment’s notice (maybe tomorrow even). My point is that Apple deserves the benefit of the doubt until the pattern is broken. A decisive break of $95 would make me give up and look for better opportunities. It’s important to be nimble and adjust when the data/technicals tell us we are wrong.

Time will tell! (Disclosure: Long AAPL)

Source:

Factset Earnings Insight

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