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Apple Fell After Rosenblatt’s Downgrade

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Apple stock fell today

On Monday, US tech giant Apple (AAPL) fell after Rosenblatt Securities downgraded it to a “sell” from a “hold.” At 2:15 PM ET, Apple stock was down 2.3% for the day at $199.58. Monday marked the first day in July when the stock had fallen below the psychological level of $200. At the same time, the S&P 500 Index, the Nasdaq, and the Dow Jones were trading with 0.6%, 0.9%, and 0.5% daily losses, respectively.

Why Rosenblatt downgraded Apple

Rosenblatt securities analyst Jun Zhang says that the iPhone maker “will face fundamental deterioration over the next 6 to 12 months,” according to CNBC. The analyst believes that “new iPhone sales will be disappointing, [and] iPad sales growth will slow in the second half of 2019.”

In the six months that ended in March, Apple reported a 4.8% YoY (year-over-year) fall in its total sales. This fall included a 15.8% fall in its iPhone sales. In contrast, its iPad sales grew by 18.8% YoY during the same period.

Zhang argues that the sales growth in Apple’s other products, “such as the HomePod, AirPod, and iWatch, may not be meaningful to support total revenue growth.”

In the first half of fiscal 2019, 72.6% of Apple’s total revenue came from its iPhone and iPad segments combined, while its Wearables, Home, and Accessories segment made up only 6.3% of its total sales. The company’s high dependence on iPhone and iPad sales explains why Zhang doesn’t expect any of the growth in Apple’s other product segments to be meaningful.

Despite downgrading his recommendation on Apple stock to a “sell,” Zhang maintains a price target of $150 on AAPL. This price target suggests a downside of ~26.6% from Apple’s closing price of $204.23 on Friday.

Our take on Apple

On March 25, Apple unveiled its much-anticipated news subscription and video streaming services, Apple News+ and Apple TV+, in a special event. The company also tried to impress investors and consumers by announcing two other services: a credit card called Apple Card and a game subscription service called Apple Arcade.

After the announcement, many analysts expressed their optimism about the company’s new services and upgraded its stock, triggering a buying spree. As a result, Apple stock managed to end the quarter with a 4.2% gain despite reporting a massive decline in its iPhone sales during the quarter.

We believe that Apple’s video streaming services could become highly popular and a big revenue source in the long term if the company plays its cards right. However, we can’t ignore the fact that the company is likely to face stiff competition from established segment players, including Netflix (NFLX) and Amazon Prime Video. Even if Apple manages to pull ahead of the competition in the segment, the company can’t depend on the revenue it generated from its new services, as they won’t make up a large portion of its total revenue.

In the first half of fiscal 2019, Apple’s total Services segment sales made up only 12.7% of its total revenue.

What Warren Buffett thinks of Apple stock

Billionaire investor Warren Buffett’s investment company, Berkshire Hathaway (BRK.B), owns nearly a 5.4% stake in Apple. In the fourth quarter of 2018, Berkshire Hathaway cut its Apple investments by 2.9 million shares to 249.6 million shares.

Earlier this year, Buffett hinted during an interview with CNBC that he finds Apple stock expensive. He said, “If it were cheaper, we’d be buying it. We aren’t buying it here.”

What technical analysis says

Despite weak fundamentals, Apple stock has managed to outperform the broader market in 2019 so far. On a year-to-date basis, Apple stock has risen 29.5% against the 19.3% and 23.0% rises in the S&P 500 benchmark and the Nasdaq, respectively.

Meanwhile, the shares of Microsoft (MSFT), NVIDIA (NVDA), Qualcomm (QCOM), and Alphabet (GOOG) have risen 34.9%, 20.0%, 34.7%, and 8.4%, respectively.

On Friday, Apple settled at $204.23, nearly a 3.2% weekly gain. The S&P 500 Index rose just 1.7%. While the stock was still trading above its 50-day and 200-day simple moving averages, its 14-day setup of RSI was hovering near the line of equilibrium at 56.2. This reflected bias in its underlying momentum.

On the downside, Apple stock might find stiff support near $173. A session closing below this support in the near term is likely to attract renewed selling pressure toward the next major support level near $147, which is below Rosenblatt’s price target of $150.

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