A view of the main entrance to Apple Inc. in Cupertino, California. The company's stock has been crushed over the past few months. How low can it go?
Last year, Apple's share price rose above $700. Some analysts started getting all crazy with their predictions for where it might go. Could Apple hit $1000 and become the world's first $1 trillion company?
For a while these calls didn't look so crazy. As a company, Apple was a beast. It could do no wrong. The declines were inevitable, but temporary. The stock would always recover and resume its inexorable match to quadruple digits.
Apple dipped below the psychologically important $500 per share barrier this week (it's since recovered a bit as investors waiting for it to dip below the psychologically important $500 per share barrier piled in). There are some serious and well-respected investors who are bearish on this stock. Jeff Gundlach, of L.A.'s DoubleLine Capital, is one of them. He's set a target price for Apple of $425.
So what's gone wrong with the company that could at one time seemingly do no wrong? Glad you asked...
Q: Help! Look out below! What's wrong with Apple? Why did I buy the stock at $700 expecting it to go to $1000, only to lose more than $200?
A: Don't panic! Not yet, anyway. There's still plenty that's right with Apple. The iPad Mini, introduced last year before the holiday shopping season, looks to be selling very well (although it might not sell quite as well as Apple expected when it ordered 12-14 million of the device from suppliers). It's maintained Apple's pattern of introducing a smaller, cheaper device to open up markets pioneered by larger, more expensive devices. iPod, meet iPod Nano. iPad, meet iPad Mini. And pretty soon, iPhone, meet cheaper version (which the iPod Touch kind of already is). The $329 price on the base wifi-only Mini was irresistible to many holiday shoppers who were finally ready to make the tablet plunge, or who wanted to get a smaller, cheaper tablet for a younger family member (I count myself in this camp). We'll find out next week how this all shook down when Apple reports fourth quarter 2012 earnings.
The real problem is a classic instance of a split between Apple as a company and Apple as an investment. As a company, Apple is in spectacular shape. It's the largest in the world by value. And it has more than $100 billion is cash sitting in its Cupertino vault. People love its products. Private and increasingly professional technological ecosystems are built entirely from Apple devices.
But. But. But. There's the stock, which is prone to big moves up and down. Why? Because it's one of the preferred holdings of hedge funds. Investors like to bet on Apple stock to rise, but they also like to bet on it to fall (this is what hedge funds do). Some investors want to use Apple stock as a cash substitute, holding it for short periods to harvest a better gain than they can from safe, low-interest investments like bonds. Apple is a trader's stock these days. Everyday long-term investors need to gird themselves to buy it at a good price (under $500 is tempting, given that its price-to-earnings ratio, at less than 12, makes it look very, very cheap) and sit tight.
There is one key issue that relates to Apple's business, however...
Q: So what is it?
A: Profit margins. Apple's business runs on extracting profit from others and adding it to the companty's bottom line. It makes industry leading, actually pretty ridonkulous margins on its hardware. It achieves this by forcing its Asian suppliers to lower their margins. Apple also compels wireless providers — like Verizon and AT&T — to subsidize, in the case of the iPhone, what is an extremely expensive gadget. That up-front money goes into the profit column for Apple. The wireless providers huff and puff, but they want to sell high-priced data plans to customers on two-year contracts, and to do that they need the most desirable smartphone.
This obviously can't last forever. Nor can Apple expect to keep selling millions and millions more devices every quarter. Some markets are getting saturated. There's plenty of potential in untapped markets, chiefly in the developing world, but Apple's devices cost too much for consumers there. Ultimately, Apple is an innovation-driven firm; it needs to introduce groundbreaking new technology that reframes whole industries. It's done this with music and mobile. Many expect the next frontier to be television.
Q: How low will it go?
A: Hey, it might reverse course and shoot to the Moon. An analyst at Topeka Capital, Brian White, is the polar opposite of Gundlach and other bears. He put the stock at $1000 a share last year and has upped that to the numerically symbolic $1111. If he's right, you'd be insane to not load up on Apple now.
But if Gundlach and the other bears are right, then Apple hasn't hit bottom yet. Gundlach's thesis is pretty simple: he thinks the innovation is gone and that Apple is squeezing the same old stone. He believes the stock's surge started at $425 and is now over, and the market will reprice the company where it should be, with all irrational exuberance eliminated.
$1111? $425? Lower than $425? I have a different theory. I think Apple is shifting from being a growth stock to a value stock — a long-term investment rather than a short-term one. Its decision to start paying a dividend last year was the beginning of this transition. What could happen now is that Apple will plateau, settling into a trading range between $450 and $550, frustrating investors who buy and sell the stock based on the premise that they'll see big moves in short periods of time.
In the end, that will be good for Apple and good for non-professional investors who believe in the company and want to own it for the long haul. But it may mean that people who bought at $700 will have to wait a while to get back to where they started.