Apple Inc. (NASDAQ:AAPL) stock is surging to new heights and is up 18% this quarter on expectations that its new devices will sell in great quantities. But this won’t last long, believes an analyst who has given a Sell rating to the stock and says the shares will decline 20% this year.

Apple Inc AAPL
Photo by matcuz (Pixabay)

Apple (AAPL) stock good for long term

On Wednesday, CM Research CEO Cyrus Mewawalla said on CNBC’s Worldwide Exchange, “We’ve had a buy for about five years, but right now we think there’s a gap between the next big blockbuster product and maturing iPhone sales. That means that there’s more downside than upside at the moment.”

Mewawalla, however, does believe that Apple Inc. (NASDAQ:AAPL) is in good shape given its pipeline of projects. He said that the company will see a lot of success in the long term, thanks to potential projects such as driverless cars and products using artificial intelligence. But the key issue for the company next year will be iPhone sales, said Mewawalla.

He believes iPhone sales will slow down a lot more than what analysts think, especially in China. He says the Chinese government will try harder than ever to protect its own phone market.

Another unknown problem is Apple’s tax issue. He said that the company and the rest of the tech sector will have to deal with regulators in multiple regions. He noted that not only is the European Commission fining Apple Inc. (NASDAQ:AAPL) $14.5 billion in taxes, but also Japan is considering taxing the iPhone maker for the profits it made in Ireland. He believes many other countries will follow suit as well.

“That’s going to have a kind of ‘kickoff’ effect in the whole of tech,” the expert said.

Apple Inc. (NASDAQ:AAPL) will appeal the fine, he believes, but adds that it will not get off “scot-free.” He also says that effective tax rates on tech companies will go up from just 4% on overseas earnings to 10% in three to four years.

Some believe otherwise

In contrast, Apple Inc. (NASDAQ:AAPL) is among the top stock holdings of Will Cazalet, the lead manager of the $273 million Dreyfus Equity Income fund. His other top holdings are Pfizer, General Electric, Philip Morris International and Darden Restaurants, according to Barron’s. He warns investors against blindly trusting high dividend yield stocks.

“Companies that forecast the highest average dividend yields often have among the lowest realized yields 12 months later,” he says.

What makes Apple Inc. (NASDAQ:AAPL) stock worthwhile for the long haul is the modest dividend offered to investors. In 2012, the company started paying dividends again for the first time since 1995. Apple’s 2% yield is the lowest among the fund’s top five holdings, but Cazalet says the company has the ability to grow earnings and raise its dividend over time.

He named earnings sustainability as the driving thesis behind his pick. For Apple Inc. (NASDAQ:AAPL), the average normalized return on equity for the past five years is 39%. With shares trading at around $112, just under 13 times estimated 2017 EPS, they are attractively priced relative to peers, Cazalet says.

Analysts divided over Apple (AAPL) stock

Friday’s pullback in Apple Inc. (NASDAQ:AAPL)’s stock suggested that investors have started considering that iPhone 7 sales aren’t going as well as suggested by data from major U.S. carriers. In order to post any meaningful gains this week, the shares have yet to pick up enough steam, and analysts are split on what to do with them.

The pullback in the stock is a potential buying opportunity, believed Bank of America Merrill Lynch, but KGI analysts have warned that the company may sell fewer iPhone 7 units this year than it sold iPhone 6s units last year.

There were strong reports from major U.S. carriers claiming that demand for the iPhone 7 was much stronger than what they saw in the early weeks of the iPhone 6s, and this led to the sudden surge in Apple Inc. (NASDAQ:AAPL) stock last week. The reports thrilled most analysts, who reacted by raising their price targets.

But not all were convinced, and a few pointed to the fact that Verizon, the largest carrier, didn’t see exceptional preorder activity. Some also pointed towards the fact that no data from outside the U.S. was available. But that changed on Friday as some third parties reported that first-weekend international sales of the iPhone 7 declined 25% year over year.

It will be interesting to see how the stock trades this week.

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