I expect a wild ride for Apple (AAPL) this week and consequently for the entire tech sector.
Apple shares dropped another 3% on Thursday taking the two-day losses in the shares to almost $200 billion, (Yep, with a “B.” That brought Apple’s market cap to $2.9 trillion. Yep, with “T.”) A massive (Internet irony alert) rally on Friday took the shares up 0.35%.
And I think that this coming week could be just as volatile. I’m selling Apple out of my online portfolios today, Monday, September 11. See my logic below and see if it’s right for your portfolio.
Apple is facing two (or maybe more depending on how you count) big problems at a very inconvenient time.
First, the company has been caught up in the continuing technology trade war between the United States and China. Government pronouncements in China have stressed that it is a public duty to buy domestic technology products, such as Huawei smart phones rather than purchase Apple’s iPhone. Recently that campaign seems to have increased in intensity with Chinese social media sites showing heavy volumes of posts attacking foreign technology products. This isn’t a minor problem since China is Apple’s biggest single foreign market.
Second, the government has expanded its ban of the use of iPhones by workers at government agencies to include employees in local governments and at state-owned companies. Japan’s Nikkei news service has reported that at least one state-owned company had told its employees that anyone working with trade secrets could not bring their iPhones, Apple Watches, or AirPods into work from next month. A good part of this seems to be the Xi Jinping led government’s continuing crackdown on anything that might impede the ability of China’s security agencies to track and censor Internet messages. China has more than 150,000 state-owned companies, according to state media, employing more than 56 million people in 2021.
And third, China’s economy has slumped and sales of Apple products were looking to reflect that weakness. The entire global smart-phone market indeed is in a growth slump. Apple launches its new iPhone 15 and upgrades to its iWatch and iPods on Tuesday into that environment. Analysts on Wall Street have been asking if the new features due for announcement on September 12 are enough to reverse this year’s weakness in Apple sales.
Apple doesn’t report third quarter earnings until October 26. With what are traditionally the company’s best quarters of the year just ahead, Wall Street is looking for the company to show signs of revising its recent slowdown. The August 3 earnings report showed a very modest positive surprise of $1.26 a share versus consensus expectations for earnings of $1.19 a share in the quarter. The consensus estimate for the October 26 report puts earnings at $1.39 a share up, up, again modestly, from $1.29 a year ago.
Anything that makes analysis and investors doubt that Apple will beat on October 26 will hurt the stock. Anything in Tuesday’s product announcement that seems lackluster will hurt the stock here. And further news about a more extensive crackdown on Apple products in China will hurt the stock.
All these development pose a huge challenge to Apple’s basic iPhone strategy since 2016. When iPhone unit growth began to plateau at 200 million to 220 million units annually in 2016 Apple decided to offset slower unit sales growth by raising prices and putting more “upscale” products on the market. In 2017, Apple released the iPhone X at a hefty $999. A year later, it offered a larger iPhone XS Max with 512 gigabytes of storage for $1,449. Today, Apple sells the iPhone 14 Pro Max for $1,599 with a terabyte of storage. The new iPhone 15 with more–more camera modes, more titanium, more speed–is expected to continue with pattern.
The strategy has worked. Annual iPhone unit sales have remained stagnant for the past seven or so years, but revenue has grown about $70 billion over that timeframe. The shift also brought a change in the way Apple measures success. It stopped reporting device unit sales in fiscal 2019, focusing instead on how much money each product brings in.
Now one of the big questions for Apple’s short-term share price is what Wall Street analysts will say about the prospects that Apple’s latest effort to raise prices will continue to be enough to offset the plateau in unit sales.
On Tuesday, the price of top-end iPhones is expected to climb higher.The company will further differentiate its iPhone 15 Pro models from the standard models by giving them better battery life, faster USB-C data transfer speeds, thinner borders and nicer screens. The Pro versions also will get a customizable action button and a faster chip. Apple also is adding an extra enticement to the top-of-the-line Pro Max: The phone will offer a wider range of optical zoom via a so-called periscope lens. This system doubles the iPhone’s ability to zoom in on an object via the hardware lens from 3x to about 6x.
In past years, the two Pro models typically only differed in terms of screen size and battery capacity. But the periscope zoom addition is more significant, and shows that Apple is getting more aggressive with its premium strategy.
Will that strategy work this time around? The environment–with price pressure from Chinese-made smart phones, a slowing global economy, and some signs that the U.S consumer is starting to feel price sensitive–isn’t an easy one for this strategy. It’s quite possible that Wall Street analysts will caution on the challenges facing Apple and start to hedge their bets after Tuesday’s announcement.
So what should you do if you own Apple shares and still believe, as I do, in the company’s long-term future as a leader in the technology sector?
I think you have two options.
First, just hang onto your shares through whatever price “reset” they face over the next few quarters to a year. A reset wouldn’t be painless so be sure that you’re comfortable enough with this strategy to hold through any downturn in Apple, As of Friday’s close the shares were up 37.68% for 2023 to date, but the stock, which closed at $178 on Friday, has broken below support at both the 50-day and 100-day moving average. Next support is at the 200-day moving average at $164. That’s only another 8% down from here. But the 200-day average is by no means a certain short-term bottom.
Second, sell to avoid any further short-term reset and buy back into the shares in 2024 on the usual seasonal weakness in the spring. This would also let you sit on the sidelines with some cash as you see how the overall market is going to move in the next few months.
I’m adopting Option #2 today and selling the shares of Apple in my long-term 50 Stocks Portfolio. That position is up 574% since I initiated it in November 2016.
I’m also selling Apple out of my 12-18n month Jubak Picks portfolio, That position is up 12% since I started it on January 26, 2022.