What has dramatically changed in the last few months for Apple's stock price to crater 35%? Has something inside the company so abruptly turned for the worse to justify such a steep downturn? I'm here going to try to answer these questions, while taking a look at the technical situation to gain a better perceptive on what's going to happen near term to the stock.
First, the answer to the questions
Probably not. At my last check today Apple (AAPL) is still the company sporting the highest earnings on the planet, still the one with the flushest bank account on the planet, still highly loved from customers as it used to be and still luring attention around itself from the public and the media alike like no other. In fact, the problem is not the company, the problem is the stock: it has turned from being the darling of Wall Street to one of the most hated stocks in a matter of weeks, if not days.
When it was at $650+, almost everybody was screaming buy as loud as they could. Now that the stock is $200 lower, you can easily find more people going to suggest you to stay away from the stock than buying it, and I'm talking about the same people who were calling the stock the most obvious buy at $700. C'mon, if it was a buy then, shouldn't it be the real deal now? Might be, but the only thing we can be sure about now is that the sentiment surrounding the stock is just awful.
And why is that?
Turns out, some reasons for the dramatic change in sentiment really exist. At $700, Apple was a juggernaut growing 30%+ a year which could do now wrong, with its new, shiniest device just landed on the market. At $470, Apple is a pitiful giant (as some bald guy called it) growing revenues at a "mere" 20% rate and sporting 0% growth in EPS for the last quarter, doomed to fail because of a company founded at the beginning of WWII as a trading company selling fish and vegetables (yeah, that's Samsung).
Truth probably lies somewhere in between, but I'm fairly convinced that the latter portrait doesn't fit the company so well: for a starter, if we make an apple to apple comparison (pun mildly intended) between Q1 2013 and Q1 2012 - that is, by taking into account the extra week the latter enjoyed - revenues actually grew ~27%, earnings grew a less than dishonorable 7%, and iPad and iPhone sales respectively grew 38% and ~60%.
Moreover, according to Canaccord Genuity, Apple brought in 72% of all handsets profit last quarter. Not bad for an ailing company.
The valuation + cash conundrum
Fundamental analysis of Apple here on SA is not exactly absent, so I won't dwell on this, but I'd just like to underline that Apple's current valuation implies a ~30% earnings deterioration. Its current P/E of 10.5 represents in fact a ~30% discount to the average 15 P/E of the S&P 500 (even though analysts are actually calling for growth in the future). And that's without even daring to take into account the $137 billion - or roughly a third of the market cap - cash hoard the company is sitting on.
Turns out, that this huge amount of cash is seen more as a negative thing for the company than the incredible asset it really is. If Apple had one third of the cash it has now, as absurd it may seem, its stock price could actually be higher, because there wouldn't be this enormous pressure on the company to use this cash, and especially there wouldn't be all the negativity deriving from the fact that Apple is actually good, for the moment, with keeping the cash exactly as it is now: cold, harsh cash.
The technical view
So we established that, for a few reasons, be them legit or less, the sentiment surrounding the stock is terrible, and that' a cause, if not entirely of the decline of the stock, certainly of its current languishing in the mid $400s. However, one of the main reasons the stock kept falling as a knife was that the technicals were just deteriorating worse than the stock itself could do.
From the chart below we can highlight a few main facts (in time-order):
- 1: the stock dips below the 20-day SMA (which had proved as a good support before the peak, around 650), then finds it as a too tough resistance to break, repeatedly, around 675 and last, but certainly not least, the first "death-cross" occurs
- 2: on the wake of the "death-cross", the stock plunges, albeit finding a mild support at $600. Q4 2012 results help the stock a little bit... for a further downside: the stock dips below $600 and then quickly falls below the 200-day SMA
3: after touching briefly $500, the stock crawls back to test the 200-days SMA: needless to say it is a too tough resistance to break, and then, the second "death-cross" occurs, sending the stock back to $500
4: after gaining a little bit of traction, the stock tries to break the 50-days SMA around $550, failing miserably. Sun sequentially, the 20-days SMA offers support and then, right before the earnings, offers resistance again.
That's the past, but what do the technicals tell us about the future? For the near term, not so great things. As you can see from the first chart below, the weekly 100-days SMA (which, by the way, hadn't been tested since 2009) is offering a tough resistance to the stock. Moreover, as the second chart highlights, the stock has traded since the September peak in a descending canal, the upper side of which has proved as an extremely tough resistance both at the beginning of December and at the beginning of January, and is being tested (without much of a success) right in these days.
Although the fundamentals have not deteriorated as the price downturn suggests, (negative) momentum is currently driving the stock down, the same momentum which (in this cases reversed) I stated would have driven Netflix (NFLX) shares up, and so it did. The sentiment around the stock is just terrible, and the technicals not only don't offer support to the current situation, but show that the stock is confronting extremely tough resistances right now: if it doesn't manage to break the weekly 100-days SMA, or the upper end of the descending canal that has formed, the stock might go down to $400 again.
The only way the stock can turn (sharply) to the upside is a staggering breakthrough: whether a new product, a partnership with a big carrier, a sudden willfulness to deploy the cash, Apple needs something to shake the bears off and reinvigorate the bulls, who are slowly losing their faith. Until then, the upside is greatly precluded.
Disclosure: I am long AAPL.