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Apple Buyers Beware

Jun. 09, 2020 10:18 AM ETApple Inc. (AAPL)223 Comments
Paul Franke profile picture
Paul Franke


  • Apple's operating margins/returns have been in decline for years.
  • Basic valuations using trailing financial ratios are at 10-year highs.
  • Several momentum indicators appear to be warning a top is approaching.
  • Long-term risk/reward analysis seems to be skewing in favor of sellers.

Apple (NASDAQ:AAPL) stock has been a rousing winner for years. However, operating margins/returns are slowly shrinking, valuations are getting stretched, and there are signs upside stock momentum is starting to wane. The potential of Chinese trade retaliation against Apple is real, which could negatively affect sales and income going forward. Overall, the risk/reward situation is not the same as five or ten years ago. Apple ownership entails substantial long-term risk to your invested capital as competition and cost pressures expand in the coming years. Reviewing the entire investment story, the highest rating I can give the stock is a Hold.

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Apple has been one of the top Wall Street gainers since the company was founded. In its infancy during the early 1980s, it become a media sensation and a darling stock market mover with its invention of the personal computer. Then Steve Jobs was pushed out of the lead chair in favor of corporate-style management experience and CEO John Sculley. Jobs came back as CEO in 1997, after the stock went nowhere, despite a massive technology boom in America. The split-adjusted stock traded between $0.40 and $2.15 a share over the span Jobs went missing, and was priced at $0.60 when the co-inventor of the home computer was convinced to return. Of course, the rest is history as the tech visionary engineered/invented portable, solid-state, wireless internet-connected, touchscreen, mass-produced computer gadgets from iPads and iPods to iPhones, propelling the stock to its $333 quote today.

Below is a comparison chart of Apple's 10-year price gain against a number of large capitalization peers and competitors. On a $10,000 investment, price gains have been strong, but not at the top of the heap for performance.

Margins/Returns Declining

One problem with Apple's underlying business results is margins/returns have been

This article was written by

Paul Franke profile picture
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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Comments (223)

TK8500 profile picture
AAPL and the market are going all the way back down relatively soon.

Both daily charts are littered with gaps. I challenge anyone to show one time, just one time in the entire history of the SP500 or AAPL chart where 4,5, or even 6+ gaps (such as today) have ever gone unfilled for more than a few months.

It is 100%. When multiple gaps occur in succession like this they get filled. This not an opinion. It is a fact. AAPL is going back down along with most other stocks.
I am naive to understand all that, you are betting technical analysis + stats against sentiment, tremendous fed will, and tremendous apple cash
Ta0 profile picture
Keep some cash on hand. Buy when the opportunity arises. This is how fortunes are made and lost.
TK8500 - Saying that the market will go down when its at its peak, is not brilliant by any means. Markets don't go up in straight lines.
Today I went to 100% cash including 1800 or so shares of Apple. Was hard to do, but I'm thinking I will be able to rebuy sub 250 in the not too distant future. It was hard to do. But this market has a frenetic feel to it. Maybe I'll be kicking myself in a year or two. Who knows? But maybe I won't. Best of luck to everyone. As Arnold famously said, "I'll be back".
Don't I look brilliant?! Lol. That was quite the fluke. I think I'll become a professional trader now.....
That was a bold move. When will you re-enter the stock? The market on June 11 slid all the way down from opening bell to its close. The Fed could provide little support, so they did not intervene. As Han Solo would say, don't get cocky. This is a schizophrenic market. In the midst of one of the worst pandemics since before WW2, the pollyanna's still outnumber the realists.
Not cocky at all. Got lucky for exactly one day. I was making fun of myself. I'm good to sit out and miss out at least for a year, if I have to. I just think nobody knows a thing about this economy and if they do know, they're not acting in a rational way about it. Also, I think whatever the outcome of the election, it will have an outsized effect on markets. Yea, I'll miss out, probably, but there will be a point in the future to step back in. Don't know what that might look like, from today's perspective. Who needs the stress? 1.5% is ok for now.
I remember 8 years ago when the P/E was 10 and it wouldn’t budge because the narrative was ‘peak iPhone’ and they had no new products. To see it more than triple in value from those days and because a $1T company has been something to behold. That being said, this is the era where FAANG dominates. If the market performs, Apple will perform. They have a nice ecosystem of products which will maintain the valuation
Perhaps the valuation methods being used are missing something? Similar to Brown-Forman, which has been overvalued for well over a decade, yet profits keep supporting the higher share prices. Just a thought.
Bought 100 call 325 option spreads on 15th may for cheap. Just today bought 100 put 345 options also for a good price. Both expire 17th June. Fingers crossed 😬
Eric Bradley profile picture
Has sold some 6/26 $330 puts so waiting to see if they get assigned. Did buy some longer dated $340 calls yesterday afternoon. Market settles down and FAANG starts rising, those will work out. A lot of positives leading up to 5G iPhone in September.
What platform are you using? And are you in the states?
Thank you for your excellent article and supporting analysis. I completely agree and sold the AAPL position which I bought in 12/2018 @ $157/share today. No doubt that Fed stimulus may drive it higher, however, I am very happy to lock-in my alpha now.
I also share your view on IBM which I have as a long hold. I agree that the acquisition of Red Hat along with new leadership has the potential to be transformational. It will require some patience, however, I view it as a relatively low risk, stable dividend, investment with substantial upside.
I’ll be aware it’s going up !!! 😂 lol
Paul Franke - If your article was about Apple being over-extended in the short term, I would not as strongly disagree with you.
But you are talking about long term, and regarding the long term Apple is better positioned than it has ever been before.
You are recommending IBM for very questionable reasons. Did you take a look at the 5 year chart for IBM before recommending this stock? IBM is purely a bottom feeder play and unclear what the future holds.

For Apple, the future is clear, they are dominating the technology of today and tomorrow, while enlarging their already historically huge and untouchable ecosystem and moat.

Approx 50% of US population use IOs. Yet if you look at the teens, its 82% while 88% of teens want their next phone to be an Iphone. It would be wise to understand that the teenagers of today give an insight into the overall trends of society. The teenagers of today will be the adults of tomorrow. Speaking of adults, Apple's superior platforms and health care integration will cause many adults to switch to Apple products. Point being, most of the world is increasing their reliance and use of Apple products, including the supposedly saturated smartphone segment....which for Apple is far from saturated,
This phenomena translates to some extent to most other parts of the world. This means that even with just the Iphone, Apple has a lot of room for growth, but as most of us recognize, its not just about the Iphone for Apple and they have demonstrated that they are very capable of moving into huge new ideas and huge new revenue streams.
Kyle Fishman profile picture
"regarding the long term Apple is better positioned than it has ever been before." -- how do you figure?
Agree! if apple really wants to increase their market share, they just need to do one simple thing, that is to reduce the price by a little bit. Not to measure their investment in Arm chips, AR and self driving cars
Kyle Fishman - "regarding the long term Apple is better positioned than it has ever been before." -- how do you figure?"

I will list for you some reasons:

1. It is now clear, for anyone who had lingering doubts, that Apple is doing just fine without Steve Jobs. Until the recent 1-2 years, this was still in doubt for many people.

2. Services is becoming a greater part of Apple's revenue, and is expected to keep increasing at a brisk pace.

3. Apple's ecosystem is expanding and is broader and stronger than anything ever seen in the history of companies. This means that the 'moat' is better than ever before, and risk of switchers out of Apple is less than ever before.

4. Many future opportunities for additional revenue are clear to see, including growth of contactless payments and financial services overall, new products like Apple Glasses, healthcare devices and services, AR, autonomous vehicles, etc. ALso, there will be new opportunities in things we cannot even imagine today.

5. 50% of Americans use an Iphone, yet 82% of teenagers do, and 88% of teenagers want their next phone to be an Iphone. The fact that the young people of USA, and most of the world, aspire to Apple products means that there will be growth even in the 'saturated' parts of Apple's products, and also helps solidify Apple's dominance of its Brand.

6. Apple is on the cutting edge of today's technology and at the very least the next decade of technology. Apple's team is first class as well as its resources.

7. Apple is on the cusp of becoming a media powerhouse. It will not happen overnight, but in 5 years this will be clear to all.
jess perkins profile picture
@Paul Franke - your choice of IBM brings up multiple questions to me. What "innovations" are they planning specifically? Have you checked the latest detail as to what AAPL is addressing specifically in their manufacturing process?
mako26 profile picture
I sold some calls this week making a huge profit and then the stock went up $7 now another $10 damn Im up %40 this year and went to half cash . bought a QQQ put for November after the election . I think unfortunately trump loses . since he caused this fraudulent killer virus .and stepped on dudes neck personally ))) Biden is lame and will go after everything especially your tax money,, capital gains,, and anything he's told ...I see at least volatility then if not the attempt to dismantle wall street...Personally I see a lot more damage from C19 . How can all these businesses make money at %50 capacity. and the same amount of unneeded employees from the fallout and ensuing handouts
surfer101 profile picture
Normally I would agree - apple valuation is very high but then hertz a bankrupt company popped what 400%? These are crazy times we live in. A FED distorted market loaded with liquidity. The wall street drug addicts are pausing - waiting on the next Fed steroid injection. What I've noticed is
1. This pandemic has been amazing for the market - not economy - as it triggered trillions in stimulus. So many trillions I have lost count between the trillions from the FED and the Trillions from congress. Debt? long term cost? who cares says the market! let the suckers coming in later on pay the bills! Money Party is on!
2. As the FED balance sheet swells by trillions so does market valuations regardless of the terrible economic/corporate news. The market is no longer connected to economic reality.
3. The rich use the crisis to enrich themselves - see 3t stimulus from congress. Peanuts ($1200) for the masses to buy TP and mac & cheese while the vast majority of the 3T went to the top under the guise of helping mom and pop america. About 500B for us and 2.5t for them. Yup that seems fair.
4. Companies like apple with fortress balance sheets are getting stronger while the weak companies are getting crushed. Yes the fed cheap cash is allowing many zombie companies to live longer but the companies like apple, amazon, ms, google...they are getting more powerful.
C-19 is pushing many to move into these areas quicker... I have never purchased so many things online in my life vs hitting the stores. I may breakdown to get amazon prime...meh naaa I dont like signing up for anything. lol

I'll hold my apple shares as I have for years. Let it drip to get more shares, watch the divy go up each spring, watch apple buy back a ton of shares... etc but I wont add new money here at all-time record highs. I'll wait on another market sale to add to my apple.
William- Billy Hill profile picture
Apple is tough to justify on normal metrics but Ive been a long time shareholder--let the band play on.
I agree AAPL's stock is kind of "high", but historic valuation is not all that meaningful because the make-up of AAPL's business is changing. Growth of AAPL's services business will accelerate growth of the AAPL ecosystem and a) accelerate growth; b) make AAPL's cash flow growth more sustainable and sticky; and c) because services is a higher margin business, it will improve profit margins. All of that implies/supports a higher stock valuation. Also, in the "new age" of income-starved environment in which we find ourselves, the market is paying a higher valuation for cash flow it believes is more sustainable, such as AAPL. If you look at EBITDA as a measure of cash flow, AAPL's valuation is pretty low at 20x EBITDA compared to 26x for MSFT, 48x for ADBE, and 36x for AMZN. There is room for AAPL's valuation to improve relative to its sustainable, visible, and growing CF.
Apple Buyers Beware: you may run out of investment ideas for your profits over the next 20 years
I know! I will owe a ton of taxes too! I have trimmed once before. I bought some land last time. (Not completely from aapl though).
SilverBullit profile picture
Established short position on AAPL just now at 352, about 1% of portfolio.
terryongarland profile picture
Everyone is guessing..when you have an economic catastrophe as the world has seen over the last three months, then things will change, but how and when..and I am looking at being called away on a chunk of Apple sold calls, when "safe" strikes became not safe at all..the stock will not correct..of course it will..but when and to what degree ..guessing again.
mako26 profile picture
right ?? bought protection these are unseen times ; eventually it would seem the dollar loses value when enough is dumped on the street . market just keeps going up it's crazy guessing ..exactly
I'm Long AAPL since 2007. Last time it was at $350, there were articles saying it was too high and about to crash at any moment. It went on to over $700 and the stock split 7 for 1. Let's hope it does that again.
Paul, thanks. Always good to have a contrarian opinion. By the way, I read a similar opinion some time ago from an analyst, when the stock was about $190-200 several months ago. You see where the stock is now. It's difficult to argue with your logic. It was difficult to argue with that guy logic too. But, innovation is a key to this type of companies. Take TESLA, as an example, it's grossly overpriced too, but obviously, something is working in its favour. I read an analysis last year, it was very very logical and bearish, I bought its view and sold when it was $320: result you know!
By the way, you prefer INTC! How does it compare with AMD?
Innovation is key,and aapl hasnt performed in that aspect.
Apple is the most innovative company in the world. They have a massive chip lead and their ecosystem is the only one in the world that works seamlessly. Add to that cutting edge products like AirPods and Apple Watch, both with incredible leads in their categories, and one can easily deduce that your statement is categorically absurd.
That must be why no one buys their products. Thanks for clarifying.
Isn't it fun to post an article calling for a FANG stock to fall and have it post on a day that Apple is up 1.5% in the first 10 minutes of the day......
One word: 5G
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