Time to sell apple

Time To Sell Apple?

3 minute, 21 second read

The company’s most recent earnings report smashed Wall Street expectations. And Apple’s stock price continues to surge. It’s up 58% so far this year.

Not only does the company hold the distinction as the most valuable FAANG stock, it’s the most valuable public company in the world … recently taking the crown from oil giant Saudi Aramco.

Then today the company reached another milestone…

It just became the first U.S. company to ever hit a $2 trillion market capitalization!

That means Apple is almost as valuable as the entire Russell 2000 Index of small-cap stocks combined.

But just as Apple is enjoying the wind in its sails, several big storms are brewing on the horizon.

Monopoly Money

Apple makes a killing on its App Store.

In 2019 alone, consumers purchased an estimated $50 billion of digital goods in the App Store. And Apple gets a 30% cut of all in-app purchases. That comes to about $15 billion … in one year. (Apple doesn’t officially disclose the sales that it collects.)

It’s been great news for Apple … not so much for app developers. They’ve been complaining about the company’s large fee and tight rein for a long time. Now the bad press is finally catching up to the tech giant.

Here’s a recent timeline events:

July 29, 2020: CEO Tim Cook is called upon to testify to the House Judiciary Committee in an antitrust hearing. Specifically, Congress grills him on the company’s App Store practices.

August 13, 2020: Just two weeks later, Epic Games — the developer of the popular game Fortnite — unveiled a way for its users to bypass Apple’s system and collect payment directly. That same day, Apple removed Fortnite from its App Store, and Epic Games turned around and filed a lawsuit — citing anti-competitive practices.

August 17, 2020: Epic filed a temporary restraining order to keep Apple from “removing, de-listing, refusing to list or otherwise making unavailable the app ‘Fortnite,’ including any update thereof.”

In other words, Apple faces a huge mess. And it threatens a key segment that has fueled the company’s sales growth as overall iPhone sales remain stagnant.

By the end of this fiscal year, service revenue (which includes the App Store) is poised to jump by 78% compared to three years ago. IPhone sales, on the other hand, are set to decline over the same period.

But that’s not all…

Caught in the Trade War

The company is also in danger of getting tangled up in the U.S.-China trade spat … most recently, with the Trump administration’s efforts to ban WeChat.

Although the social media app doesn’t have much of a presence in the U.S., it’s used by over 1 billion people and is firmly embedded in everyday life in China.

Depending on the scope of the ban, Apple could be forced to remove WeChat from its App Store.

And rather than live without WeChat, surveys show that Chinese consumers would instead switch smartphone brands.

That would put a serious dent in Apple’s revenue … China generated $44 billion in sales in 2019. That’s about 17% of the company’s total haul.

Buy? Sell? Hold?

Apple just reached a $2 trillion market cap because it is great at what it does.

But threats are converging at a time when Apple’s forward price-to-earnings ratio (which even includes the next 12 months of estimated profit growth) has risen to its highest level in 12 years.

The stock is priced for perfection, and any signs of disruption to iPhone demand or slowing service revenues will send investors rushing for the exits.

That’s why it’s smart to take profits if you hold the stock. Recycle those gains into more cyclical areas of the stock market that are in the early stages of their uptrends.

Ted and I have recently highlighted several opportunities that will benefit from a cyclical rotation, and how you can play them with exchange-traded funds.

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After 2019’s Mega-Rally, Is It Time To Sell Apple?

After seeing the value of their holdings doubled during the past year, one logical question for investors in the shares of Apple (NASDAQ: AAPL ) is whether it’s time to take some risk off the table and reduce their holdings of this mega tech stock?

The proponents of this call have a point to make. The stock has surged more than 100% in the last 12 months to hit another record high on Friday, closing at $310.33. Indeed, Apple’s gains are now the largest among the group of top five tech giants that includes Amazon.com (NASDAQ: AMZN ) and Google’s owner Alphabet (NASDAQ: GOOGL ).

For the first time since 2011, shares of the iPhone maker have been trading at a higher price-earnings ratio than the S&P 500 after the stock’s valuation almost doubled in 2019. It’s a reversal from the previous nine years, when concerns over a lack of product innovation kept the stock at a persistent discount to the market.

After a powerful rally in 2019, Apple is trading at 26 times last year’s earnings, the highest level since 2008. That compares with a multiple of 24 for the S&P 500. The magnitude of Apple’s current rally has raised concerns that the stock is due for a correction.

At yesterday’s price, the stock is trading more than 12% higher than analysts’ average price target. Seven of the 49 analysts tracked by Bloomberg that cover Apple have sell ratings, the most in at least nine years.

Apple Investors Ignoring Bearish Case

Despite these concerns, Apple’s persistent strength shows that investors have started to ignore a bearish scenario which calls for avoiding the company because its growth is too dependent on iPhones. The flagship product still contributes to about half of the total sales, making the business vulnerable to a shift in consumer preferences and a potential slowdown in economic activity.

One of the biggest factors that’s helping a strong bull case for Apple is its fast evolving ecosystem of products and services which is helping the company to deepen its penetration. Apple’s services unit, which includes growth businesses such as the App Store, Apple Pay and Apple Music, is picking up and contributing more each year to the company’s total sales.

According to analysts’ forecasts, the number of iPhones sold this year will be well below the total number sold during peak iPhone years of 2015, 2016, 2017 and 2018. And yet, Apple is expected to generate record revenue this year of more than $275 billion thanks to its evolving business model.

Apple’s sales from services are forecast to rise to $54 billion in fiscal 2020 and account for a fifth of total sales, up from 18% at the end of 2019, according to analyst data compiled by Bloomberg.

In addition to these growth drivers, the macro environment, which became hostile last year following the U.S.-China trade spat and the growing risk of recession, is improving fast. The stock market is rising, volatility is low, and employment is growing.

The U.S. Federal Reserve is firmly on the sidelines and it seems unlikely that President Donald Trump would purposely cause any market shocks in an election year. That positive backdrop is prompting consumers to spend more on gadgets globally. Apple’s iPhone sales in China, the company’s biggest foreign market, rose more than 18% last month, according to CNBC calculations.

Bottom Line

Apple’s push to reduce its reliance on iPhones is showing clear signs of success. That means the company has developed a very robust ecosystem built around its services business. This momentum is weakening the bear case against Apple stock and fueling the ongoing rally. In this highly favorable environment, in our view, investors would do better to hold on to their Apple shares instead of taking profit.

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What to do before you sell, give away, or trade in your iPhone, iPad, or iPod touch

Use these steps to transfer information to your new device, then remove your personal information from your old device.

Before you sell, give away, or trade in your device, you should first transfer information to your new device, then remove your personal information from your old device.

You shouldn’t manually delete your contacts, calendars, reminders, documents, photos, or any other iCloud information while you’re signed in to iCloud with your Apple ID. This would delete your content from the iCloud servers and any of your devices signed in to iCloud.

If you still have your iPhone, iPad, or iPod touch

Follow these steps to transfer information to your new device, then remove your personal information from your old device.

Transfer information to your new device

If you have a new iPhone, iPad, or iPod touch, you can use Quick Start to automatically transfer information from your old device to your new device if you’re using iOS 11 or later. Use iCloud, iTunes, or the Finder to transfer information to your new device if you’re using iOS 10 or earlier.

If your phone number will change with your new device, add additional trusted phone numbers to your account to ensure you don’t lose access. If you no longer have access to your old phone number, you can generate a two-factor authentication code on your old device if needed.

Remove your personal information from your old device

1. If you paired an Apple Watch with your iPhone, unpair your Apple Watch.
2. Back up your device.
3. Sign out of iCloud and the iTunes & App Store.
   • If you’re using iOS 10.3 or later, tap Settings > [your name]. Scroll down and tap Sign Out. Enter your Apple ID password and tap Turn Off.
   • If you’re using iOS 10.2 or earlier, tap Settings > iCloud > Sign Out. Tap Sign Out again, then tap Delete from My [device] and enter your Apple ID password. Then go to Settings > iTunes & App Store > Apple ID > Sign Out.
4. If you’re switching to a non-Apple phone, deregister iMessage.
5. Go back to Settings and tap General > Transfer or Reset [device] > Erase All Content and Settings. If you turned on Find My [device], you might need to enter your Apple ID and password. If your device uses eSIM, choose the option to erase your device and the eSIM profile when asked.
6. If asked for your device passcode or Restrictions passcode, enter it. Then tap Erase [device].
7. Contact your carrier for help transferring service to a new owner. If you aren’t using a SIM card with your device, you can contact them to get help transferring service to the new owner.
8. Remove your old device from your list of trusted devices.

When you erase your iPhone, iPad, or iPod touch, Find My [device] and Activation Lock are turned off.

If you no longer have your iPhone, iPad, or iPod touch

If the steps above weren’t completed and you no longer have your device, use these steps:

1. Ask the new owner to erase all content and settings using the above steps.
2. If you’re using iCloud and Find My [device] on the device, sign in to iCloud.com/find or the Find My app on another device, select the device, and click Erase. After the device has been erased, click Remove from Account.
3. If you can’t follow either of the above steps, change your Apple ID password. This won’t remove personal information that’s stored on your old device, but it prevents the new owner from deleting your information from iCloud.
4. If you’re switching to a non-Apple phone, deregister iMessage.
5. If you’re using Apple Pay, you can remove your credit or debit cards at iCloud.com. Choose Account Settings to see which devices are using Apple Pay, then click the device. Next to Apple Pay, click Remove.
6. Remove your old device from your list of trusted devices.

If you’re trading in an Android device to Apple

Before you send in an Android device to Apple as a trade-in, be sure to do the following:

• Back up your data.
• Erase the device.
• Remove any SIM cards, memory cards, cases, and screen protectors.

Contact your device’s manufacturer if you need help.

Learn more

• Make a backup of your iPhone, iPad, or iPod touch or restore from a backup.
• Remove all of your cards from Apple Pay.
• Get help if your iPhone, iPad, or iPod touch is lost or stolen.
• Learn about Activation Lock.
• No matter the model or condition, we can turn your device into something good for you and good for the planet. Learn how to trade in or recycle your iPhone, iPad, or iPod touch with Apple Trade In.

When you tap Erase All Content and Settings, it completely erases your device, including any credit or debit cards you added for Apple Pay and any photos, contacts, music, or apps. It will also turn off iCloud, iMessage, FaceTime, Game Center, and other services. Your content won’t be deleted from iCloud when you erase your device.

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