Apple (AAPL, Financial) reported its worst-ever quarter earlier this week, missing estimates on both revenue and earnings. Not only were the misses the biggest in Apple’s history, the company’s guidance was also terrible. The high end of Apple’s revenue guidance for the next quarter came in 10% lower than the analysts’ estimate of $47 billion.
Although Apple is trading at a conservative earnings multiple, Mr. Market’s obsession with growth has pushed Apple’s stock down more than 10% since the earnings release. Moreover, Carl Icahn selling his position in the stock recently put further downward pressure on the stock. It was only a few months ago that Icahn said Apple was worth more than $200 and that buying the stock was a “no-brainer.”
Apple is facing many problems and the stock will probably stay under $95 until the launch of iPhone 7. However, the iPhone 7 has to be a really successful product for Apple to cross the $100 mark. Apple faces many difficulties going forward, which is why I am neutral on the stock.
Smartphone market saturating
The eventual decline of the smartphone market is probably going to start soon. The market is nearing saturation, and the great growth of the smartphone industry is coming to an end. Like the stocks in the PC market, companies that rely on the smartphone industry will soon have trouble growing. Apple is one such stock.
Apple generates 65% of its revenue from the iPhone, and the saturation of the market will definitely hurt it. What makes matters worse is Samsung’s (XKRX:005930, Financial) new flagship phone, the Galaxy S7, has been a great success, and its sales have already been three times the sales of the Galaxy S6.
Given that the high-end smartphone market is pretty limited in terms of unit sales, the fact that Samsung has increased its sales considerably will hurt Apple in the coming years. Apple will really have to revolutionize the iPhone 7 so as to curb the growth decline.
As of now, the chances of Apple surpassing the sales of the iPhone 6, or the iPhone 6S for that matter, will be very difficult.
Conclusion
Due to the reasons mentioned above, investing in Apple is not recommended right now. Despite the headwinds, Apple has great earnings power and plenty of cash. Apple can use the money to propel growth; however unless there’s a clear path to it, investors should stay on the sidelines.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
