Chart of the Week – Apple

screen shot 2019-01-07 at 12.41.58 pmSource: ThinkorSwim

This was a very difficult week for Apple (AAPL). CEO Tim Cook released a warning letter to investors stating the revenue did meet expectations for the recent quarter due to decreasing iPhone sales. On the day this letter was released, Apple stock dropped nearly 10%. Three business days later the stock is now trading at $147 and from a technical perspective it appears to be very undervalued. The RSI is at 34.8 which tells us that the stock is oversold.

One would have to go back to July 2017 in order to find a price this low for one of the worlds industry leaders, Apple. Along with this low price, the current P/E ratio of 12.21 is Apple’s low price/earnings ratio since June 2016. This is a surprising occurrence when the company’s TTM Net EPS has only been increasing during this period. Apple has shown an incredible ability to generate operating cash over the last ten years so buying a strong company like this when pessimism is at its highest would normally sound like a great idea.

However, the reason for this slowdown in iPhone revenue in China is unclear. Can it be blamed on the trade tensions between the U.S. and China? Are these tensions causing a greater sense of nationalism in China in which they are simply purchasing phones from company’s such as Huawei and Oppo so that they do not support American products? Or is Apple’s inability to innovate yet increasing prices the reason for this slowdown in China? I believe the latter can be most blamed for the slowing iPhone revenue. The iPhone used to be a status symbol due to its incredible technology that was leading the phone industry to new heights with every release. But now, each iPhone seems more and more similar to the last yet prices are becoming sky high. In the United States, many still buy the iPhone because there is not a great alternative, however, Microsoft and Google may be gaining ground on Apple. In China, innovative and cheaper alternatives have surfaced such as phones made by Huawai and Oppo. Tim Cook along with investors who are saying one should buy at this low point are putting the blame for the decrease in iPhone sales on the trade tensions with China. However, they are looking passed the idiosyncratic issues that are inside Apple’s building. The company that was built on innovation is no longer innovating with its most popular product. It appears that China has beaten the U.S. to finding good, affordable alternatives to the iPhone but I do not think it is long before we see revenue slowdown in the United States as well.

Due to its current oversold level Apple could be a good trade. Cook may have exaggerated the poor revenue numbers in order to generate a slightly positive surprise when the company releases earnings later this month. However, I do not see Apple as a profitable long position because I feel that China is only the first to stop buying the iPhone; not the last.

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