Are Shorts Bailing on Apple at the Worst Possible Time?

Image source: Apple.

Naysayers aren't as excited about betting against Apple (NASDAQ: AAPL)as they used to be. The number of shares sold short has fallen sharply since mid-May. The stock itself is also on the rise in recent months.

This is all happening as we're now just four days away from the consumer tech giant's unveiling of its new smartphone, placing perhaps too much pressure on a device that many industry watchers say will be a modest update as Apple saves its iPhone upgrade ammo for next year's refresh, which will coincide with the product's 10th anniversary.

Volatility may be just around the corner. Bears are taking to the sidelines.

Short story

The number of shares of Apple sold short peaked at 99.7 million at the end of May. It has dropped all the way down to 51.2 million my mid-August. It was 96.2 million a year earlier.

One can argue that it's right for those betting on a slide in Apple stock to bail. Shares of Apple have now soared 20% since bottoming out in May, and they're up 8% since the end of May, when short interest almost poked into nine figures.

The rub is that Apple's fundamentals aren't necessarily better now than they were then. The Cupertino giant cranked out a horrendous quarterly report. Revenue clocked in with a year-over-year decline for the first time since 2012,according toS&P Global Market Intelligencedata. Earnings took an even bigger spill.

Wall Street isn't necessarily seeing things through rose gold-colored glasses. Analysts think Apple will earn less for this quarter, current fiscal year, and next fiscal year than they did three months ago, when short interest was nearly twice as substantial. Wall Street's profit targets for fiscal 2017 have gone from $9.11 to $8.91 a share over the past three months.

The prospects aren't any brighter for the smartphone industry in general, and the iPhone in particular. Apple has now posted back-to-back quarters of year-over-year declines in smartphone units, and that's problematic, since the phone accounts for the lion's share of the tech bellwether's business these days. Industry tracker IDC trimmed its forecast for global shipments in June, expecting just 3% in overall growth and the iPhone's first ever annual decline.

Getting over peak iPhone

It's always possible that Apple says or does something on Wednesday that turns heads, making the marketplace think we didn't hit peak iPhone sales in 2015. We could even see a game-changing development outside the iPhone.

Apple is an innovator, and these are the situations it lives for. Sales may be going the wrong way for the first time in more than 14 years, and its biggest product is current losing market share. It may be a challenging time to be long Apple. But there are a lot of people in recent months who think it's perhaps even more dangerous to bet against the company.

Wednesday, don't fail the longs now.

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Rick Munarriz owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.