Apple's Stock Risks More Declines As iPhone Outlook Darkens

Apple Inc.'s (AAPL) stock has been on a roll this year as it became the first publicly-traded U.S. company to achieve a market capitalization of $1 trillion in August and kept on rising. But since October, the stock has plunged nearly 18% from its all-time intraday high as doubts have increased about the growth outlook for its flagship product, the iPhone, the main driver of its profit and revenue growth. The stock faced another blow on Tuesday as Goldman Sachs - in one swoop - lowered its forecasts for 2019 iPhone sales, earnings and revenue, and also its price target for Apple stock. "We are concerned that end demand for new iPhone models is deteriorating," said Goldman Sachs. The catalyst was a sharply lowered forecast from a key Apple supplier, Lumentum Holdings Inc. (LITE). JPMorgan this week also reduced its own price target for Apple.

The high water mark for Apple's market value was about $1.13 trillion on Oct. 3, but has since fallen to about $915 billion as of Tuesday's open of trading, a stunning loss for investors as a group.  

Apple Heads Toward A Bear Market

Down by 17.9% from all-time high set on Oct. 3
Lost almost $200 billion of market value from that high

Source: Yahoo Finance

Significance For Investors

Apple's stock also has gotten caught in a major tech downdraft driven by investors concerned about growth and valuations. That has made Apple and other tech stocks vulnerable to sell-offs at the slightest sign of weakness. In its latest report, Goldman reduced its forecast for iPhone unit sales in Apple's fiscal year (FY) 2019 by 6%. That led to a full year revenue forecast that is lower by 3.5%, and a 12-month price target that has been cut to $209, or by 5.9%. The new price target implies a gain of 9.1% from the Nov. 13 open, which amounts to a tepid endorsement of the stock. That target would still leave Apple 10.5% below its all-time high. Goldman has a neutral rating on Apple.

Why Goldman Is Bearish On Apple

Key supplier to Apple slashes its own sales forecast
Goldman infers that this is the result of slowing iPhone sales
Demand for iPhones weakening in China and other emerging markets
Goldman cuts price target for Apple, based on lower sales and earnings estimates

Source: Goldman Sachs

Goldman bases its reduced forecasts for Apple mainly on an announcement by key supplier Lumentum Holdings that it is reducing its revenue guidance for its own current fiscal quarter by 17%. The announcement did not name Apple specifically, but it noted that the lower guidance was the result of reduced shipments to "one of its largest 3D sensing customers," as Goldman's report puts it. Putting these and other facts together, Goldman concludes that only Apple could produce this large an impact on Lumentum's sales. Shares of Lumentum suffered a 33% price decline on Nov. 12 on heavy volume as a result of the reduced guidance.

Apple has acknowledged "macro and FX [foreign exchange] driven consumer weakness in EMs [emerging markets] such as Russia, Brazil, Turkey and India," Goldman writes. "We suspect that China also weakened during the quarter," they add.

"We are concerned that end demand for new iPhone models is deteriorating." -- Goldman Sachs

Meanwhile, JPMorgan also cut its iPhone sales estimates, and reduced its own price target for Apple stock, per MarketWatch. JPMorgan projects that 218 million iPhones will be sold in calendar year 2019, down by 10 million units, or 4.6%, from their previous forecast. Goldman meanwhile, forecasts 203 million units sold in Apple's FY 2019, which already is in its 2019 first quarter. JPMorgan cut its price target to $266 from $270, which implies a gain of 38.8% from the Nov. 13 open and thus is considerably more optimistic than Goldman's new target of $209. JPMorgan also has an overweight rating on Apple.

However, JPMorgan recognizes that the strong U.S. dollar is hurting iPhone sales in key emerging markets. They also note that weakening economies in key markets such as China are another headwind for Apple.

Looking Ahead

In addition to weakening iPhone demand, Goldman sees "pressure on gross margins and large & dilutive acquisitions" as other big downside risks for Apple. Key upside risks, they say, are "better-than-expected iPhone demand, better than expected iPhone mix, significantly outsized [stock] buybacks and [a] meaningful dividend increase." The big question is whether those positive forces will be able overcome the bearish factors pressuring the stock today.

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