Given Apple's (AAPL) recent share price performance during the past 3 months, we've heard whispers questioning the strength of the company's fundamentals. It first started with the Google Maps (GOOG) debacle when somehow replacing the default maps program on the iPhone with an inferior product was going to sink the entire company. Then fears of the iPad Mini--either not selling or cannibalizing sales of the full-sized iPad and subsequently crippling margins--became the next fear.
Apple's Fundamentals Remain Sound
However, there is no evidence of a product slowdown at Apple. The iPad Mini sold out its first run in a short amount of time, and data over the Black Friday weekend showed that the iPad accounted to 88.3% of total tablet sales. Further, the iPhone 5 only recently became widely available in the United States, and we believe it will be the best-selling smartphone of all time. Though gross margins may fall slightly, Apple's impressive supply-chain management could help mitigate the total impact on profitability.
Because Apple is among the most widely-held stocks, rumors occur almost daily about the company's future. Apple TV, iPhone 5S, and even a cheaper iPhone have been rumored, but we prefer not to speculate on specific new products. We think it is fair to assume that the firm will continue to come up with innovative products, even if we aren't aware of exactly what they are. In fact, a significant portion of Apple's current revenue stream didn't exist as recently as just 5 years ago, and the company's innovation track record is the best we've ever seen. Still, we're not forecasting breakneck growth at the company for it to reach our fair value estimate, and we think our projections remain achievable and conservative.
What's the Latest Rumor?
The latest rumor blames the change in the capital gains tax rate for Apple's share price decline. Though this may make sense to some degree (as Apple has been a big winner for a lot of investors), we don't think the company's full 20% share decline from the peak is solely a result of profit taking. And we do not think the cause of Apple's share decline is nearly as fundamental as it is based on momentum. Apple's share price appreciation was parabolic (almost straight up), causing some investors to pile into shares, leading shares to spike to over $700. When upward price momentum stalled, we think these same investors dumped shares of Apple. Okay. But where did the money go?
If we compare Apple to two other tech companies, we can see that the share prices of both Facebook (FB) and Research in Motion (RIMM) have increased considerably during the past 3 months. Both RIM and Facebook have shown improving fundamentals-better mobile ad monetization at Facebook and the launch date for Blackberry 10 at RIM-thus increasing investor interest. We think it is entirely possible that some investors have simply been betting on the faster-moving tech stocks rather than Apple, which remains a solid long-term investment. We inevitably believe that these investors will migrate once again to higher-quality Apple in the coming months.
What's the Bottom Line?
Profit taking and downward momentum have been the key drivers of Apple's recent stock move lower -- not fundamentals. We think it may just take a favorable earnings report or two (or a hefty dividend hike or buyback) to get the company's share trajectory back on track toward our intrinsic value estimate. Apple has unmatched fundamental strength, a cash balance of over $120 billion that can buy a meaningful number of companies in the S&P 500, and shares that are trading at bargain-basement levels. The firm may face some tough sledding in the months ahead, but the company is in the portfolio of our Best Ideas Newsletter (click here for our methodology), and we're not budging. There are few better firms out there on the market today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: AAPL is included in the portfolio of our Best Ideas Newsletter.