After Apple’s Rise, a Bruising Fall

Apple Inc.
Adam Jeffery | CNBC

Wall Street has turned viciously on its one-time iDarling. The rout in Apple's share price—it fell nearly 2.7 percent on Thursday, bringing the damage since late September to 44 percent—has many wondering when, and where, this will end.

The answer, of course, is that no one really knows. Yes, Apple is slowing, as companies inevitably do. But Apple remains enormously profitable and the envy of corporations worldwide.

And yet Apple's decline in the stock market has been so swift and so brutal that the development has begun to change the way investors view the company. Apple no longer looks like a sure thing.

It is a remarkable turn in one of the standout stock market stories of recent years. Only seven months ago, Apple's share price raced above $700 to a record high, making Apple the most valuable company on the planet. By Thursday, the stock had sunk to $392.05, closing below $400 for the first time since late 2011.

The proximate cause of Thursday's decline was news this week of a glut of audio chips at one of Apple's suppliers. That, in turn, prompted concern that sales of iPhones might fall short of expectations.

But that was just one more bit of downbeat news in what has been a downbeat few months. All told, $290 billion has been wiped off Apple's value since September. It might seem difficult to believe, but Apple now ranks among the biggest losers in the stock market over the last seven months, right next to the J. C. Penney Company, that sick man of American department stores. The last time Apple was trading this low was in November 2011. Steve Jobs had just died and everyone wondered how Apple would carry on without its visionary leader.

Stock price aside, Apple is bigger and, by some measures, stronger today that it was then. It sells more iPhones and iPads than ever. It is expanding its global reach. And it is making so much money—analysts expect the company to report another solid quarter next week—that it has been having trouble figuring out what to do with all of its cash. Speculation is rife that Apple might pass some cash to shareholders in the form of an increased stock dividend.

On one level, the Apple story is a common one on Wall Street: what goes up also goes down. As Apple's stock price soared in recent years, some pointed out that the company's sales couldn't keep growing—and its share price couldn't keep rising—at that rapid pace forever. In hindsight, Apple's surge above $700 strikes some as irrational, as does its precipitous plunge back below $400.

"Overexuberance on the upside leads to herd behavior and panic during the correction," said Avanidhar Subrahmanyam, an professor of behavioral finance at U.C.L.A. "People just panic and the stress hormone kicks in."

One issue is that Apple is a favorite stock among individual investors. The investment firm SigFig estimated last fall that 17 percent of all retail investors owned Apple stock, four times the number that owns the average stock in the Dow Jones industrial average.

Trading by retail investors can be amplified by hedge funds, who see everyday investors piling in and push in the opposite direction by shorting the stock, betting it will decline. The so-called short interest in Apple reached a peak last November, but hasn't gone down much since then, according to data from Nasdaq.

Aswath Damodaran, professor of finance at New York University, said the enthusiasm surrounding Apple last year prompted him to sell his own holdings in the company when the stock was around $610.

"I was terrified by the kinds of investors coming into Apple's stock," said Mr. Damodaran. "Not only were they coming in with unrealistic expectations, they were at war with each other."

Recently, Mr. Damodaran began buying shares again, convinced that the fears had gone too far.

"Right now, Apple is being priced as though it has no future growth," he said.

Indeed, Apple looks cheap by the most popular way of gauging a stock's value, the amount of profit it generates for each outstanding share. Investors are willing to pay about $15 for a dollar of profit of the average Standard & Poor's 500 company. But for Apple, they will pay less than $9.

At its current price, investors are betting that Apple will grow more slowly than the average American company. And they are ignoring the enormous pile of cash that Apple has built up, which it could hand out to shareholders tomorrow if it wanted.

The cash, and Apple's apparent inability to find a use for it, has taken some of the blame for the stock's recent performance.

Toni Sacconaghi, an analyst at Bernstein Research, said that if Apple developed a clear plan to use some of its cash to pay dividends to shareholders it would help the company's shares, perhaps lifting them 10 percent or more. But that will not return Apple shares to their glory days. He said the bigger problem bearish investors saw with Apple's shares was more straightforward: growth is stalling.

"That's the story," he said.

During the fiscal second quarter that Apple will report next Tuesday, Mr. Sacconaghi predicts that Apple will post an 18 percent decline in net income, as less lucrative products eat into its profit margins. In 2012 during that same period, Apple almost doubled its net income from the same period in 2011.

Still, this is Apple—the company that produces some of the most popular products in the world. While Mr. Jobs is no longer around, almost all the people who worked with him are still there.

One thing is sure: the shift in sentiment has been a big change for Apple bulls like Gene Munster, an analyst at Piper Jaffray. He still sees host of opportunities for growth ahead. He said that, for instance, Apple could play a big role in mobile payments.

But it's no longer easy being an Apple bull.

"It's like getting a beating every day coming into work," Mr. Munster said. "Investors are so negative, they want to take it out on somebody. I feel like I end up being that guy."

More From The NYT:
Daily Report: As Unauthorized Fees Hit Cellphone Bills, U.S. Acts
LinkedIn Refreshes Mobile App
There's Something About Smartwatches