Saying that a stock is crashing is serious stuff.
When I think of a crashing stock, immediately images of a 15% drop in pre-market trading pops up in my head. And when that crash happens, it's usually due to fundamental reasons ranging from a material earnings miss, a competitor making a major acquisition or rumors of an executive scandal. But it would seem that Apple (AAPL) is currently offering up a new definition of a stock crash, one that occurs over a longer period of time despite a valuation that appears tantalizingly attractive.
Shares of the tech giant are down about 24% from their April 28, 2015 52-week high. In truth, the decline feels like 50% -- everyday seems to bring more "bad" news on the company. Similar to a traditional stock crash, Apple's new-age stock plunge is due to very specific factors that seem fundamental to the company's story. Below is what the market is voicing right now.
As I noted recently, I would not be a buyer of Apple until we get a sliver of good news on the company -- and the market reacts favorably to it. Looking back, Apple CEO Tim Cook's appearance on 60 Minutes -- in which no news was shared on coming products and no comments were made on sales trends -- was quite telling.
Decoding an Apple Stock Crash
Inventories are piling up: According to reports, Apple is expected to cut production of its latest iPhone models by about 30% in the January-March quarter due to ballooning inventories. Back when Apple was in the good graces of Wall Street, a move such as this would be viewed favorably. It would be a sign the company wants to blow out the channel ahead of a transformative new iPhone launch. Alas, that doesn't appear to be the case this time around, and it offers up two concerns for investors to consider.
The first is that Alphabet's (GOOGL) Android platform, which has over 80% of the market according to research firm IDC, is continuing to gain share. Android's share was trending higher for most of 2015, according to IDC data, likely as a result of interest in Samsung's flashy looking phones. Ironically, shares of Alphabet have risen nicely during Apple's glacial stock crash.
The second issue is that as a result of the slowing market for smartphones, and some share loss, Apple may be forced to adjust prices in two manners. The first, by introducing a supremely cheap, stripped-down iPhone that targets low-income consumers (think some kind of burner phone sold at convenience stores/the low-end section at Best Buy (BBY)). That would erode the company's premium positioning, however. Second, the company may be forced to price the iPhone 7 suite more competitively right out of the gate, which is something the market would unlikely embrace initially.
Google beating Apple in smartphones? Maybe...
Source: Yahoo Finance
Apple Watch threats are real: Apple may be learning a valuable lesson. It may be forced to update the Apple Watch every quarter to keep pace with a very dynamic wearables market. Moreover, it may have to price Apple Watch 2 much more competitively to drive volume given the greater, and credible, competition.
Here come pressured profit margins as that spending on production, design and price points kick into overdrive.
I have been impressed with the newest round of smart watches being shown at the Consumer Electronics Show (CES). They actually look like watches and are highly functional, outperforming the Apple Watch in many areas (notably, design). The Fitbit Blaze is the real deal. Sure, it's app community is virtually non-existent (an issue of course) but the watch is sleek, tracks just about everything one wants to track and is more affordable than the Apple Watch. This will likely entice existing Fitbit (FIT) users to upgrade instead of switching to an Apple Watch.
Elsewhere, the new Movado (MOV) Bold Motion is equally compelling. It looks near identical to a Movado, but sleeker and equipped to handle messages, emails and health tracking.
Yes, China is slowing: On the positive side of the equation, by the middle of this year Apple will have 40 stores in China -- not rinky dink mall stores; these are flagship shrines to all things Apple. The issue, though, are the traffic levels at the stores that have not been opened within the past 12 months.
Apple's stock crash is hinting at a major slowdown in China, one that is causing inventories to pile up. It has been my experience that inventory build-ups take a few quarters to work through, meaning Apple's margins will not be as healthy in the first half of 2016 as in prior periods. In effect, the company will be cleaning out old iPhone inventory, in part due to China's macro slowdown, as it stuffs the channel with iPhone 7 and Apple Watch 2 inventory.
Revenue from Greater China for Apple rose 99% in the fiscal fourth quarter, cooling from the preceding quarter. If the market is right, look for that growth number to be cut in half when holiday-quarter results are announced.
Apple Greater China Sales Growth
- 4Q15: +99%
- 3Q15: +112%
- 2Q15: +71%
- 1Q15: +70%