Talking tech since 2003

Everyone loves to see a media darling fall from grace (think Lindsay Lohan), and it seems that’s what’s happening with Apple lately.  The company’s stock has been hit hard by headlines of missed results and slowing demand.  As a result, shares have dropped below $400 for the first time since December 2011.  But in actuality, Apple’s stock decline may be the result of market psychology instead of valuation.

The decline started in mid-September after Apple’s shares topped $700 per share.   A decline was inevitable as the stock had continued a non-stop upward trajectory even as growth began to slow.  But to drop below $400 is a little overblown.  Apple’s price to earnings ratio (a measure of its stock performance with its earnings) now sits at less than 9.  To put that in perspective, that means Apple’s stock is almost half as cheap as Microsoft’s (PE ratio 16.4) and the average PE ratio of the 500 stocks that make up the S&P 500 (PE ratio 17.82).

Some investors are arguing that Apple may be the new Microsoft.  Microsoft once dominated the tech world and then saw its shares fall flat.  But Apple and Microsoft couldn’t be more different.  While Microsoft relies on declining PC sales to drive Windows revenue, Apple is focused on the growing tablet and smartphone market.  Apple is the number one computer seller in the world, outselling  Hewlett-Packard (if you count iPad sales) and the number one tablet maker in the world.  But even if Apple can’t maintain a 20 to 30 percent growth, it still doesn’t account for a PE ratio of 9 (and 5.4 if you back out cash).  In fact, Apple stock is cheaper than it was in 2000 when it was trading for $7 per share ( Apple’s PE ratio hit an all-time low of 5.76 in the fall of 2000, when you could buy Apple for $7).

In January, investors hammered Apple’s stock, driving it below $500 per share after the company reported revenue and iPhone sales that fell short of analyst expectations for its fiscal first quarter.  The decline has continued since then as headlines continue to overshadow the company’s strong results.

In February, Apple was back in the hot seat after Greenlight Capital’s David Einhorn sued the company over its stockpiles of cash.  Einhorn led an investor revolt trying to force Apple to modify its proposal that would allow Apple to eliminate preferred stock.

And now today, Apple is under pressure after Cirrus Logic, a U.S. chip supplier, gave a disappointing revenue forecast that increased fears about weakening demand for the iPhone and iPad. Cirrus Logic warned of a reduced product forecast from one customer (which it did not name) and the rumor mill jumped on board, saying it must be Apple (90 percent of its business comes from Apple).

But even if it is Apple and the company is slowing down its production of iPad and iPhones, does it mean that the stock should be in a free fall?  Apple has grown at a rate of 57 percent over the past five years so it’s understandable that the growth rate will decline.  Apple had $156.5 billion in sales last year so if the company continued at that same growth rate for the next five years, revenue would reach $1.2 trillion, or the size of Australia’s GDP, according to a recent report by Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co.

Steve Wozniak, co-founder of Apple with Steve Jobs, said today that Apple’s share price, is “disappointing” but that he was confident the tech giant would come out with products which would “surprise and shock us all.”

“[Apple’s]stock price is a little low right now. Over time I’ve seen Apple go up or down 2x over a few months. It’s very disappointing because if you look at the amount of cash that Apple holds that cash translates to one to two hundred dollars per share of stock just in cash form. So the expectations are a little lower even than they expect,” Wozniak said at a speech at the Login technology conference in Vilnius, Lithuania.

And on Monday, famed investor and Berkshire Hathaway CEO Warren Buffet said that Apple should use its cash pile to buy back more stock. Doing so, Buffet said, would be like buying dollar bills for 80 cents.

What is happening right now seems to be as much about market psychology as it is about fundamentals.  I’m not suggesting you jump in and buy Apple stock today, you never want to try to catch a falling knife.  But at some point, the negative headlines are going to give way and Apple could be a pretty nice buy.  Maybe Apple was never worth $700 per share, but a decline of such magnitude in comparison with the overall market and in the absence of a serious competitive threat seems overblown.

Some could argue that Samsung is dominating Apple in the smartphone market, but it doesn’t account for the innovation that Apple is capable of.  To discount Apple to such a degree, would indicate that investors don’t believe Apple will have another hit.  One thing is for sure, investors will be paying close attention to Apple’s earnings results when it releases them on April 23.  And with so much negative news priced into shares, we may see a nice upward swing.

 


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