Is Apple Falling Back to Earth?

Joel Anderson  |

Just last month, Apple (AAPL) was bulletproof. There was nothing that wasn't possible. The company announced a small dividend and a share buy-back program that represented a tiny fraction of the nearly $100 billion is cash reserves and analysts started to speculate. A share price of $1,000? Why not? A market cap north of $1 trillion? Well if it keeps growing this rate, who knows? The Cupertino, CA-based company was just the bee's knees.

However, the last five days has seen a swoon for the company to the tune of 8.45 percent, culminating Monday with a 4.15 percent drop in a single day. Is it possible that the most-hyped company in the world is beginning to come back to earth after Wall Street's initial enthusiasm wears off?

“Every living thing, including Apple, needs to stop and breathe,” says Rick Bensignor of Merlin Securities.

Long Term Prospects Unclear

If one is interested in reading into the most recent swoon a lot, there could be cracks showing in Apple's facade. The company has, in many respects, become a glamorous consumer goods company, offering top-tier gadgetry at sky-high prices. As such, shifting consumer trends over time could cut into the company's profits. The release of the Lumia 900 phone from Nokia (NOK) means that Microsoft's (MSFT) entered the smart phone market with a Windows phone that costs half what the iPhone 4s is going for. Apple also got rocked by news that it was being targeted by the US Department of Justice in a suit being brought against major publishers for colluding to keep the price of eBooks high. Lower prices on popular titles could help competing tablets like the Kindle Fire from Amazon (AMZN) grow their market share.

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Some of these concerns may have been fueling the fall as two rumors about the company swirled on Monday. One was that Apple was considering offering a new iPad mini for just $200 (which, quite frankly, sounds like an iPhone, but who knows) that investors worried might undercut iPad sales. The other rumor was that mobile carriers would be slashing subsidies for the iPhone, a move that might eat into sales for the company's most popular product.

BTIG LLC analyst Walter Piecyk cut his rating on Apple from "Buy" to "Neutral" on April 9th, citing long term growth concerns.

“We continue to maintain our view that Apple is the primary beneficiary of an accelerating growth trend in the global adoption of smartphones, considering global penetration of smartphones has not yet even reached 30%,” he wrote. “However, given the run up in Apple’s stock and the consensus estimates, we think now is a good time to more carefully consider how it will capitalize on the next and likely much larger leg of growth in the industry and prepare for the inevitable bumps that may occur on the way.”


Of course, the alternative would be to not look into the week-long swoon too much. Regardless of Apple's long term prospects, there's still a great deal to like about the stock in the short term. Despite sky-high share prices, Apple's shares are still priced relatively attractively based on the company's projected growth and free cash flow. What's more, the reasons for the most reason plunge may be relatively short-term concerns. Some are pointing to Apple's technicals and insisting that it's natural for any stock rising as fast as Apple's to ease off and fall back periodically.

“Apple has had a pretty uninterrupted rise,” says Relative Value Partners CIO  Maury Fertig. “It’s natural for any stock to take a pause no matter how good the story is.”

There are also those who aren't as convinced that the rumors about the new, cheaper iPad have much weight to them.

“This has been rumored for a long time,” says Brian Marshall, an analyst at ISI. “We doubt the product will hit the shelves anytime soon.”

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