Apple stock suffers fresh collapse

Already down a third since October, Apple is taking a further pounding after a big disappointment overnight. Graeme Evans explains what's going on.

As the world's first trillion-dollar company, Apple is used to facing - and often fuelling - the lofty expectations of Wall Street analysts and investors.

So, when chief executive Tim Cook admits trading has been tougher than even he thought 60 days earlier, there are implications far beyond those investors who have profited from a doubling in the price between 2017 and last summer.

Apple's warning deals a hammer blow to hopes that the new year will bring an upturn in fortunes for the wider US market following a dismal December in which the S&P 500 spent Christmas week at an 18-month low.

For Apple, its first revenues warning in more than a decade caused its shares to slump 7.5% in after-hours dealings. Having peaked in value at US$1.1 trillion in October, the stock now trails Microsoft and Amazon at below $700 billion.

But if Apple is feeling the chill from slowing iPhone sales in Greater China - as Cook pointed out in his letter to investors last night - then there's a good chance other major US corporations have also been heavily impacted.

Source: TradingView (*) Past performance is not a guide to future performance

Ahead of Wall Street's fourth quarter results season, forecasts are already pointing to a slowdown in growth in the S&P 500's average earnings per share (EPS) from 15% in 2018 to 5% in 2019.

That would still be a record high for the S&P at $170, but in the wake of the Apple warning the notion that the S&P is looking better value at around 14 times expected earnings is again being questioned by a bearish market.

As well as the challenges in China and emerging markets, Apple investors will be worried by Cook's admission that iPhone customers are not upgrading their handsets as often as the company would like. This raises fears that Apple is running out of road in which to maintain its remarkable run of iPhone success.

There were inevitable share price consequences for Apple suppliers today, with South Wales-based IQE down 6% to re-test the 18-month low seen in November, when it warned of a material reduction in its financial performance for 2018.

Just as excitement over IQE's reported role in the Apple supply chain helped shares soar 300% in 2017, so the stock has been subject of volatility every time there are jitters or trading disappointments in relation to the tech giant. 

IQE's photonics division specialises in Vertical Cavity Surface Emitting Lasers wafer technology used for facial recognition in mobile phone handsets.

• Apple supplier IQE's latest plunge creates fresh interest

Despite last night's downgrade, there were areas of encouragement for Apple and its suppliers after Cook highlighted "remarkable strength" in many areas during the first quarter. Profitability and cash flow generation also remain strong, with Apple expecting to exit the current quarter with a stunning $130 billion in net cash.

Cook added:

"We are as confident as ever in the fundamental strength of our business. We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result."

While Apple no longer reveals unit sales, the installed base of active devices hit a new all-time high - growing by more than 100 million units in 12 months. There were also record revenues from the Services division and from Wearables after Apple Watch and AirPods proved "wildly popular" among holiday shoppers.

UBS analyst Timothy Arcuri said the Services performance represented an important silver lining against the China headwinds. He said:

"Slower iPhone growth ultimately presents services headwinds, but Apple still has a huge untapped services revenues pool."

UBS cut its price target from $210, but retains a 'buy' recommendation based on a new forecast at $180.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.