If Apple Wants To Stay Levered To The iPhone – Here’s An Idea

Disappointing demand for the Apple Watch and weaker than expected iPhone shipments shaved off more than $110 billion from Apple Inc. (NASDAQ:AAPL) market value. The recent skid has been largely brushed off as an outgrowth of AAPL’s periodic volatility, which has been well documented since the 1990s. While AAPL’s recent volatility doesn’t foretell its future performance, sales projections for its upcoming iPhone 6s and 6s Plus raise warning signs for even the most hardline supporter. Insider Monkey, known for its research (read more details here) showing that hedge funds’ small-cap picks outperform large-caps, has been bearish on Apple over the last year due to its iPhone-focused business model. Ian Dogan, the site’s co-founder, recently warned of Apple’s future success still being tied to one product. Dogan also warns that consumers may be unwilling to pay the high premiums for the iPhone if another recession were to hit. He believes that consumers would switch to lower-priced phones that are increasingly becoming comparable in quality to the iPhone.

In a slightly bearish sign, the funds that Insider Monkey tracks cut their exposure to AAPL with 142 funds now holding about $21.3 billion in stock compared to 150 holding about $21.5 billion in stock according to their previous filings. Still, legendary investor Carl Icahn, coming off his big gains in Netflix, Inc. (NASDAQ:NFLX), maintained his previous position in AAPL of about 52.8 million shares. Icahn was followed by Fisher Asset Management with 11 million shares and Adage Capital with 8.85 million shares. It’s hard to argue with Icahn, who has been one of the most successful investors of all-time, but the recent news on the iPhone may signal that this Icahn investment may not turn out as great as the others like NFLX.

Zero-to-Negative Growth Outlook for iPhone 6s

For the first time ever, iPhone sales are expected to stagnate or decline over year-ago levels. Generally speaking, any sign that iPhone growth is reaching its peak – so-called “Peak Apple” – is a major cause of concern for Wall Street.

Sales of Apple Inc. (NASDAQ:AAPL)’s next iPhones – the 6s and 6s Plus – are forecast to hit around 70 million in the December quarter, down from 74.5 million a year ago. Given that iPhone sales account for roughly two-thirds of quarterly revenues, a YoY drop in sales would be clear indication AAPL has reached critical mass. The annals of Wall Street are filled with companies that lost an average of 76% of their value after previously impressive growth streaks stalled or stopped altogether. On average, these companies saw their revenues stagnate for at least the next 15 years.