Is Apple a Value Trap?

Apple (AAPL) stock has pulled back considerably since the company reported bad earnings last month. Fundamentally, Apple looks very cheap at current levels, however, investors shouldn’t consider buying it just yet. I think Apple can fall towards $80 and given its cheap valuation, Apple may fall in the category of a value trap and here’s why.

iPhone 7 might not be able to accelerate the sale growth.

Apple generates most of its revenue from the iPhone and the falling growth of the iPhone 6S has understandably hurt the stock.
In the first half of FY16, the company sold 125.97 million iPhones, a drop of 7 percent as compared to the first half previous year. Similarly, top-line descended 13 percent in the most recent quarter equated to the previous year’s same quarterly results.

On the other hand, the company guided for $42 billion in revenue for Q2, which would signify a decline of 15.33 percent compared to same quarter previous year. There was so much pent up demand for a bigger screen iPhone that when the company finally launched the iPhone 6/6 Plus, it encouraged a passion of purchasing and horde up sales very close to impossible comparable levels for the ensuing year. Hence, most of the customers using iPhone 6/6 Plus decided not to switch to iPhone 6s/6s Plus, and to wait for the new iPhone to come in the market.

As per the report from the mostly consistent KGI Securities analyst Ming-Chi Kuo, the company will only manufacture a single model of its 5.5-inch iPhone in 2016. This report opposes a prior report from the consensus signifying that the company could launch two variants of the new iPhone, one with a single camera lens and other with the dual camera lens.

However, Apple’s single variant, predictably, will apparently pack a dual-camera lens together with 3 GB RAM, an increment of 1 GB as compared to its previous iPhone 6s/6s Plus. The company decided to increase its RAM size mainly because of the high image processing requirements.

At present, it is not possible to say about the exact appearance of the upcoming iPhone 7, but it is highly likely that there will be no major physical changes in the iPhone 7 as compared to its predecessor iPhone 6s/6s Plus.

If Apple does decide to not improve the appearance of the new iPhone, the device will lose its ‘WOW’ factor and existing Apple customers will not shell out hundreds of dollars to upgrade their iPhones.


Due to the uncertainty surrounding the iPhone 7, investors should avoid Apple going forward. Apple’s stock may appear cheap but it can continue moving lower if the company doesn’t pack in a lot of new features in the next iPhone, thereby making a stock a value trap.
Published on May 17, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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