Apple’s Short-Term Weakness Still Has More Room To Run

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Some of the highest flying technology stocks have been among the shares that have taken the biggest hit in the latest market rout, which began in October. But the reversal in the Apple’s (NASDAQ:AAPL) fortunes has perhaps been among the most dramatic, particularly among the FAANGs.

Since hitting its record high of $233.47 on October 3, Apple shares have lost more than 29% of their value, the worst performance among the group of highly profitable tech firms that includes Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), and Facebook (NASDAQ:FB). This plunge has also cost Apple its title as the most highly valued company in the world by market capitalization.

The headwinds that are gathering around the iPhone maker are so powerful, they’re impossible for analysts to ignore. Some market watchers are reevaluating their price targets and scaling back their sales forecasts for Apple’s flagship smartphone for next year.

Ming-Chi Kuo of TF International Securities, the most widely followed Apple analyst on Wall Street, cut his demand forecast for iPhones in a recent note, saying the iPhone shipments during the first quarter of 2019 may fall by 20% to a range of 38-42 million. His previous forecast for iPhone sales was in the range of 47-52 million. For 2019, he estimates that iPhone shipments will decline by 5-10% from 2018 to a range of 188-194 million.

Apple’s Short-Term Weakness Still Has More Room To Run

AAPL Weekly 2015-2018

We believe the weakness in Apple shares will persist for at least the next two quarters. That’s based on clear signs that consumers haven’t embraced its newer iPhone models as enthusiastically as we previously anticipated. Providing confirmation: some of Apple’s biggest suppliers, such as audio chip maker Cirrus Logic (NASDAQ:CRUS), Lumentum (NASDAQ:LITE), which supplies components for the iPhone’s facial recognition technology, and Japan Display (OTC:JPDYY), which sells screens, have each reduced their financial guidance.

Another indicator of sustained weakness in demand for iPhones—which account for more than 60% of Apple’s revenue—came from the company itself. In early November Apple said it would stop reporting how many iPhone units it sells each quarter.

China Risk

Adding to this sluggish outlook is the general risk-aversion on the part of investors. They’re dumping growth stocks on concerns that the US-China trade war will crimp global economic growth and could end the decade-old bull run in equity markets.

A negative outcome of the US-China trade negotiations is more devastating for Apple’s shares than for any other FAANG group stock due to the company’s huge exposure to the Chinese market. A fifth of Apple’s sales come from the world’s biggest market for smartphones.

The recent arrest of the CFO of Chinese telecom equipment maker Huawei Technology (SZ:002502) in Vancouver, at the behest of US authorities, has added another element of uncertainty for companies with exposure to Chinese consumers. If this diplomatic row develops into a full-blown, tit-for-tat war between the two largest economies and spurs a backlash from the Chinese consumers, it will be tough for Apple to keep from getting caught in the crossfire.

Investors were given a preview of this type of scenario last week when the shares of Toronto-based Canada Goose (NYSE:GOOS), the maker of luxury down jackets, slumped 24% since December 5 after a Chinese state-run tabloid said a boycott of Canada Goose by local consumers was “likely.”

An additional concern: last summer, Huawei surpassed Apple to became the world’s second-largest seller of smartphones despite the US ban on sales of its products in the country, on concerns that its technology could be used by the Chinese government to gather intelligence.

Bottom Line

It’s tough right now to call a bottom for Apple stock, given this extremely negative environment for technology stocks. Nevertheless, investors shouldn’t forget that Apple has all it takes to rebound quickly when these macro threats are out of the way.

The company is rapidly diversifying away from its core iPhone business by bringing in expanding revenue from its services division which includes the App Store, Apple Music, iCloud storage and Apple Pay. That segment is well on course to generate $50 billion revenue by 2020.

Though we remain positive about Apple’s long-term prospects, we don’t see this bearish spell ending until we have more data from the company that would show the resilience of its overall business model. For long-term investors, this short-term weakness shouldn’t be a reason to exit this fundamentally strong player, but it may be sign to hang back if you’re thinking of purchasing additional shares.

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