Apple Inc. (NASDAQ:AAPL) stocks have been up 19 percent since the earnings on July 23, compared to a 2 percent decline in the S&P 500. As the iPhone maker enters a new product cycle, a key question concerning investors will be whether the stock will take forward the momentum or will reverse course.  A report from Goldman Sachs by analysts Bill Shope, Elizabeth Borbolla, Cristina Colon and Justin Price reiterates the Buy rating on Apple Inc. (NASDAQ:AAPL) and tries to address the investors’ concerns over the share price movement.

Apple Inc. AAPL

Apple’s dream run

A year ago, Apple Inc. (NASDAQ:AAPL)’s stock was trading at an all time high, gaining 80 percent over the previous 12 month period compared to a 25 percent return from S&P 500 for the same period, September 9, 2011 to September 7,2012.

The dream run was in part driven by the expectation that an update to the iPhone 5 will further the share of the iPhone maker in the smartphone market, and offerings from Apple will “inevitably” rule the “mobile computing landscape.” Apart from these, the fact the Apple has been posting impressive numbers quarter after quarter also fueled the share price. The fact becomes more clear on noticing that from October 3, 2011 (day before the launch of iPhone 4S) to September 11, 2012 (the day before the iPhone 5 launch), the consensus estimate for 2013 fiscal for revenues and EPS has grown 24 percent and 40 percent respectively.

However, the unprecedented rise in the shares began to roll back in the months “that followed the iPhone 5 launch.” At the end of October 2012, Apple Inc. (NASDAQ:AAPL) shares were down 10 percent versus a 1 percent decline in the S&P 500. Then, after the release of the December quarter earnings, shares were down 24 percent against 1 percent gain by the S&P 500. On April 13, 2013, shares hit a closing price of $390.53, which was 45 percent below the all-time high achieved on September 21, 2012. Over the same period, S&P 500 was up 7 percent.

Consensus estimates have also followed the share price trend

The EPS numbers are also in line with the share price trend. For Fiscal 2013, consensus EPS stands at $39.10, this is 26 percent below the estimates when iPhone 5 was launched, in 2012.

The last twelve months have not been good for Apple Inc. (NASDAQ:AAPL) and investors. Also, during the period, the estimates for fiscal years after 2013 have gone down sharply. From September 11, 2012 to September 5, 2013, consensus revenue and EPS estimate for 2014 have been lowered by 18 percent and 30 percent, respectively. This trend, according to analysts, points out that Apple shares in the smartphone market will continue to decline. “[The] iPad share has been permanently reset downward,” and margins will remain pressurized. Lastly, Apple might not foray in new product categories.

The slightest success could spark a major recovery

However, analysts also believe that the consistent decline in estimates represents a “strong sign of capitulation,” and sentiments and expectations are very low as Apple Inc. (NASDAQ:AAPL) enters into the next product cycle. This could work in favor of the Cupertino-based firm, as even the slightest improvement in user growth backed by “powerful tailwind from replacement demand” could significantly boost the unit expectations for the coming months.  In simple words, given a “drastic reset” in the consensus expectations, even a marginal successful iPhone product cycle could significantly boost the recovery in the share price.