Should it bother investor that Apple stock is getting killed lately?

Yes, Apple is still the biggest company in the world. But since hitting a high of over $700 in late September, the stock is off about 20%. Putting this in dollar terms, the value of Apple, as a company, has fallen by nearly $140 billion compared to the September highs.

During this 20% drop, Apple’s market value has fallen by 32x the total market value of RIM. Talk about a metric that puts things in perspective! Apple has also lost more value than 60% of Google’s total market capitalization, and more than Verizon’s entire market cap. Why?

The folks at Business Insider published a solid article this morning explaining why Apple is tanking. The biggest two reasons seem to be:

  1. iPhone 5 supply could be tight because Foxconn says it’s difficult to manufacture the phone. This has lead analysts to worry that Apple won’t deliver the monster holiday quarter they expected.

  2. iPad mini eats into profit margins. Yeah, it seems to be selling well, but Apple has been a very high margin earner since the iPhone launched. iPad margins are a bit lower, but blockbuster sales more than made up for the margin drop. iPad mini margins are significantly lower than its big brother. This has Wall Street worried that, unless volume ramps up bigtime, Apple profitability doesn’t rise much as unit sales increase.

Combine this with worries about executive changes and you have the perfect conditions for worry on Wall Street. When fund managers worry, they tend to sell to protect themselves. This causes the stock to tumble.

As a long term investor, I have to say I couldn’t care less about short term gyrations. I do care about how Tim Cook and team manage the business. I do care that they screwed up Apple Maps, and that they may run into supply constraints on iPhone 5 for the next while. But these are all things we’ve seen before. Apple has been unable to meet huge demand for iPhones with nearly every launch. They catch up over a couple of quarters. It seems to me this is a high quality problem to have.

What about iPad mini profitability? Yeah, it costs less and has less profit for Apple. Wall Street never seems to be able to think long term enough to understand why this is actually good for business.

Here is a non-Apple story that should help convey the importance of expanding with lower cost products. Back in the mid 2000s, RIM was the clear leader in smartphones. BlackBerry was expanding globally. And to hit a segment of the market they weren’t previously hitting, they created more cost-effective hardware and struck service revenue agreements that were less profitable (per user). Analysts complained that ARPU (average revenue per user) was declining, and kept declining, which was an obvious problem. Analysts said this for years. Yet throughout that period RIM’s profitability expanded enormously. The short term thinking of most analysts prevented them from realizing that these markets RIM was entering were new business opportunities. They may be less profitable than selling in Canada and the USA, but they are still hugely profitable.

So let’s turn back to the iPad mini. Sure, it costs less. A lot less. And I think that’s wonderful. When I look at what Apple is doing with textbooks in the education market, I get excited about a lower cost iPad. When I think about the portability of the device relative to its full-size counterpart, I think it opens a lot of doors. Most important, it makes the gap between a Nexus or Kindle Fire tablet seem much smaller.

Industry estimates suggest that tablets will outsell traditional PCs (desktops and notebooks) by 2015. I believe this. I think we’re moving into a world where kids get handed a tablet at some point, at a very young age. Apple is dominating this market right now. They are executing on their opportunity to move from a single digit player in PC market share to a very significant high double digit player in mobile computing.

That’s why Apple is the most valuable company in the world today. I can understand why short-term investors are getting worried. But when I think about the long term changes happening in the market, I think Apple is doing exactly what they need to do. Nothing has changed. Except the stock price is suddenly a lot cheaper. According to data from S&P Capital IQ, Apple’s P/E ratio is 12.4 based on the next 12 months of earnings, using analyst consensus estimates.

Source: Business Insider