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Apple Inc. Stock Could Be in for a Rough 2018 on Weak iPhone Demand

The big run in Apple Inc. (NASDAQ:AAPL) stock, which started in June 2016 and caused AAPL stock to nearly double, appears to be over.

Apple stock has been treading water since early November. It has been bouncing around the $170’s in an unusually long consolidation period. Bulls think the stock is just taking a breather before its next leg higher, which could get started with a blowout Q1 earnings report (due at the end of January).

But that isn’t the most likely outcome for AAPL stock.

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The most likely outcome for Apple is that this period of consolidation ends with the stock dropping. Here’s why.

How Well Did the iPhone X Really Sell?

The market sentiment on Apple’s red-hot iPhone X has quite suddenly shifted. And that is a bad thing for Apple.

Rumors are surfacing that iPhone X demand started weakening in November, and further dampened in December to the point where Apple is being forced to cut its iPhone X sales forecast for the quarter from 50 million to 30 million units.

Moreover, Wall Street analysts, like those from CLSA and JL Warren Capital, are starting to warn clients that the Street is far too bullish with their iPhone X sales estimates for this quarter.

That all makes sense to me. I’ve always thought that it would be impossible for the iPhone X to live up to expectations.

Firstly, expectations are really, really high. While Apple’s other businesses are on fire, the iPhone still accounted for more than 50% of revenues last quarter. Clearly, Apple stock is an iPhone-driven story. Thus, when Apple stock runs up from $120 to $170 the year of the iPhone X launch, that massive run implies huge expectations for the iPhone X are baked into the stock price.

This has happened before. Back in 2014-15 with the iPhone 6. And even though the iPhone 6 sold exceptionally well, that success was not repeatable. AAPL stock ended up falling from $130 to $90 in about 12 months.

Secondly, there really isn’t any reason to believe that the iPhone X will defy gravity. Despite all the hype, the iPhone X is still more iterative than it is innovative. The phone has a price point that most consumers balk at.

Older phone models haven’t lost their relevance, so the “need to upgrade” factor really isn’t there. Plus, a lot of consumers really don’t like the whole facial recognition thing.

Overall, I don’t think the iPhone X sold that well during the holiday quarter. I also think that there is no way that Apple’s iPhone sales in the quarter live up to buy-side or sell-side expectations.

And if they don’t, that could be the downward catalyst which shoots AAPL stock into correction mode.

At 19x trailing earnings and 12x trailing EBITDA, Apple stock is trading at its richest valuation in five years. That makes the stock especially vulnerable to any negative news causing material weakness in shares. Considering that the iPhone X has dominated the AAPL growth narrative for the past 12 months, confirmation of poor iPhone X sales could be catastrophic for AAPL stock.

Bottom Line on AAPL Stock

The last time all this happened (supercharged expectations for an iPhone launch, followed by a valuation reset), Apple had a tough time for about 12 months.

But after the dust settled in mid-2016, Apple stock provided investors with an exceptional “buy the dip” opportunity.

The same thing should happen this time around. Apple is a long-term winner, but 2018 is due to be a tough year because expectations became too full in 2017.

Let those expectations unwind. Let the valuation reset. And then come in and buy the dip on AAPL stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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