• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

Why I Think Apple's Stock Bites

The "Law of Large Numbers" will eventually hit growth and P/E.
By DOUG KASS
Oct 28, 2015 | 10:00 AM EDT
Stocks quotes in this article: AAPL, TWTR

This commentary originally appeared on Real Money Pro at 9:01 a.m. ET on Wednesday, Oct. 28. Click here to learn about this dynamic market information service for active traders.

Apple (AAPL) gave something for both the bulls and the bears in its fiscal fourth-quarter earnings released yesterday after the bell.

For the bulls, Apple's $1.96 earnings per share slightly exceeded the $1.88 consensus expectations. And as Tim Cook recently mentioned in an e-mail to Jim "El Capitan" Cramer, China sales were robust -- doubling from the year ago period.

However, the $12.5 billion in quarterly China sales were down from $13.2 billion in the previous period and from the +120% year-over-year increase. And while the company noted that the upcoming quarter's iPhone sales will exhibit an advance over the prior year's stellar results, management gave conservative forward guidance overall (as is typical).

Bears will also note that iPhone unit sales' year-over-year growth rate has decelerated over the last four quarters, from 46% in fiscal 1Q to 40% in fiscal 2Q, 35% in fiscal 3Q and 22% in the latest period.

Further, the company modestly missed analysts' unit estimates in every major product line:

  • iPhone: 48 million units vs. 49 million expected
  • iPad: 9.9 million vs. a 10 million estimate (down 20% year over year)
  • Mac: 5.7 million vs. 5.85 million projected (up 3% year over year)

Revenue came in slightly ahead of some analyst estimates despite these misses only because the company's "Other Income" line expanded.

Why I'm Short on Apple
Personally, I continue to look at Apple through the prism of a bear. (And if you're interested in my view of Twitter (TWTR), I have a full rundown of TWTR's earnings in my diary on RealMoney Pro this morning.)

The key to my short case for AAPL lies in the notion that the most-recent product upgrade cycle was the last important one that Apple will see over the next few years.

While the iPhone 7 lies ahead for fiscal 2016, I don't expect we'll see much of a technological change from the iPhone 6. And I don't see a compelling reason to upgrade to an iPhone 7 despite the iPhone 6's relatively low penetration rate (28%) among Apple's existing installed base.

At the same time, ancillary businesses (iWatch, Apple Pay, Apple TV, Apple Music and even the Apple car) won't likely be earnings "needle movers," nor materially offset the absence of growth in the company's core iPhone division during 2016-17.

And while Apple's "Other Business" line contributed about $3 billion in the latest quarter, that's a large figure for most companies but not for Apple -- which had $51 billion in total revenues. Indeed, in looking at the non-core businesses, it's not even clear to me that music will survive.

And even though penetration into China is a plus that will make a strong contribution to Apple's top-line sales growth over the next few quarters, the overall smart-phone market is maturing (particularly at the high ASP level).

My Forecast
As a result, I expect Apple's top- and bottom-line growth over the next two to three years to dramatically moderate from what we saw over the last two to three years.

Despite fiscal year 2015's 42% growth EPS rate, I expect flattish Apple profits of about about $9.50 per share in fiscal 2016 vs. $9.22 this time around. I also predict revenues will come in essentially unchanged at $235 billion next fiscal year vs. $233 billion in this one.

Sales might be flat in fiscal 2017 as well, with EPS benefiting from continued share buybacks and growing about 8% to roughly $10.25 a share.

Overall, I think that while Apple's fiscal 2015 sales totaled $234 billion, revenues will likely only reach about $250 billion by fiscal 2018. That's a small, 8% cumulative advance.

The Pros and Cons of Cash
Of course, much is made of Apple's cash horde, which provides a safety net for investors. (Note: Net cash was unchanged in the latest quarter over the previous one).

It's true that all of that cash provides a continued buyback opportunity for the company, and pressure from Carl Icahn and others will pressure management to continue share repurchases.

However, should Apple decide to make a major acquisition, that could be valuation destructive -- as it would underscore the company's "maturing-market" theme.

While Apple's valuation is around 12x projected 2016 EPS (less than the overall market's average), a maturing company of Apple's size in terms of sales and market capitalization deserves a substantially lower market multiple.

The Bottom Line
As I've previously written, Apple suffers from its prior successes and the "Law of Large Numbers," which I expect we'll began to see in the company's next quarterly report. It is tautological that the needle of sales/profits/cash flow will be ever harder for management to move.

Finally, who's left to buy Apple stock? And conversely, the shares could continue to be an ATM for investors who'll sell their AAPL stock if the bull market fades.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Kass was short AAPL, although positions may change at any time.

TAGS: Investing | U.S. Equity | Technology

More from Technology

The Selloff in Twilio Could Extend Deeper Into March

Bruce Kamich
Mar 5, 2021 2:30 PM EST

TWLO could bounce in the short-run but avoid the long side for now.

Updating Tesla's Weakening Technical Condition

Bruce Kamich
Mar 5, 2021 12:00 PM EST

Let's review the charts and indicators.

FireEye Is Likely to Slip Still Lower in the Weeks Ahead

Bruce Kamich
Mar 5, 2021 10:10 AM EST

Stand aside and see how far the current correction carries.

Splunk Has Further to Fall

Bruce Kamich
Mar 5, 2021 9:16 AM EST

Let's look at SPLK shares after the cloud name reports earnings.

5 Chip Stocks to Consider as Markets Tumble

Eric Jhonsa
Mar 5, 2021 6:30 AM EST

While chip stocks have outperformed in recent months, some still look intriguing as tech stocks in general sell off this week.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:38 AM EST GARY BERMAN

    The INDU and DIA

    FIBOCALL: The INDU index and the DIA The INDU ...
  • 10:44 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "The Challenge of Short-Selling"
  • 08:40 AM EST PAUL PRICE

    Recent Pick SpartanNash (SPTN) Raised Its Quarterly Payout by 3.9%

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login