Over the past few months, “AI mania” propelled Apple (NASDAQ:AAPL) shares to new all-time highs. More recently, however, excitement about possible generative artificial intelligence growth catalysts for Apple stock have faded.
As this comes ahead of earnings, you may think this is the perfect setup to “buy the dip,” before a well-received earnings report and updates to guidance send AAPL quickly back to higher prices. However, it’s definitely not a lock that this bullish scenario plays out.
In fact, looking at various factors, it may be more likely that this upcoming event for the iPhone maker’s shares elicits a negative response from the market. That’s not to say, of course, that AAPL is headed toward experiencing a sharp collapse.
Still, don’t rule out the possibility of a moderate reversal to lower prices. How low? As I’ll explain below, a drop to $175 per share, or less, may not be out of the question.
Apple Stock and its July Pullback
The aforementioned AAPL rally kicked off in mid-May, in the lead up to Apple’s then-rumored AI unveiling at its June Worldwide Developers Conference. When Apple did indeed deliver at WWDC, by showing off its planned AI features for the iPhone and other products, this rally intensified.
Yet while the rally carried on into early July, AI excitement for Apple stock has since taken a breather. That’s not surprising. This comes at the same time that Main Street and Wall Street investors have started to doubt how much the GenAI boom will last. Big Tech for now remains willing to spend heavily to build out their respective AI infrastructures.
The jury’s still out whether all of this spending will result in an adequate return on investment. This has led to price declines across the board for “Magnificent Seven” stocks across the board, not just AAPL. Meanwhile, with “AI mania” cooling down, long-standing concerns about the company are coming off the back burner.
For instance, Apple’s continued iPhone sales challenges in China. A few days from now, we’ll have a clearer indication whether current challenges will continue to come back into focus.
Will Shares Surge or Sink After Earnings?
On Aug. 1, Apple will announce its fiscal results for the quarter ending June 30, 2024. Along with the latest results, the company will also provide updated guidance.
Although investors have been growing lukewarm on Apple stock ahead of earnings, it’s worth noting that Wall Street’s sell-side has become more optimistic about the upcoming release.
According to Seeking Alpha, over the past 90 days, 17 analysts covering AAPL have increased their Q3 2024 earnings forecasts. Only six have lowered their forecasts. Yet while this signals a strong possibility of Apple reporting “better than previously feared” results, that alone may not spark renewed bullishness for shares after earnings.
Again, investors, in a more fearful mood about Big Tech stocks, may decide to focus on more negative aspects of the release. For example, the company may be successfully using sales discounts to stabilize Chinese iPhone sales, but price cuts could affect margins.
News of Apple’s AI upgrades arriving later than expected may foreshadow disappointing guidance regarding the impact of AI integration on growth in the coming quarters. Hence, as has occurred with other “Mag 7” stocks this earnings season, AAPL may be more likely to sink rather than surge after earnings.
Bottom Line: Exit Now, Before the Sell-Off Intensifies
Barring a game-changing update about its AI plans, it may be best to be cautious. Assume that the iPhone maker will at best meet, and at worst, miss on revenue and guidance. With this, also expect guidance to be underwhelming.
Doing so, and selling accordingly, could save you from experiencing big losses, from holding onto a position through and after the Aug. 1 earnings release. If the above-mentioned factors are present, the AAPL sell-off could intensify.
Maybe not immediately, but in the weeks and months ahead, if bearishness continues to rise, don’t expect shares to maintain a forward valuation on par with AI front-runners.
Now, I’m not saying at Apple is going to go from being valued more like Microsoft (NASDAQ:MSFT), which trades at a forward earnings multiple in the mid-30s, to being valued more like Google parent Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), which sports a forward multiple in the low-20s.
Nevertheless, a further cool-down in excitement may push Apple stock back down to a forward multiple in the mid-to-high 20s. In other words, around a 20% drop from current prices, all the way back down to near $175 per share.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.