Over the past year, I’ve encouraged you to take profits on Apple (AAPL).
Apple is one of the greatest companies in the world. Its signature products include the iPhone, iPad, Mac computers and the Apple Watch.
These tech gadgets are among the top-selling products in their respective categories. And many investors generated huge profits owning Apple ahead of these product launches.
However, as I predicted here, Apple was about to see a dramatic slowdown in growth (in earnings and sales) in the years ahead.
In fact, this trend began in July. This was after the company reported earnings (for its fiscal third quarter) that fell short of consensus estimates. Apple reported weaker than expected iPhone sales again in October (in its fourth quarter).
Apple is down 25% since my call. This is much more than the S&P 500 — which is down 10% in the same time frame.
Back in July, I recommended not buying the pullback. And based on all my newest research, I continue to stand by my call not to add shares here in the near term.
In fact, the stock could fall another 10% to 15%, as the next six months will be incredibly challenging for the tech giant.
Let me explain …
On Tuesday, Apple reported first-quarter earnings.
During the company’s conference call, CEO Tim Cook highlighted several records. For example, Apple generated $75.9 billion in sales last quarter.
This was the strongest quarter in the company’s history.
The company generated more than $5 billion from its services division. This includes sales from its Apple Pay, iTunes, iCloud and Apple Care segments.
This was also a record for the company.
Apple said it generated $18.4 billion in net profit.
This was the most-profitable quarter in U.S. corporate history!
These numbers are nothing short of impressive. However, Apple is about to set another record.
And this record should be the most important factor for any investor looking to buy Apple right now…
Next quarter, Apple will report its first decline in iPhone unit sales in the company’s history. This means Apple will sell fewer iPhone units next quarter compared to the year before.
To put this in perspective, the iPhone accounts for nearly 70% of Apple’s total sales. This is also the most-profitable product the company sells. And unit sales are slowing much faster than the company — and analysts — expected.
Apple began selling its latest iPhone (called the 6s) in September.
Sales were strong during the product launch. But there were not enough “exciting” changes to the new handset to warrant massive upgrades from customers.
In fact, some of the most widely-followed publications in technology — including Tech Insider and re/code — found little reason for Apple customers to upgrade their older handsets to the newer 6s version.
Most Apple bulls see this as a positive …
Apple is expected to release its new iPhone 7 later this year. This means existing customers — who did not upgrade to the 6s — are likely to upgrade to the iPhone 7. That could result in Apple reporting one of its strongest quarters ever to end 2016.
However, the new iPhone 7 will not be released until September.
Remember, Apple receives more than two-thirds of its revenue from iPhone sales. And iPhone sales are slowing much faster than expected. With eight months left until the iPhone 7 release, Apple is likely to report terrible iPhone sales numbers over the next two quarters.
Of course, Apple sells other products like iPads and Macs. However, unit sales for these major brands are also declining. For example, iPad unit sales are down 24% year-over-year. Mac unit sales are down 4% year-over-year.
Apple generated over $5 billion from its services division. The company also generated $4.3 billion in sales from its division that includes the Apple Watch, iPod, Beats headphones, Apple TV and accessories. This amounts to nearly $10 billion in sales for both divisions.
This $10 billion is a huge number for most companies. Yet, it only amounts to just 4% of the $230 billion in total sales Apple is projected to generate for 2016.
In other words, investors should stop focusing on exciting headlines relating to the Apple Watch or Apple TV. Apple is clearly an iPhone company. And over the next six months, sales of the iPhone are likely to slow much further.
Turning to the fundamentals, Apple is currently trading at 10 times earnings. That’s incredibly cheap compared to the average company in the S&P 500 — which trades for 15 times earnings.
Apple is also sitting on $213 billion in cash. To put this in perspective, that’s more cash than the entire market cap of JPMorgan (JPM). It also amounts to almost $40 a share in cash, or 41% of Apple’s market cap.
However, more than 90% of this cash is held overseas. If it is brought back to the U.S., this cash could be taxed at 38%. To put this in perspective, this could cut Apple’s cash by roughly $70 billion.
Again, Apple is one of the greatest companies in the world. The fundamentals also look attractive at these levels (even after the potential tax on its cash hoard).
However, the company is likely to see more pressure over the next six months as iPhone sales continue to slow. This could push the stock down another 10% from current levels.
If I’m right, this would be a much better entry point for investors to buy Apple.