How investors should play falling Apple stock
It seems gravity applies to Apple (AAPL), too. It's such a foreign feeling, Apple investors need to figure out how to react.
Apple stock is down 12% since July 21 — following the company's second-quarter profit report showing iPhone sales that were strong, but not the blowout many investors have gotten used to, as well as lackluster Apple Watch sales. Shares of Apple are now in a correction, falling more than 14% from their all-time high of $134.54 notched on April 28.
Apple's decline is a startling development for the markets — and could have broad importance. Apple is one of — if not the — largest holding by many individual investors, says SigFig. A big decline like this for Apple is noteworthy enough to rattle investors who might not normally pay much attention to the broad stock market. Apple is so enormous, with its market value of $660 billion, more than any other U.S. company, when it struggles all investors feel the pain. Apple alone accounts for just shy of 4% of the value of the Standard & Poor's 500 and 17% of the tech sector, says Howard Silverblatt of S&P Dow Jones Indices.
"The combination of Apple's size and price moves, results in an enormous impact on indices, with the only comparison being International Business Machines' impact in the early 1980s, when PCs were new, and IBM was expected to own the market," Silverblatt says.
Given the importance and size of Apple, it's not surprising investors have very different reactions to its stock's fall. Bulls are looking at it as a giant buying opportunity, while those less optimistic see the decline as a repricing due to serious risks the company faces. China, Apple's last big growth market, is seeing its economy slow. China's economic growth has been just 7% during the first six months of this year - the slowest growth in 25 years, says Reuters. That's a potential problem since China was responsible for 60% of Apple revenue growth and 80% of its operating income growth in the recent quarter, says Steven Milunovich of UBS. Analysts are squaring off on what the large decline by the nation's most valuable stock means and are coming to two conclusions:
• The cautious case. Smartphones were flying off the shelves when they were new and novel, but at this point, it's largely a replacement market in the U.S. The effect on Apple is huge. The company relies on smartphone sales for a majority of its profits. Two-thirds of Apple's revenue this year is expected to come from smartphone sales, says Trefis.com. December could potentially be the first quarter Apple's smartphone shipments drop compared with the same period a year ago, says Abhey Lamba, analyst at Mizuho Securities. Strong sales of the latest iPhone late last year will make it difficult to show robust growth this year due to difficult comparisons, Lamba says. That could be a problem for the stock, says Lamba, who has a price target of $125. Meanwhile, new products like the Apple Watch aren't picking up the slack, and iPad unit sales are in double-digit percentage decline, says Tavis McCourt of Raymond James, who thinks Apple could see shares decline to $100 if the market overreacts to falling profit growth.
• The bull case. There's no shortage of analysts who think Apple's sell-off is overdone and a buying opportunity. Daniel Ives at investment firm FBR says concerns about China are overblown and new products will start to contribute more over time. He says the stock will be worth $175. Alex Gauna at JMP Securities agrees with the mean estimate of analysts, calling for Apple to be worth $150. He says the company's commitment to return its cash to investors creates value and China will resume growth.
Apple is one of those stocks investors will agree to disagree over. The market will determine who was right.