Amid Strong Sales, Market Still Worries Apple is Rotting

Javier E. David | Special to
Apple Today, or Stay Away

Strong sales of its iPhone notwithstanding, Apple continues to be dragged by an undertow of market pessimism about its prospects.

This weekend, Apple sold more than two million units of its popular iPhone 5 in China, in what was the smartphone's maiden voyage in the world's second largest economy.

Still, the tech giant's stock briefly set a new ten-month low in early Monday trading near $501 before staging a modest rebound -- underscoring how investors aren't completely mollified about the company's ability to keep up with a changing marketplace. (Read more: Defying Growth Concerns, iPhone Sales Soar in China.)

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The enthusiastic reception Chinese consumers gave Apple's iPhone failed to prevent Citigroup and at least one other bank from downgrading the stock over the weekend. Citing concerns about the company's supply chain, Citi analysts questioned how vigorous sales would be going forward.

"We see execution risk for Apple as it decreases the time between new product introductions on larger volumes each time," Citi said, as it lowered its rating on the stock from a buy to neutral. "We believe this kind of supply chain disruption is indicative of this."

A softening global economy is also a headwind for Apple. On Monday, Canaccord lowered its iPhone and iPad sales "due to softer sales expectations in international markets," especially recession battered Europe.

"While order reductions to iPhone suppliers are not unusual this time of year, we believe reduced iPhone 5 orders for the March quarter could also indicate an earlier launch of new iPhone products in the June quarter," Canaccord analyst Michael Walkley said, as he cut Apple's price target to $750 from $800.

"Despite our slightly lowered estimates, we believe Apple's industry- leading software ecosystem and integrated hardware experience will result in a strong multi-year product cycle," Walkley added.

Not long ago, Apple towered head and shoulders above a landscape filled with would be competitors, with every product getting a rapturous reception from customers who would wait in line -- sometimes for days -- to get its latest offering.

Now, as the digital wars between tablet and smartphone makers intensify, Apple almost always gets mentioned in the same breath as Samsung, the Korean technology upstart whose phone offerings threaten the iPhone's dominance.

Samsung's Galaxy has overtaken the iPhone in market share, and Google's Android software has caught on with tech savvy consumers. As a result, some analysts to wonder if Apple can successfully defend its popularity,and keep up with competitors who are equally as nimble and innovative. (Read more: Two Key Reasons Why Apple is Getting Crushed.)

"The sentiment is obviously is very negative," said Brian Marshall, senior analyst at ISI Group, who nonetheless retains a buy rating on Apple's stock, and is bullish overall about the tech company's long-term profitability.

"Clearly from a mechanics perspective, Apple has the most embedded capital gains in it out of all the stock out there," he said, which makes it susceptible to selling by investors who fear the "fiscal cliff" could result in higher capital gains taxes next year.

"People want to take some chips off the table. But all that stuff is not related to [Apple's] fundamentals, those are solid."