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AAPL Bears Do A Happy Dance: Were They Right?

After a year of outperformance against the S&P 500, Apple stock took a hit following reports of lackluster demand for the iPhone 14. Will bears finally be proven right?

For most of 2022, a very disruptive year for equities and risk assets in general, Apple stock  (AAPL) - Get Free Report stood out as a safer bet.

Around mid-August (see first carrossel chart below), shares of the Cupertino company nearly set all-time highs. At the same time, the S&P 500  (SPY) - Get Free Report hovered near correction territory and the tech-rich Nasdaq  (QQQ) - Get Free Report was a step or two away from a bear market.

But lately, the tables have turned. In the past week alone (see second carrossel chart below), AAPL has lost 7% of its value, the equivalent of about $170 billion in market cap. Meanwhile, the S&P 500 has dipped only 3%. Apple stock is still an outperformer YTD, but the gap to the broad market has shrunk to only two percentage points.

Have the bears finally gotten this figured out? Is Apple, indeed, headed towards a period of underperformance relative to other US-based stocks?

Why AAPL slipped

First, it helps to understand why Apple stock has trailed the S&P 500 by four percentage points in the last four trading days alone.

It started with a Bloomberg report issued on Tuesday evening. According to it, Apple has scaled back on its plan to increase production of the iPhone 14, allegedly the result of demand for the device that was expected to come in shy of previous, more aggressive projections.

That was enough for Apple shares to gap down by 3.5% on Wednesday – while the S&P 500 kicked off the trading session in the green.

One Apple bull in particular did not seem too concerned about the recent news. Wedbush’s Dan Ives reminded investors that, while soft demand for the base models can be a disappointment, the story really revolves around the iPhone 14 Pro.

The analyst sees 85%-plus of the revenue mix going to this higher-end product category, which would be a huge positive for ASP (average selling price) – and, as a consequence, revenues and likely gross margin.

Bears take a quick victory lap

But the AAPL bulls seem to be under heavy scrutiny here. Case in point: on Thursday, two sell-side analysts revised their ratings on Apple. Rosenblatt upgraded the stock from neutral to buy, while Bank of America went the opposite way: buy to neutral.

Net net, bearishness took over, and Apple shares sank nearly 5% in a single day. The S&P 500 was down a tamer 2%.

I believe that bulls have bid up Apple enough in the past weeks and months to the point that the stock unlocked plenty of alpha to those that bet on it vs. the rest of the market. Now, it may be time for the (relative) winners to de-risk their positions, putting pressure on AAPL.

Only a few Wall Street sell siders can take a victory lap here, even if still early in the race, following Apple stock’s most recent slip up. ItauBBA’s Thiago Kapulskis is the only analyst tracked by TipRanks with an underperform rating on AAPL.

Most recently, Thiago and his team reinforced the idea that, as the title of their latest report suggests, “signs of weak demand for new iPhones [could cause] our Underperform call to finally work”.

After looking at Apple’s decision not to raise the price of the iPhone Pro by $100 this year, ItauBBA concluded that demand for the device could be lackluster this year and next. Worse yet, with production costs rising, lack of ASP uplift could hurt margins.

It is too early, in my view, to draw firm conclusions about Apple’s sales in the upcoming holiday season and next year. But at least at this moment, it looks like skeptics may be on to something.

It will be interesting to see how this story unfolds. The next chapter will probably play out in about four weeks, when earnings season for the tech sector kicks off.

Ask Twitter

Conflicting reports and opinions have surfaced on the success of the iPhone 14 in the first few weeks. The Pro version could be experiencing high demand, but not so much the entry-level models. What do you think this means for AAPL investors? They should:

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