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Stocks  | December 17, 2018

The recent market selloff has been especially unkind to big tech stocks which were once upon a time considered unstoppable. Naturally, the biggest tech stock of them all, Apple (NASDAQ:AAPL), has been one of the market’s biggest losers. Over the past two months, AAPL stock has lost about 30% of its value.

During this selloff, I have continually remarked on how the slump of Apple bears strong similarities to prior corrections of Apple stock in 2012-13 and 2015-16. All three corrections were sparked by concerns about slowing demand for iPhones and were preceded by periods of time in which the valuations of AAPL stock reached above-average levels. During all three downturns, Apple stock lost at least 25% of its value, and bears said that the demise of AAPL was near.

Because the prior two big corrections of Apple stock dragged on for several months and this one has only lasted two months, I’ve also warned that AAPL stock’s current slump could last for awhile longer.

But let’s refine that statement. History suggests that only a very specific catalyst can rescue Apple stock from this recent selloff. That catalyst is a quarterly earnings report which includes above-consensus iPhone unit sales.

The trouble is that AAPL isn’t disclosing iPhone unit numbers anymore, so above-consensus iPhone unit sales won’t boost AAPL stock any time soon. But Apple could report strong overall quarterly results, and that should be enough to end the selloff of AAPL stock.

Until that happens, though, history says Apple stock won’t bounce back.

This Is How the Selloffs of AAPL Stock Normally End

Let’s recall the two other sizable selloffs of Apple stock that occurred this decade.

The first was in 2012-13. Everyone was worried about slowing demand for iPhone 5 , and consequently, Apple stock dropped 40% over the course of several months. AAPL also reported multiple weak earnings results during that stretch. The second slump was in 2015-16 and had a similar backdrop as the first one. Everyone was again worried about slowing iPhone demand, and AAPL tumbled 30% over the course of several months. Once again, the tech giant’s earnings reports were weak during the downturn of AAPL stock.

There are two important things to note. Both of these selloffs were sparked by the same thing: concerns about slowing iPhone growth. Likewise, both of these slumps were ended by above-consensus quarterly iPhone unit sales which put to rest concerns about slowing iPhone demand.

The 2012-13 selloff ended with a strong July 2013 earnings report which featured much higher-than-expected iPhone unit sales. That halted concerns about decelerating iPhone sales and kick-started a multi-year rally by Apple stock.

The 2015-16 selloff was ended by a strong July 2016 earnings report which also featured higher-than-expected iPhone unit sales. Again, the results put to rest concerns about decelerating iPhone sales, and again, the demise of those concerns ended the downturn of Apple stock and enabled it to regain its winning ways.

So history has a very clear message for the owners of AAPL stock: Every once in a while, iPhone sales weaken, investors get worried, and Apple stock drops. Estimates come down, but they come down too much. Then, Apple reports above-consensus iPhone numbers, and AAPL stock bounces back.

Why This Time Could Be Similar

AAPL doesn’t disclose iPhone numbers any more, so the broken record won’t repeat perfectly this time around. This selloff of Apple stock won’t be ended by quarterly iPhone sales that come in above expectations.

But stronger than expected overall results should do the job.

Apple is an increasingly diversified consumer hardware and software company. Importantly, the company is less reliant on new iPhone sales today than ever before. Today, Apple Watch, AirPods, and Apple TV all boost the company’s hardware growth. Apple also has a burgeoning Services business that will offset the plateauing growth of its iPhone business.

So owners of Apple stock are in some pain right now as the market tries to adjust to valuing AAPL stock as a multi-product hardware and software company and not just an iPhone maker. This transition isn’t an easy one. For many years, Apple stock has been about the iPhone. Today, the iPhone is still important, but it’s not the be-all and end-all.

It will take a strong, double-beat quarter for Apple stock to overcome this rough transition. Apple needs to show the Street that, despite sluggish iPhone growth, the company is still firing on all cylinders because of strong growth everywhere else. Until that happens, AAPL stock won’t bounce back.

The Bottom Line on AAPL Stock

Apple stock is a long-term winner that’s going through a rough, short-term transition. Until AAPL reports clean, double-beat results, indicating that it will not be derailed by this transition, Apple stock will have a tough time bouncing back.

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