Why is Wall Street losing its appetite for Apple?

December 7, 2012 by Michael Liedtke
In this Tuesday, Aug. 21, 2012, file photo, the Apple logo is shown on a stock ticker at the Nasdaq MarketSite, in New York. Apple is entering the home stretch of what will likely be its best holiday season yet as shoppers snap up iPhones and iPads in record numbers in December 2012. Yet the world's most valuable company has lost its luster among investors, causing Apple's stock price to plunge by more than 20 percent from a peak reached less than three months ago when the latest iPhone went on sale. (AP Photo/Mark Lennihan)

(AP)—This holiday season is shaping up to be a record-breaking period for Apple as shoppers snap up iPhones and iPads. So, why is the world's most valuable company losing its luster with investors?

Apple began selling the on Sept. 21, the same day the company's stock hit an all-time peak of $705.07 per share. Since then, the stock has plunged more than 20 percent, trimming the company's market value by more than $150 billion. On Friday afternoon, shares were trading at around $534.

The sell-off has had broad impact. It has reached beyond Apple's own stockholders because the company is the largest component in the Standard & Poor's 500 and Nasdaq composite index—two benchmarks that are tracked by widely held mutual funds and exchange traded funds, or ETFs.

Apple comprises 4 percent of the S&P 500 and nearly 12 percent of the Nasdaq, according to FactSet. The Nasdaq has shed 6 percent since Apple's stock price peaked while the S&P 500 has declined 3 percent, the same as the Dow Jones industrial average, which doesn't include Apple in its basket of 30 stocks.

Apple's abrupt descent is fueling a debate among market-watchers. Is the stock now a bargain, as some would argue? Or, is the recent markdown in Apple's value justified because the company has entered a phase of less innovation and slower revenue growth?

Disagreements over the issue are contributing to unusual volatility in the stock. On Wednesday, Apple's stock fell 6.4 percent, the biggest one-day drop in more than four years. Just two-and-half weeks ago, the stock surged 7.2 percent for its biggest one-day gain in three years.

There's no consensus regarding the cause, but one thing is clear: There have been more investors eager to sell Apple's stock than buy it in recent months, despite all the evidence indicating Apple's products have never been more popular.

Here are several theories that seek to explain the recent downturn in Apple's stock:

Theory: The Competition Conundrum

Hypothesis: Apple's grip on the growing mobile computing market is loosening amid a wave of cheaper alternatives to the and iPad.

The iPhone's early lead in the smartphone market already has been surrendered to the more than 500 million devices running on the free Android software made by Google Inc. By comparison, as of the end of September, Apple had shipped 271 million iPhones since the gadget's 2007 debut.

Nokia phones running on the recently released Windows 8 system from Microsoft Corp. pose a new threat, especially in China, where Nokia has struck a deal with that country's largest wireless carrier. Meanwhile, struggling Research In Motion Ltd. is pinning its comeback hopes on a revamped operating system for the once iconic BlackBerry to rekindle demand for that device.

Now, there are signs the competition is putting pressure on Apple in the booming tablet computer industry that it launched in 2010 with the release of the iPad.

In a report that likely contributed to Wednesday's steep drop in Apple's stock, research firm IDC predicted the iPad's share of the worldwide tablet market this year will decline to 54 percent from 56 percent in 2011. IDC said the iPad will dip below 50 percent by 2016.

Meanwhile, the market share of tablets powered by Android, including Google's Nexus line and Amazon.com Inc.'s Kindle Fire, has climbed from 40 percent last year to 43 percent his year, according to IDC.

Windows 8, which is designed to run on tablets, also is expected to chip away at Apple's lead and latch on to 10 percent of the market by 2016, IDC said.

The popularity of smaller tablets with seven-inch screens and retail prices below $200 has already forced Apple to make changes. The company responded by introducing the iPad Mini, which features a nearly eight-inch screen. The iPad Mini sells for $329, which helps Apple protect its profit margins and preserve its reputation for selling top-of-the-line products that merit prices a notch above the competition. Nevertheless, the iPad mini is undoubtedly diverting some sales away from full-sized iPads, which sell at prices ranging from $399 to $829. That is one of the reasons BGC Financial analyst Colin Gillis expects the iPad's average selling price to fall by about $50 in the current quarter, which ends this month. That would be a 9 percent decline from the iPad's average price of $535 during the July through September period.

Even if it's no longer the market leader, the iPhone remains hotter than ever. Based on figures released by wireless carrier AT&T earlier this week, Jefferies analyst Peter Misek predicts Apple will sell 53 million iPhones this quarter, primarily the newest model. That would be a more than 40 percent increase from Apple's previous one-quarter record of 37 million iPhones set in the period covering last year's holiday shopping season.

Theory: The Creativity Contraction

Hypothesis: Apple is running out of fresh ideas.

Since Apple co-founder Steve Jobs died in 14 months ago after a long battle with cancer, the company has mostly been fine-tuning products that were created under his visionary leadership. The former CEO's hand-picked successor, Tim Cook, is well-respected, but some investors are starting to wonder if Apple can conjure up another revolutionary product to catapult the company on another multiyear stretch of breakneck sales growth. Can Apple innovate like a hard-charging startup while maintaining its giant company stature?

Smartphones and tablets "are starting to become more like commodities," Gillis said. "And how much upside is left if you are stuck in a commodities business? The question is: What is going to get Apple going again?"Most analysts believe Apple's next breakthrough will be a television that shares the same operating system as the iPhone and iPad. An Apple TV would give the company a prized perch on the biggest screen in most households and open up an array of new business opportunities.

Jobs hinted Apple had figured out how to produce a mesmerizing new TV during interviews he gave before he died with his biographer Walter Isaacson. That led many analysts to predict an "iTV" would come this year, only to be disappointed. Cook indicated Apple is still trying to develop the device during an interview that aired on NBC's Rock Center.

"When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years," Cook said. "It's an area of intense interest. I can't say more than that."

Theory: The Fiscal Cliff Factor

Hypothesis: Many long-time Apple shareholders are selling stock to lock in gains at a lower tax rate.

Under laws set to expire Dec. 31, profits on stocks owned for at least a year are taxed at a 15 percent rate—less than the same rate for ordinary income. If Congress and President Obama are unable to reach agreement that preserves that long-term capital gains rate, investors' tax bills will be substantially higher next year.

The recent drop notwithstanding, Apple's stock has still enjoyed an incredible run. It has more than quadrupled since the iPhone's release in June 2007. Even investors who bought Apple's stock a year ago are still sitting on a gain of nearly 40 percent.

Gillis, though, points out that savvy investors probably wouldn't be selling their Apple stock just to save some money on taxes if they truly believed the is destined to soar higher and make them even richer a year from now.

"Sometimes, stocks just take a breather," he said. "And when you get to be as big as , any shift in sentiment can have a material impact on the share price."

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3.9 / 5 (14) Dec 07, 2012
I have a theory: investors are finally realizing that Numbers (Apple's spreadsheet program), is nothing but junk. How can Apple be a serious player in business application when they can't even put out a decent spreadsheet program?

25 years ago, Lotus 1-2-3 was superior to today's Numbers, even though I had to boot it up off a 5.25" floppy.

And Pages ain't much better.
4.4 / 5 (7) Dec 07, 2012
Real Investors figured out for ages ago, that when Jobs kicks the bucket, you give Apple a year or two, and then sell. This ought to be a no brainer for anyone who's older than 50, so that they have seen stuff. Or for any professional.

The Real Investors jumping ship simply has to eventually trickle to the mindless masses, who ask their brother-in-law "because he knows stuff".
3.3 / 5 (3) Dec 08, 2012
Apple has long been a personality cult.

Now that the personality is dead, it is just a second rate toy company, and the cult is disbanding.

1 / 5 (1) Dec 08, 2012
Apple may need to settle in for a long slog. They are at serious risk of out-pacing the culture. The iPad has enjoyed popularity, but most people just view it as an expensive toy. I've written two-and-a-half novels on mine. Smartphones are now everywhere, but most people just use them to basically text & tweet -- not much beyond the function of an ancient pager! Rebuilding Pages and Numbers to provide real business productivity performance would help. And, of course, the TV experience is in the dark ages and needs help. But, in the end, if they can't overcome the "hip toy maker" mantle, the crowd will go to price.
3.9 / 5 (11) Dec 08, 2012
Apple will be in trouble if they take their mantra of 'intuitively simple to use' as an excuse and cover up for cheap software with limited options. It is already the case in many respects.
3.7 / 5 (3) Dec 08, 2012
Apple was always fun & hip, quirky & offbeat, with a aura of exclusive membership granted by the high price points. But they should move beyond that to embrace real functionality and productivity. They excel in the graphic arts arena, but still bow to the ghost of Steve Jobs in other areas. Here's my proof that his ghost is alive and well -- Pages always needed arrow keys on the iPad. Jobs refused for reasons that I'm sure he took with him. On a good day I can write 3,000 words on the iPad glass. But I have to do any real editing on my laptop in MSWord. Even editing out my typos in this post has been a pain. Word to Apple: move beyond the ghost and get down to business.
3 / 5 (2) Dec 08, 2012
No Jobs = no future
2 / 5 (4) Dec 08, 2012
Wall street never had a clue, and they still don't.
Don't read anything into it, It is essentially a gamblers market.

1 / 5 (2) Dec 08, 2012
ScooterG, Numbers on the iPad works more than excellent for me.
Could you tell me what it is you can't do, and what functionality of Lotus 1-2-3 25 years ago your missing?

not rated yet Dec 08, 2012
Maybe Apple need to add another row of icons to the iPhone, maybe that kind of "innovation", "beauty" and "creativity" could save them?
1 / 5 (2) Dec 09, 2012
Apple should never have survived to this millennium. There was nothing special about Apple or Mr. Jobs. Apple stole ideas from BlackBerry and made a little bit appealing (i.e. touch screen, instead of touch button). It took apple almost 30 years to come up with something new, after Mr. Gates screwed them in the 80s. Now, Samsung is crushing them for good. Within years (at most till 2020), there won't be any "Apple," or may BE, but worst than 80s. Samsung is a leader, with Android as its backbone.
not rated yet Dec 09, 2012
Overly Harsh.

Apple is an over hyped toy company, but one thing can't be denied. Compared to most other machines out there, it's products had some style and elegance.

And Jobs was a good salesman who duped millions of customers.

not rated yet Dec 09, 2012
Samsung called their bluff and we shouldn't measure a company too much on the stockmarket alone, any company would be happy to have over 30 percent marketshare in the phone market and be profitable from real sales and not investors greed.
3.4 / 5 (10) Dec 09, 2012
ScooterG, Could you tell me what it is you can't do

There is probably not anything numbers cannot do, but the bottom line: it's *un-necessarily* too different from excel.

Re-educating a prospective clientele is enormously expensive. Expecting/forcing a prospective clientele (who is already very busy) to re-educate themselves (simply because you are hard-headed and arrogant) in order to use your hardware will create resentment. Resentment lasts forever in the minds of the public.

Re-education of the public is a battle best avoided.

If you are going to sell hamburgers, place the meat between the buns like everyone else does. Placing the meat on top of the buns (for example) will differentiate you in the marketplace, but not likely in a positive way.

Try to edit a SUM function - a six-click nightmare. And count on editing *every* SUM function you enter, as the SUM'd range goes to the top of the page *every* time.
3.2 / 5 (9) Dec 09, 2012
ScooterG, ... and what functionality of Lotus 1-2-3 25 years ago your missing?


I doubt I'm missing any functionality of 1-2-3.

Me Me Me

It's called resentment, as there is no logical reason for making Numbers/Pages difficult. My time is valuable and my patience thin. I'm a typical consumer - I want it all and I want it now - and Apple's inattention to MY needs is affronting to me :)

I like the fact that I'm not plagued with windows viruses - that has been a huge plus for me.

In today's business world, excellent customer service is the best way to differentiate yourself. If Apple wants to garner Excel and Word users, they should make the transition easy and painless. Anything less is a well-directed shot at their own foot.

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