Why Apple's slump could deepen

The glow has come off Apple (AAPL). And the results are ugly.

The stock started dropping in July on weaker-than-expected iPhone shipments and Chinese revenues, continued falling this week on further word about slippage in China and was hit again at the open on Wednesday after Bank of America Merrill Lynch analysts downgraded the stock to neutral from buy. The shares later climbed back and ended the day up 0.66 percent, or 76 cents, to $115.40.

The stock is down some 12 percent from the mid-July high and has pushed below its 200-day moving average. The drop has taken the tech favorite down and out of a consolidation range going back to February, which was just one month before Apple was added to the Dow Jones industrial average.

It's the most heavily weighted stock in the Nasdaq Composite as well as in the S&P 500. It has been both a hedge fund haven and a favorite of Main Street investors after rising 155 percent from its 2013 low to its April high.

aapl080515.png

The last time Apple lost its 200-day moving average in late 2012, it took almost a year for the stock to recover. A similar wait could be in store again now as the negatives pile up.

For one, and there's just no other way to say this: The much-heralded Apple Watch has been a dud. Reviews lamented the short battery life, slow app loading times and finicky wrist-flick sensor that turns the screen on.

Wall Street analysts are slashing their sales estimates: Pacific Crest securities cut its 2016 Apple Watch sales estimate from 24 million to 21 million, and lo and behold, a market research report says Apple Watch sales have practically ground to a halt.

As the first major product unveiling under CEO Tim Cook, it has been an embarrassment hampered by not only scant battery life and inadequate processing power, but most important, a lack of clear demonstrated need vs. pulling your phone out of your pocket.

Clearly, Apple's product innovation cycle has slowed since the passing of Steve Jobs. The company's new streaming music foray -- like the introduction of the iPad Mini -- was something the late co-founder was on the record as being against. Not only does Apple Music risk cannibalizing iTunes music purchases, but it's not clearly differentiated from competitors.

It's hard to escape the feeling this was merely catchup and an underwhelming application of Apple's $3 billion acquisition of Beats. Recent headlines about a potential electric vehicle tie up with BMW or launching a mobile virtual network seem like distractions as competitors eat into Apple's core categories.

Its bread-and-butter product is the iPhone lineup, led by the admittedly well-received iPhone 6 refresh that finally increased the form factor size.

The problem from here is that the coming iPhone 6S, which is ramping up production, will have a hard time repeating this success with incremental improvements at a time when smartphone market share penetration has fully matured and is at risk of oversaturation.

A similar dynamic is playing out in tablets: IDC reports second-quarter worldwide shipments of tablets declined 7 percent year-over-year. The trend is set to deepen, with Digitimes Research predicting a 15 percent decline in the third quarter. iPad shipments are expected to fall 20 percent from last year.

marphon.png

The big catalyst for Tuesday's AAPL decline was a report by analysts at Canalys that the company has lost its lead in the Chinese smartphone market. Xiaomi regained its sales leadership crown with a 15.9 percent market share. Huawei is in second place at 15.7 percent share. Apple fell to third place.

China was supposed to be the great growth market for Apple, but a combination of slowing Chinese demand (thanks to slower GDP growth and Chinese stocks on the fritz) and stronger competition is unraveling that thesis.

Add it all up, and Apple may have more hard times ahead.

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.