Why Apple is down below $400, and is still a very good thing

Why Apple's stock dipped below $400 and what investors should do about it

Today Apple stock dipped below $400, and is down about 5% as I write this. Yes, the overall market is down today. But Apple is down a lot more than normal. The reason? Cirrus Logic, a supplier of audio chips to Apple, warned today. To “warn” is Wall Street speak for press releasing preliminary results that are crappier than people expected.

In a nutshell, Cirrus has a major customer transitioning to a new product, and this is causing the chip supplier to write down a bunch of inventory. Cirrus just wrapped up its March quarter, but the real issue surrounds the upcoming June quarter. That’s because as part of its press release, Cirrus is warning investors that June quarter revenue will be only $150-170 million compared to Analyst estimates above $190 million.

Here’s the exact wording from the Cirrus Logic press release that has people freaking out:

“The company also announced that it will record a total net inventory reserve of $23.3 million of which approximately $20.7 million is due to a decreased forecast for a high volume product as the customer migrates to one of Cirrus Logics newer components.”

So let’s break this down a bit. Cirrus has a major customer who no longer expects to purchase certain old generation product, and is instead transitioning to a new generation of product. As a result of this, Cirrus is writing down the value of the product.

If you’re wondering why Apple stock is tanking because of this, no, there is nothing wrong with how your brain is functioning. I don’t think the Cirrus warning says anything specific about Apple’s sales. But Wall Street will speculate, worry, and trade based on all of this, and that’s why the stock is tanking.

For all we know, Cirrus has a new product that is about to be released, and Apple’s manufacturing partners have enough inventory of the older part to get them through until the part transition is complete. We have no idea how much of this old part exists in the supply chain. We have no idea if Apple is transitioning a part within its existing iPhone and iPad lineup or if they’re doing a component transition to line up with a new model.

Could Apple be about to post weak results? Yes, it’s possible. In fact Apple stock already took a beating as Hon Hai (aka Foxconn) reported weak results for the month of March as reported by the Wall Street Journal. So this release out of Cirrus Logic is what I’d call mounting circumstancial evidence of a possible problem rather than strong, convincing evidence. But investors and analysts are nervous about Apple, and whenever a major coughs, Apple is going to catch the latest Avian flu.

Apple is currently a stock that has negative sentiment. That doesn’t mean results are problematic, or that the business is in any kind of trouble. But it does mean that in the short term, anything that could possibly be interpreted as bad news will be. And the stock will suffer.

That's life. As an investor, I just deal with it. Apple’s position in the mobile industry is still far stronger than it ever was in the PC market. Long term, this is a very good thing.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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There are 34 comments. Add yours.

NamelessStar says:

always a pleasure to read these articles and how crazy some traders and analysts can be cause other stocks to dip

Trappiste says:

Apple stock was so ridiculously-overvalued for so long that all negative news are only going to mount upon each other -- for the short term at least. This is good, not bad. The excess fat needs to be squeezed out of the stock price. Too bad for those who, against all sound advice, mind you, bought the stock last summer. They have nothing but themselves to blame.

Rob White says:

My sentiments exactly. I said too many times to friends & family to invest for the long term in stable stocks with solid dividends paid out over time. Apple had a meteoric rise in stock price occurring around a number of other factors. It has needed to come back to earth just like Google stock eventually will.

rogifan says:

What exactly made/makes Apple overvalued? I hear people say this all the time but no one ever explains why. And if Apple is overvalued then what the heck is Amazon, Google and Netflix? Yet I don't hear anyone saying excess fat needs to be trimmed from them.

Rob White says:

"It has needed to come back to earth just like Google stock eventually will."

Reading is your friend. I didn't mention Amazon or Netflix but they'll flatten out eventually too.

If you don't understand the stock market (it seems you don't) then a quick briefing. A stock's value is directly related to the dividends it pays back the shareholders. That is to say, shareholders are the owners of the company & all profit aside from needed operational expenses/R & D/taxes etc belong to the shareholders. Apple for years has paid no dividends to the shareholders. That has made the stock an overpriced commodity. Tim Cook has reversed this just a little but far from enough. When Apple starts paying out for their shareholders in correlation to the amount of cash they are needlessly sitting on, you'll see the stock reflect it's true value.

Go read up on Berkshire Hathaway & a fellow named Warren Buffett. You'll learn a thing or 2 about how to value a stock as related to a public company like Apple.

cardfan says:

Some don't want dividends. I know I don't. I'd rather the company invested it as I watch the stock appreciate. But like you said, it's just sitting in the bank.

Steve Philpot says:

Rob, you make a pretty presumption comment about someone not knowing stuff about the stock market, but then prove that you know nothing about the stock market.

"Stock value is directly related to the dividends it pays back the shareholders." Yeah, no! Stock value is based off the perceived value of a company based on many metrics including what is perceived by investors as the future of the company, not simply the dividends a company pays.

By your argument Amazon's stock should have completely bottomed out considering they lost $39 million last quarter and hence no one earned any money on their stocks.

Rob White says:

I gave one metric, not one of two or three dozen ways to measure a stocks value. To go any further would only undermine the well written piece by Chris. If you want to compare internet smarts then look elsewhere. I'll concede you can probably search Google faster than me to prove how smart you are. Good for you! If my comment offends you, perhaps you should ignore it. So thanks but no thanks.

Oh & see what I said about Google originally? That'll happen to Amazon at some point. Amazon as a company, & its limited pool of shareholders, is an outlier to a trend of serving a larger purpose than pursuing profits. Much like green energy & organic foods. Those categories have never made money either. Yet they are completely overvalued & overpriced.

Steve Philpot says:

You gave one FALSE metric that stock value is based on dividends, despite the fact that it is completely incorrect. I don't have to Google to prove I'm smart, I know because I day trade and I'm pretty darn good at it, I made over 100k last year doing so. I don't really get offended, especially when someone posts and proves they are just talking out their fifth point of contact.

Rob White says:

Ok whatever. You must be right & over 100 yrs of Wall Street history are wrong. Your a real Internet superstar. Cheers. Troll on.

Chris Umiastowski says:

Guys - I'm sure you both have valid points. Just to chime in, most tech stocks are not valued based on dividends. The dividend discount model is rarely used by analysts and investors in tech because we'd rather see the companies deploy the capital for growth. Apple, clearly, has way more cash than it needs so dividends become more important. Or share buybacks, which is just another way or returning cash to shareholders.

Anyway, there is certainly good reason for investors to now be talking about Apple divi, buyback, etc. Their cash mountain is enormous. But it would be an over generalization to say all stocks are valued based on dividends.

scottdx says:

Rob, you have some valid points, however your assertion that a stock's value is tied solely to the companies dividend policy is just flat wrong. Also, your belief that Apple has been "over-valued" is based on what metric? If you look at P/E, cash flow, and other fundamental metrics based on math and logic it appears the complete opposite. I could argue more effectively that its has been dramatically undervalued for some time now, especially in relation to the tech sector as a whole. The basic idea here that I believe Chris is stating effectively is the impact sentiment has on stock pricing in the short term, Buffet said it best, in the short term the market is a voting machine, in the long term it is a weight machine.

Rob White says:

"I gave one metric, not one of two or three dozen ways to measure a stocks value. To go any further would only undermine the well written piece by Chris."

Again, reading is your friend. Try it sometime.

elpolodiablo says:

402, stock price, break it down $156 of that is cash, they make $44 per share in profit. Take out the cash the P/E multiple is <6, its the cheapest stock on the S&P. There is no fat. Its priced as if the company is going to collapse and burn through its cash

Chris Umiastowski says:

Right - in fact Henry Blodget wrote a very good piece on SAI yesterday on exactly this issue. It was well balanced, considering the good and bad. But for the most part the conclusion is exactly as you've explained here.

elpolodiablo says:

Thanks I went through his piece, I guess my judgement is clouded, however I can't see the bear case and shake my head. He says apple may become nokia, for that to happen they would really have to be asleep at the wheel. I saw how Basille and Lazaridis let android take all of blackberry's market share away as they took forever to get bb10 to market. Tim Cook would have to do a worse job X 10, to get apple in the same position. With $150 billion dollars you don't necessarily have to make the next big thing, you just need to identify it and buy it when you see it.

doogald says:

Wall Street values a stock not just on recent results but on where buyers and sellers think the stock is going.

But if you think the price is too low, you should be pleased - buy it up and hold it, if you think the value should be higher. Even if you have some priced more, buy more now - if you're sure the value is wrong.

elpolodiablo says:

This isn't about future results, this is about management philosophy. I've been trying to rack my brains and figure out why the share price is so low as I'm buying more shares (you start getting paranoid that there is something obvious that I'm missing). I watched this interview with Tim Cook at the All things digital conference and I realized what Wall Street doesn't like at 19:00 he basically said that he wants Apple to be more secretive a company particularly about products that they were under Jobs. Wall street never liked the secrecy that Apple had around products however the felt it was the tradeoff that had to be made for the vision of Steve Jobs. Now you have this guy who isn't Steve Jobs that says I'm not going to tell you what I'm going to be selling next or what my strategy is... just trust me. So they saw the product refresh, weren't to excited about the iphone 5 , ipad mini and macbook pro. And basically said that secrecy stuff isn't going to work anymore, you need to be more transparent, tell us what you are going to do with "our cash", tell us how you are going to sell in emerging markets, tell us what are the products you have... your roadmap. So there are two ways this plays out, he just keeps a bunker mentality and come up with new products and outperform blowing out earnings. And the stock price will go up as wall street scrambles to chase returns. Or his products flunk out and a new ceo is brought in who will be more "transparent" and apple's corporate culture will really change.

elpolodiablo says:

agree with you, but its hard to see how $44 a share in profits and the cash is evaporating so I'm buying quite a bit

Dev from tipb says:

A lot of the negative pressure on Apple's stock results from their cash hoard.

To use a Starcraft analogy, Android is the Zerg, with swarms of relatively crappy units, while iOS is the Terrans, with marines in bunkers confidently holding off any encroachment. By 2010, the Terrans amassed 2500 units of Minerals/Vespene Gas (Apple's $100B in cash). In the intervening 3 years, Android has kept churning out zerglings, managed to upgrade the a little, and developed roaches, too, throwing them in waves against the marines. Apple, meanwhile, preferred to bank their gas rather than use it to develop Siege Tanks. You can have all the Vespene Gas in the world, but, at some point if you do not know how to spend it you will simply have a large bank vault when the zerglings overrun you.

Use it or lose it, in other words. By 2013, outlets as diverse as the Economist and MG Siegler maintain iOS is still better, but perceive Android to be moving faster. This perception, combined with Apple's maintaining a **huge** cash stockpile over multiple years, makes some investors nervous that Cupertino lacks the vision required to maintain their superiority. This fear was only reinforced by Jobs' untimely passing. Given Apple's penchant for secrecy, they may have something even better than Siege Tanks cooking in the labs, but investors cannot see that, only that a tremendous amount of resources have gone largely unused for years, and that makes them skittish. It may be an irrational approach given Apple's continued strong performance, but fears are seldom rational.

Rob White says:

A pretty good synopsis using a weird Starcraft analogy. But hey it works. I tried explaining this above.

Dev from tipb says:

It's a weird analogy, sure. The point is not that paying dividends is great or that having a lot of cash is a bad thing, but that Apple's continued success depends on its ideas, and some investors are nervous that if Apple cannot find a use for a mountain of cash in 3 years, they just may be running out of ideas. May or may not be true -- if not, buying may be in order.

TumnusMr says:

Personally I'd like to see Apple use their cash hoard to buy the stocks back and go private again so that they don't have to pander to stockholders who seem to want Apple to keep their unnecessarily high profit margins.

Rob White says:

http://branch.com/b/taking-apple-private

An interesting quick read that pretty much settles this idea. It would be near impossible for a company like Apple to take itself private at this point.

TumnusMr says:

Hah, I see Rene commented on that thread and I generally agree with him. While I realise it is highly unlikely to happen, it would be pretty amazing if the stock price continued to decline while still making oodles of cash so that they got to the point where they could buy back the stocks.

vianar says:

Good post. The media is also being used to cause fear and dumping of stock and price so the larger funds can get in at lower price or to have a story like this at the start of a session that will rebound by the end of the day means a quick buck for day trading.

asuperstarr says:

Wow! Well this is a good time to buy.

Jammo says:

Apple will be the new blackberry. Short that stock asap.

rogifan says:

As if people haven't been doing that the past 6 months???

west3man says:

Boy have YOU changed, Jony Ive!

kataran says:

I finally break down and get an iphone and the company tanks......story of my life :'(

carry on ;-)

Sandra De Zen says:

Apple has always been tight lipped. its hard to say what they plan on doing with the cash. I would like to see some of it come to the shareholders. I hope it comes back up in price as I have a lot invested. I am optimistic. Really to compare it to blackberry! Don't think so at all!!
Recently, I sat in the airport for half a day as my flight was so delayed; all I saw was people with apple products. Honestly, if I could do it financially I would buy more. I am so tired of the negative comments from analysts this is what tanks the stock not bc the stock is performing badly.