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Bear of the Day: Apple (AAPL)

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It's a good time to revisit the short-term bear case for Apple (AAPL - Free Report) after I first took a look at the decline in earnings estimates a month ago.

Since then, a few things have happened...

1) Estimates came down further: for the current fiscal year ending in September, the consensus EPS projection fell from $9.02 to $8.29 as 17 analysts have lowered estimates since the company's April 26 quarterly report. That now represents -10% EPS growth vs. last year.

For next fiscal year, estimates were knocked down from $9.92 to $9.02, for +8.75% EPS growth relative to this year.

2) The stock's new trading range: shares reacted by marking a 2-year low in mid May at $90 and then rebounding to bump their head on the $100 level, where I have shorted it.

3) UBS and the "BlackBerry Scenario:" their analyst Steve Milunovich published a report on June 7 essentially asking what happens if Apple loses the phone wars to Android and sales decline over 20% for the next two years.

While he remains bullish on the shares with a $115 price target, Milunovich says that it's pointless to project how well the company might do in the future. I interpret his intent as "Everybody is doing that and everyone is already long the shares." Here's how he describes his objective...

What Apple is doing today likely will be irrelevant 5-10 years from now. Imagine doing a DCF on Apple in 2007 -- would you have captured the remarkable success of iPhone? Unlikely. Consequently, we believe a primary use of a DCF is to value Apple in weak to worst-case scenarios to determine downside risk in the stock. Bull-case scenarios should be considered exercises to evaluate the sensitivity of the model.

Noting that the consensus for FY2016 sales is $215 billion, an 8% drop, and FY2017 is projected to be $225 billion (+5%), here is the UBS sales wipeout scenario...

Backing out the FY17 and FY18 -23% and -22% revenue drops in a simple earnings model produces top line results of $165 billion and $128 billion, respectively. Quite a fall from 2015's $235 billion. And something that might have large investors, like a Carl Icahn, more than a little worried.

The Value of Seeing Half-Empty

Again, those sales projections of back-to-back 20%+ declines are just Milunovich's worst-case scenario. But the risk is that other analysts see the potential for an iPhone7 launch later this year that could have some threats to escape velocity.

That would have more investors concerned about the company's growth in arguably the most over-owned stock on the planet. And this sentiment could inspire a rush for the exits, especially during any type of broad market downturn.

Recall that the last time AAPL went through such a cleansing the stock fell from $100 to under $60. During the same period, September 2012 to June 2013, the S&P rallied strongly from 1450 to 1650, over 14%.

While many investors might already believe that the company is experiencing "peak iPhone" demand, others think this is just a normal ebb and flow in product cycles.

The iPhone 7 will certainly revive record-breaking sales and profits once again, say the bulls.

Where ever you stand, in the short run the stock is probably headed lower until analysts and investors get more visibility on the next cycle and potential global demand.

Keep your eye on the Zacks Rank and the Detailed EPS Tables to let you know when the turnaround is at hand.

Disclosure: I am short shares of AAPL for the Zacks Tactical Trader.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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