Should it bother investors 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

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

  • Look at it this way: The iPad-Mini is at a price point that lots of folks that would never otherwise consider an Apple device not only consider, they buy... then, people find out that they like what they got and are willing to forget their previous prejudices, and buy more Apple products... the Mini is a 'gateway' device. In the long run, it's a good thing... lots of investors don't see this.
  • Great comment. I like the thinking.
  • I wish there would be more smart and independent writers like CHRIS .... out there ....
    The reason for the decline is MARKET MANIPULATION by Hedge Funds...just look on the whole flood of AAPL negative headlines in last weeks, which they fabricated ..
    if U read into it and think about , than U'll see there isn't any particular problem .... all just a non sense and hot air produced solely for stock bashing purposes....the aim of all of this : AAPL's all the in the money PUTs and dirt cheap CALLs.... the one and only fair valuation of a stock , known to date... is its P/E ratio, which is by AAPL way under it should be even with 705$ price for it... P/E average for the tech. about AAPL should be trading for 1100$ at least ....but apple isn't just a average company... its the leader of the sector.... so why does it have a P/E12( like a sector looser .. if APPL would have the P/E 2763 of AMZN ...its stock price would need to be about 121 986 $... ya that's right... a piece ...DUDES...
    What about this bizarre and inexplicable discrepancy?.... the answer is. quite simple..
    there is not much money Hedge Funds can make from manipulating they don't bother spending a bug on paying some sucker analysts and column writers for negative headlines !!!... It was always this way with AAPL as long as I can remember,... and it used to give me a real headache as I was newbie to the I don't even bother to look at the I could predict the reaction on it... the moves after any negative comments by who the fck ever... are produced by nervous newbies scared to loose too much $ they act always in there is no time for thinking.... (that's is also the major reason for hedge-funds getting so rich).. but with the time you will realize, that short therm moves have no meanings... on the long therm U'll be happy that U bought or didn't sold it... because against all the odds in the past ...AAPL still marched all the way UP and generated more % return to its shareholders than any other tech company in the world... and so they will in the future...U just have to accept that Hedge Wolfs will always bite a big chunk of it there are top-tier PREDATORS ...on the top of the food chain ... and that's just the way... it is... FOLKS
  • The only issue I had with this article is the part where you say Apple stock is tanking. It is not anywhere near tanking. I own Apple stock, not as many shares as I wish I had, since I bought it at $85! but at anything over $600 it's not even close to tanking. It is lower, it is shedding, it is losing but wanna know something the only time an investor will lose is when they sell their shares at this lower price. Anyone who bought before the huge run up is not worried. So it is the people who bought shares at $700 and then see the fluctuation and sold shares. Humans are emotional beings and so they do their finances with emotions instead of reasoning. In the long term the price of the stock will stabalize and may go higher or stay around the $700 mark so patience would have rewarded investors with their money back that they lost.
    I still maintain that the whole fund manager system is a flawed concept. They are in charge of billions of dollars and people listen to what they have to say. It is easy for them to push the market in the direction they desire. If they want to make money they talk about fears of Apple's stock and people start to sell then they start to buy at the lower price. Then the stock stabalizes and they have made millions off the $30, 50, 100 increase when the stock goes back to what it was before. If an analyst has any Apple positions they shouldn't be able to talk to anyone other than their clients about their projections for Apple. Apple still has over 100 Billion in the bank so if investors looked at the story realistically they would know that there isn't any need to worry.
    Then the iPad Mini play that is so brilliant that people just haven't realized how brilliant it is yet. The iPad Mini has just come out and it is a little expensive but it is still close enough to competitors while being cheaper than the full sized iPad. But it doesn't have a Retina Display yet. So what happens to the competition when the Retina Display is included? The price will remain the same, the ecosystem is huge and then you have this glorious screen in this ultra portable device. It will look like a deal and a half compared to the big brother. Just look at the original iPad when it was launched and now 3 generations later it has Retina Display and defined a new market.
  • Sorry, the stock IS tanking. You may not like the use of that specific word, but in the stock market a 20% decline is considered pretty major and people use the word "tanking". Above or below $x is irrelevant. Percentage movements are what define significance here. Also, what you're writing about fund managers doesn't make sense. If it was so easy for them to make money at our expense, why do they under perform on average? Most people who don't understand how the market works think that the pros have some kind of massive advantage and dupe the rest of us with fake information. That pretty much never happens on large cap stocks. It's like trying to win a knife fight using a toothpick.
  • i'd agree with Chris a 20% fall is a big deal. You lose 20% of your value and that's pretty much "tanking." If the stock market falls 20% it's basically crashed.
  • This is a nice way to say they are in a tail spin. We are in some VERY un-Apple terriorty here. They launced a phone in September that you, for all practical purposes, can't buy today. There are none to be found (iPhone 5) and that has NEVER happened before. There were / are issues with maps. Now, we are losing key people. I would be nervous too. This is their first major product roll out post Jobs, and it has not gone well to say the least. They seem off their game. Go to an ATT store and ask when they will get a new shippment, and you are told to order one online. They don't know. They will tell you however that they have pleanty of Samsungs in stock. There has to be some laughter in some board rooms over this. They should have raised the price of the phone. These devices are getting smaller and that has to put pressure on the company that has to produce them. The shortage is being blamed on build problems. It must be a bitch to have to assemble one of these in the factory. The Mini is very cool, but we had months of sub-$200 rumors, and then get hit with sitcker shock when it comes out. I know several people that were all lined up to buy one that backed away solely due to price. I am one of them. I have a iPhone 5, Macbook, and an iPad, and was looking at the Mini for my 6 year old son. He has a 4th gen iPod, and lives with my iPad attached to his arm. But, $329 is a lot to hand a 6 year old, no matter how careful he is. So, that was put on the back burner for now. I underatand that all of this is being given extra attention due to Jobs being gone, and a lot of people are looking for that first mis-step. It just seems like Apple is giving it to them.
  • No, Apple is not the "biggest company in the world", in fact it never was and probably will never be. Apple is currently the 22nd largest company in the world, but it is the company with the highest market value, which is quite different of being the biggest company.
  • what measure is used to determine it is 22nd largest company? # of employes, yearly revenue, etc.?
  • generally the biggest company is the one with the highest market capitalization.
  • And Romney was "projected" to win. Analyst starts with "anal" for a reason. It's just a bunch of shit.
  • And it is a shame that he didn't win. Time will bear that out.
  • You know what Chris, Apple's stocks doesn't need your analysis.
    I know that you've been very good on do some writing about RIMM stocks, but to compare the case where AAPL is now with where RIMM before isn't fair.
    For traders, it seems bad, but for us, users, getting low on market share means the company will improve, and not just slacking like Apple did with iOS6 Maps or the quality control over Foxconn before.
  • Nice job completely missing the point on the RIM comparison. And the discussion of market share is where, exactly?
  • Sorry, was confused between market share as in stock price/market value and the market share on the iOS device. My bad :D
  • yes it should bother investors but they should have seen it coming early this year and started to lesson their position in Apple. I used to track and trade apple for personal account. Now personally I had to unload my apple to buy stuff but my parents had some Apple and i anticipated a turn in the stock, and advised them to look for it to level off and fall some. Maybe sell a bunch and come back in at a different level. Why? contrary to popular belief i think the execution at apple fell off when jobs sadly passed. Buffet says when he buys a company he's buying the management team really. So i put a lot of stock in the competency of whose running a company and i think there was a drop in management with Job's passing. Don't get me wrong it's not incompetence but not run at the same level resulting in problems exemplified by the maps, passport, lackluster new apple apps, etc. i think even before that the products where much less about big tent pole ideas and more about spec bumps. Even iphone 5 is really just lte, a bigger screen and a better camera. Oh and a screwed up port. The phone looks the same and though we know it will sell it lacks the wow factor to take the market by store in a way that it hasn't before. I didn't see big lines for the ipad "4" spec bump or the mini at my local apple store. For the highly anticipated 4s there was a wait just to get into the door of the apple store for weeks after launch. Also there are vast improvements to Android that made it a viable alternative for most people. I love my iphone but Android is perfectly usable. It's just not my preference. But that's much better than before when i didn't like it, it's better then Palm or Blackberry which i wouldn't touch if you paid me. There was another big issue that's been common and coming, After one of the ipad launches, forget which one, there was a big probem simply making enough ipads. The same thing happened with the 4s. Demand you can't meet, that's a good problem to have but it's still a problem. And over years investors wonder when it happens yearly what's wrong when you can't sort out your manufacturing. The inability to keep up with demand can begin to look like management failure. And speak of the devil, the story today is of the same problem "It's not easy to make the iPhones," Foxconn chief Terry Gou said, according to Reuters. "We are falling short of meeting the huge demand." Investors don't like that. And look at what investors read. And foxconn lays it also at the feet of apple designers saying assembly is "most complicated" device Foxconn has tried. And notice that's an article not in a place investors read the wsj talking about "shortage" not apple's selling huge, blah blah blah. That investor psyche is different the the fanboy that doesn't care about such things as "supply chains" or "production facility shortages." If you can sell 9 million of a product per quarter investors want you to sell all 9 million. They don't want to hear you only sold 7 million cause you're plant couldn't keep up. Especially when it's a year product cycle, maybe less now. But since in some places it takes weeks to get a product you may lose people that need a phone the same day they walk in. Everyone isn't willing to sit on a waiting list for two weeks. But all that means from quarter to quarter the earnings may not be what they could, even if relative to other competitors it's good. With that the stock will still sell off. And if you don't see any events to push the stock forward its gonna flatten out. I didn't see any of those events. Apple is a great company that makes money hand over fist but that's not enough for the market sentiment, and if you can't make earnings sentiment tanks, and people sell off. I thought the things mentioned in the first paragraph would hurt sentiment and you'd see the stock plateau and decline. That and the fact that with apple there is typically buying into earnings and a sell off after even good earnings. So there was always gonna be a decline even with an earnings beat. But i'm not remotely suprised it's sold off given the signs that have been growing for a long time.
  • The tablet is still not a viable option for most, until a perfect hybrid of pc/tablet is made then a tablet is nothing more than a hobby device IMO. Most people who have them use them for general browsing/reading/facebook. A lot of people I know are buying macbooks, you just cant do the things on a tablet that you can on a laptop/pc, yeah the ipad is great for showing off content you have made on a laptop/pc. Not so great for making that content (video editing/photo editing etc...) and most people's opinions of the ipad mini is, well its only 3.5" bigger than my iphone, why would I need it?
  • i think tablets are simply not a replacement since the pc market is bigger then the mom and pop consumer. Business still needs full computers for many things and they still buy tons of them.
  • We have to prepare ourselves for the idea that Apple is going to fail because it's been too successful and unwilling to change even in the face of valid criticism. And with Jobs gone, the "magic" is gone. It's becoming a real company and people are starting to see that. If you like an Iphone, keep it, but Apple's just joining the real world again.
  • I'm actually pretty disappointed in the way you basically insult people that have disagreed with you. You have to remember that not everyone on this site has a formal education, and may have no understanding stock markets in the least. I'm also wondering about your definition of "a lot less", in terms of price on iPad Mini. Where I am, the cheapest iPad Mini retails at $369, with the RRP of an iPad 2 at $429. $60 is not a whole lot, and even less when budget retailers run the iPad 2 at $399. But those were both nit-picky. Of course investors should be worried that Apple stock is dropping quickly. Comparisons to other companies are irrelevant - Apple is dropping from a higher value than anything we've seen in the past, which is great, but it's taken quite a fall, and is still quite turbulent. If I personally was invested, I'd be selling out now to bank what I have, and buy back in when the price appears to have stabilised, or be back on the up. In addition to low-margin devices, such as the iPad Mini (not necessarily a bad thing, as you stated), you also need to be on the lookout for the improving competition from Microsoft and Nokia in particular, as well as various Android devices. We've seen in the past how rapidly the smart-phone market can change, and I view the weakened price as a sign that a lot of investors are wondering if this will happen soon, possibly due to the growing opinion that Apple is simply releasing devices with minor upgrades. Realistically though, I'd say that Apple's peak price, and current price were both overvalued, and this is the market reorganising itself appropriately. No company will be the most valuable forever.
  • I read that the stock is tanking because long-time investors are selling shares to take advantage of the lower tax rates before next year's hike. This appears to be temporary and there is nothing wrong with Apple. They are the strongest tech in the business. I can see Apple hitting $500 and that will be the low of the year. Once the sellers are done, this stock is going to go higher into the holiday season and next year. Do not get shaken out be these short-term gyrations.
  • Can't get away with over charging people forever.