It may be a difficult stance to take, but now is the time to take profits on Apple (AAPL). Apple's trend has shown considerable strength over the last few years, defying gravity as it continued to roll out new waves of innovation. The iPod, the iPhone, and most recently the iPad have all served as catalysts that have propelled the company into the personal space of consumers around the world. Yet as bold as the products have been, the company's reliance on a few key products has centralized the risk of the company's earnings potential. In light of the high expectations set by the market, investors may do well to take a step back from their bullish enthusiasm in order to first evaluate the impact of the upcoming iPhone 5.
As seen in the chart above, Apple's climb over the past two years has gone largely unchallenged despite indication that earnings growth may be slowing. Over the last year alone, the company's stock has risen 73.26%. Investors continue to hold Apple to higher expectations even as the fundamentals begin to waver. After missing on revenues and earnings in the last quarter and subsequently reducing its future guidance, the market proceeded to send the stock higher over 17% in the last month alone. Even by itself, such market action appears to merit a more cautious approach.
Yet a look at the concentration of the company's earnings power suggests that the company is reaching another moment in its history in which it must outperform in order to meet those expectations. Earlier this month, Business Insider writer Henry Blodget crunched some key margin metrics that show that the iPhone now accounts for 62% of Apple's gross profits. Based on the growing change of this percentage over the last few years, it's become clear that the boom in the mobile device market has largely accounted for the success of the company over the same time period. For comparison, the iPhone line accounted for only 32% of the company's gross profits back in 2008. Such a concentration on a particular product line introduces a greater degree of risk for such a large company.
As of August 27, 2012, Apple currently stands valued with a market capitalization of $633 billion despite only having $111.7 Billion in shareholder equity as of June 30, 2012. It does remain an impressive feat that the company grew to this amount from just $69.3 billion in a year's time. Yet with this growth rate clearly being accounted for in the current valuation, the iPhone 5 product launch has become a critical event by which to evaluate the company. Any poor reception, product launch delay, macroeconomic downturn, manufacturing problem, distribution issue, or failure to live up to the quality of Apple's revolutionary brand name, and the company's total profits are sure to take a large hit.
As a result, investors may find it more advantageous to take profits now in order to strike while the iron's hot. The dividend's been issued, the company has won its lawsuit, and the stock is now pressing 52-week highs. While Apple's stock may very well continue to climb in light of the ongoing enthusiasm, conservative investors might find it ideal to step into the sidelines as the potential risk of a tepid iPhone 5 product launch begins to make its way into the picture. Should the launch prove overwhelmingly successful, as was the case in years prior, it would not be difficult to migrate back into a bullish position.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.