Photo: Yahoo Finance
Apple stock got hit again today, falling 1% to $513.
That’s getting close to the lowest close since the stock began its recent slide in September.
(It’s also a level that Apple first breached on the way up last winter. The stock is still up sharply this year, having entered the year at about $400.)
What’s going on?
Some are fundamental, having to do with changes in Apple’s business.
Others are market-related (tax-related selling is likely having a significant impact).
Still others are related to sentiment.
Here are some of the issues:
- First, in recent news, Apple has reportedly slashed its orders for iPhones for the first quarter of next year. According to UBS and other sources, Apple cut its “build” orders from 35-40 million units to 25-30 million. This suggests that sales of the all-important iPhone may be far lower than Wall Street has been expecting. It also suggests that the iPhone 5 has not been the colossal hit that Apple needed it to be.
- More broadly, Apple has been a monster of a stock for the last decade, and some investors are likely taking the opportunity to lock in these gains while paying today’s low capital-gains tax rates. Whatever deal the government finally arrives at with regard to the Fiscal Cliff (if any), it will likely include a hike in the capital gains rate. So the logic is sell now to lock in the gain at a low rate.
- Apple recently refreshed its entire product line, and analysts aren’t expecting anything truly exciting to happen until next summer at the earliest. That gives short-term investors little reason to hang on to the stock.
- Apple’s amazingly high profit margin is likely to decline over the next several years, as Apple’s product mix shifts toward lower-margin tablets from the high-margin iPhone and the iPhone margin itself declines with the introduction of lower-priced phones. This suggests that earnings are likely to grow more slowly than revenue, in contrast to the situation for the past 5 years.
- Apple’s next revolutionary new product–a TV or TV device of some sort–appears to have been postponed by a year. Analysts are also not sure what this product will be and how it will sell. Dozens of companies have tried to reinvent TV over the last 15 years, and almost all of them have failed. Apple also appears to have met resistance from the TV industry, which will do everything it can to preserve the status quo.
- The smartphone market, which has driven Apple’s spectacular iPhone sales over the past 5 years, is entering a new phase of growth, in which low-priced phones are capturing an increasing percentage of market share. Apple does not yet offer a low-priced phone, and if and when it does, this will likely add to the pressure on Apple’s profit margin.
- Apple’s competitors are catching up in both smartphones and tablets, so Apple no longer has the leverage with distributors and consumers that it once did. This, too, could eventually lead to more margin pressure.
- Lastly, Apple really is finally entering the “post-Steve Jobs” era, and it remains to be seen how successful the company’s next generation of products will be.
All of these factors are likely weighing on Apple’s stock.
But here’s the good news:
The stock is now cheap.
Apple is now trading at less than 12X trailing earnings per share.
That’s not screamingly cheap. In the old days (mid-1990s and earlier), hardware stocks used to trade between 8X-12X earnings, and Dell, HP, and other companies are actually trading at even lower multiples than that now. (Dell’s at 7X. HP is trading at 4X next year’s estimated EPS).
But unlike HP, Dell, et al, Apple is still a very healthy company, so if Apple ever gets to 8X earnings, it will be screamingly cheap.
At 12X earnings, Apple is at least reasonably cheap–cheaper, for example, than the stock market as a whole.
And Apple also has $125 billion of cash.
Factor out that cash, and the business itself is actually getting close to the Dell level.