I used to be one of the original Apple (Nasdaq: AAPL) skeptics. I disliked everything about the company, from its goofy logo to the names and artistic interfaces of the products. To me, it was clear these machines belonged in an art classroom and not the workplace like a regular PC does.
This bias changed drastically when I experienced the first generation of the iPhone in 2007. Even with my strong opinion against the company's trendy products, I completely understood this was a revolutionary product that even I must own. The Apple iPhone -- and eventually the iPad -- quickly became my go-to productivity and entertainment tools. I don't know any other way to describe it, but these products have a soul. And this soul is what the competition is missing.
But now I'm starting to feel a certain apprehension over the optimism surrounding Apple.
The uptrend ended -- as they all do -- in an abrupt and unexpected manner. The institutional profit-taking that started in mid-September pushed shares 13% lower to about $610. Shares currently sit in the $620-$630 range. The selling was fuelled by Apple's earlier warning in July of missing this quarter's earnings estimates by 25%.
The consensus right now is for earnings to reach $8.93 per share when released on Thursday, Oct. 25. This number is above the original warning figure but still below the original expectation of $10 a share.
The question is, can Apple's stock reach the coveted $1,000 level, creating history's first trillion-dollar company?
As a huge Apple fan, it pains me to say that I don't see it happening. Here's why...
1. The good news has been priced into the stock
The stock's run up to $700 was in anticipation of the success of the iPhone 5. Once the product was released, despite its success, shares still sold off. From here on out, the company must constantly outperform to meet investors' optimistic targets. I don't think any company can keep up with expectations as high as Apple's.
2. Insiders are selling
The most recent information indicates company insiders are selling the stock. Notable examples include the company's general counsel Bruce Sewell, who sold 2,500 shares. He still has 10,000 shares left, but in the weeks following his selling, Apple fell 6% while the benchmark was flat. Board member S. Millard Drexler recently sold 25,000 shares, leaving him with just 584 shares in his portfolio. But perhaps the most disturbing insider sale, is from Apple's Senior Vice President Jeff Williams, who just dumped about 2,200 shares -- nearly his entire ownership of the company -- leaving him with less than 300 shares.
These three major insider transactions, when combined with the other factors and a dropping share price, may be signaling tough times ahead for the company.
3. Sales miss expectations despite huge demand
Apple sold 5 million iPhone 5s the first three days after its launch. This is an amazing number, yet it missed analysts' estimates of 7-8 million sold.
4. Reliance on a few high tech products
More than 60% of Apple's gross profits are attributed to the iPhone. High-tech consumers are fickle and often not brand loyal. What this means is iPhone users may quickly jump to the next big thing in smartphones. It's estimated that Apple controls nearly 19% of the smartphone market, while Android-based phones own close to 70%, according to an International Data Corporation study in August.
Historically, high-tech gadgets have a short life span in terms of being the "hot" product, so it's just a matter of time until another product captures the public's imagination. When this happens, Apple will experience a rapid decline.
5. A slowdown in China
Second-quarter revenue from the Chinese market fell 28% from the previous quarter. This is bad news, because China is Apple's second-largest market. A Chinese revenue slowdown could do significant damage to the company's bottom line.
Action to Take --> Although I feel strongly that Apple will not make it to $1,000 per share this year, this does not mean there isn't any opportunity in the stock. My plan for Apple is to trade it with a channel system. What this means is I will go long above a certain price and short below a certain price, staying out of the market until one of these two things happen. The upper channel line is at 633 and the lower channel line is at 609. This system tries to capture a portion of a volatile move in either direction. Stops should start at these lines, in the opposite direction, then trail price as it moves profitably, locking in gains that could reach up to 25% or more during the next 24 months.