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Wall Street Downgrades Apple, But Robinhooders Pile in Without a Care

Last Updated September 23, 2020 2:19 PM
Mark Emem
Last Updated September 23, 2020 2:19 PM
  • Apple is the flavor of the month on Robinhood.
  • The iPhone maker is splitting its stock at the end of August.
  • Two major Wall Street firms have downgraded the stock.

Wall Street is beginning to fall out of love with Apple (NASDAQ:AAPL). Just this month, Bank of America downgraded the stock , assigning a hold rating from the previous buy recommendation. Last month, Goldman Sachs maintained a “sell” rating  on AAPL.

If you look at millennial investors, you wouldn’t think that sentiment has soured, though.

Over the past 30 days, Apple has been the most-purchased stock on Robinhood. The stock has welcomed over 160,000 new investors  on the trading app.

AAPL has even outpaced millennial favorites Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), and Netflix (NASDAQ:NFLX).

AAPL has been the most purchased stock on Robinhood over the past 30 days. | Source: RobinTrack 

This is not the time to be investing in Apple, though. Here’s why.

Apple’s Stock Is Relatively Pricey

From a historical perspective, Apple’s stock is expensive, which raises the chances of correction. In one year, its price-to-earnings ratio has more than doubled from 16 to 34.

Compared to the average price-to-earnings ratio of the S&P 500 Index constituent companies, Apple’s stock is trading at a 30% premium . Currently, Apple’s share of the benchmark index is nearly 7%, a 40-year high.

The price-to-sales ratio of AAPL has doubled too, reaching a level last hit 13 years ago. While its stock has surged by triple digits in the past year, sales of the tech giant have gone up by just single digits.

The last time Apple’s price-to-sales ratio was at this level, the stock corrected sharply. | Source: @charliebilello/Twitter 

Mounting iPhone Problems

The iPhone has been Apple’s most significant revenue contributor for over a decade. In the June quarter, iPhone sales grew by just 1.66% .

The iPhone contributes close to half of Apple’s revenues. | Source SixColors 

In the fourth quarter, they could fall even further due to anticipated delays in the release of a new iPhone lineup. So far, Apple hasn’t revealed when it will release its new slate of iPhones, an event that has traditionally occurred in the fall.

According to Goldman Sachs, a delay of just one month hits revenues by 7% and earnings by 6%.

In China, Apple’s second-largest iPhone market, the company is yet to introduce a 5G smartphone  even as competitors have done so already.

The iPhone 12 will be 5G-ready, but a delayed release will leave Apple at a disadvantage. The world’s second-largest economy already has the highest adoption rates of 5G handsets.

Video: What to expect from the 5G-ready iPhone 12

The other problem is that Apple continues to introduce cheaper iPhones. While the relatively less expensive iPhone SE boosted sales , it is also cannibalizing higher-priced smartphones. Investors should expect reduced margins from Apple’s most successful product.

The relatively lower-priced iPhone SE boosted sales at a time when they were declining. | Source: @onlyyoontv/Twitter 

Devices such as Mac desktop computers and laptops, as well as the iPad tablet, are unlikely to compensate as they are replaced less frequently. Sales in these categories rose in the second quarter, but that was due to stay-at-home measures, a one-off event.

“Real Economic Adversity” Out There

The pandemic has led to job losses and declining economic growth around the world. Reduced and lost incomes have and will continue to destroy purchasing power. Apple recognized the economic hardships both at the macro and micro level  while releasing its Q3 results.

CEO Tim Cook said last month:

We’re conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small, and certainly for families.

Consequently, the iPhone maker declined to provide guidance for the upcoming quarter. That’s never an optimistic sign.

Additionally, Apple’s stock is rising ahead of a split at the end of this month.

Later this month, Apple will split its stock for the fifth time. | Source: @brandcratic/Twitter 

If history is any guide, Apple’s pre-stock split period  tends to see a price rally. Once the split happens, the stock falls for a considerable period. This is not the time to buy.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.