Apple Is Still in a Lot of Trouble

Alcoa (AA) kicked off the earnings season in style, however the outlook for corporate earnings still looks bleak. According to estimates, corporate earnings are expected to shrink 4.7% for the quarter, marking the fourth successive quarter of decline. In addition, revenues are also expected to decline 0.8%, marking the sixth successive quarter of decline.

With most of the companies yet to report earnings, I think investors should be cautious moving forward, especially since the market has rallied to all-time highs. While Apple (AAPL), due to its valuation, may look like a safe stock to buy heading into the earnings season, I think the Cupertino giant will be the biggest drag on corporate earnings this season.

It seems like the smartphone market has either peaked or is close to it as smartphone shipments shrunk for the first time in Q1.
Weak market outlook coupled with the bad performance of the iPhone 6S and 6S plus makes for a very ugly quarter for Apple.

Although Apple has already guided down for the quarter, the successful launch of Samsung’s Galaxy S7 could see Apple’s sales fall further. Given the cost of the iPhone, the newer versions of the iPhones need to have significant updates over its predecessor so as to convince consumers to shell out hundreds of dollars for an upgrade.

While Apple had managed to do it successfully till the iPhone 6, the company is running out of features to add to the iPhone to make it more appealing. This points to the fact that the smartphone market is peaking. According to reports, the best feature that the iPhone 7 has to offer is a more powerful battery and no jack. These additions hardly look convincing and could push Apple into another quarter of sales decline.

Thus, Apple’s prospects do not look bright heading into the earnings seasons and the company’s long-term prospects don’t look that bright either. Although the stock is undervalued and the company has over $200 billion in cash, I wouldn’t recommend buying Apple right now.

I think Apple is a sell, and investors who have a higher risk-appetite can also consider shorting the stock ahead of the earnings report. I can see Apple falling under $90 in the coming weeks. Also, since the market is at all-time highs, the upside at these levels is pretty limited, making Apple a bad short-term investment. In my opinion, buying put options would be the best way to play Apple earnings.

Disclosure: No Position
Published on Jul 20, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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