Apple's (AAPL) high growth phase seems to be over. And it was an unusual one, lasting through as much as eight years, which is rare to see. The stock was a leader in many stock market bull cycles, which is also not seen often. The situation we have right now is that it seems the market is anticipating further deterioration of future growth. Hence, the leadership of Apple in the future stock market cycles might be over.
The fact is that the growth decelerated significantly, which caused the stock price to drop heavily. Analyst estimates are going down, from $49.28 expected EPS 90 days ago to $44.59 for this year and from $57.95 to $50.51 for 2014. This is normal for stocks when their high growth phase comes to an end. Based on the current valuation and growth expectations, Apple is still very, very cheap, but history shows that what is cheap, might become cheaper.
AAPL data by YCharts
The technical picture is still bearish. The stock is in a clear downtrend, and was rejected by the 50 day moving average several times on the way down, and once from the 200 day moving average. Apple is still below both key moving average lines. A decisive break to the upside on above average volume might end the downtrend.
Earlier in the history we saw similar ends of high growth phases, over and over. Some of Apple's competitors had quite aggressive breakdowns after their respective growth cycles ended and Apple was somewhat a cause for them, at least in case of Nokia (NOK) and BlackBerry (BBRY), which suffered declines in revenue and earnings after losing market share to Apple.
Nokia is still very far from its all time highs, despite the latest surge of 100% since the July 2012 lows. Four years ago, the stock recovered somewhat after the severe bear market, but those gains soon evaporated, bringing the share price down from $15 to $3.59 at the moment of writing, and being below $2 in July 2012. The cause of the drop was growing competition and the end of the growth phase of earnings and sales the company had in time preceding the bear market.
The chart below shows how the end of revenue and earnings growth coincided with the drop in share price of Nokia.
NOK data by YCharts
BlackBerry had a similar fate. The company saw its earnings and revenue decelerate, and then go negative over a short period of time, causing a severe breakdown, falling 90% in 18 months, from February 2011 to September 2012. It is now 100% up from September 2012 lows.
BBRY data by YCharts
To be clear, I am not calling a decline of Apple of a similar degree, and am more inclined to think the end of decline is near. But, there is a real possibility the valuation situation is going to change. According to Ycharts, BlackBerry had a PE of 11 at peak price of around $70 in February 2011, preceding its 90% decline. Share price of Nokia was around $15 in March 2010 and twelve months trailing PE was around 7 at the time. That did not prevent the share price going down more than 80% in two years. Apple's PE is currently 9.76 and forward PE is 8.52 according to Yahoo Finance.
Other technology leaders had similar movements after the end of their respective growth cycles. Microsoft (MSFT) and Cisco Systems (CSCO) have underperformed the market after their peak prices in the roaring 90's bull market, and even if you take the lows of the bear market in late 2002. Microsoft is basically flat when compared to its price in 2002 (at the end of the bear market), and still far away from its all time high price achieved in 2000. Cisco Systems delivered roughly the same performance as the S&P 500 index from 2002 lows of the bear market, and is as much as 70% down from the peak price of 2000.
Source: Yahoo Finance
Source: Yahoo Finance
Considering earlier examples of Nokia and BlackBerry, one should be very careful investing in growth stocks which became value stocks. The situation can change very quickly, earnings expectations and analyst estimates can change for the worse, and the more projected in the future, the less reliable they are. So it is important to listen to price behavior, which is still negative, and stay away from Apple for the time being. Many historical examples show that once the growth cycle of the stock ends, they underperform the market significantly, as examples mentioned in this article show. However, that is now warranted, and Apple might again surprise in a positive way, although the situation right now does not suggest it.