There's a common saying that "no news is good news," which forebodes of the potential for bad news arriving in certain circumstances. However, in Apple's case, investors have anxiously awaited the good news of a new product introduction. Instead, the news emanating from Apple (AAPL) has tended to tell of its shares falling another several dollars. The drop from $705 has been precipitous, and it has marked a dry spell in the company's modern innovative history. The company which had become known for surprising investors with disruptive technology suddenly has investors questioning whether it can do so anymore. With each passing day, as corporate events bore shareholders and industry conferences disappoint investors, the shares soften. This indeed is a period in which no news is bad news for Apple.
The drop in AAPL shares has been bizarre, because it has contrasted against a period of broader market rise, as seen in the six-month comparison with the SPDR S&P 500 (SPY) below. Apple's poor recent performance has influenced the underperformance of the PowerShares QQQ (QQQ) and the Technology Select Sector SPDR (XLK) versus the SPY. Still, the tech giant has also moved markedly counter to each of its more relative peer groups, as other technology stocks like Google (GOOG) have outperformed and countered its impact upon them.
It would be wise to test the strength of our theory by dissecting some of the other possible reasons why AAPL is on the decline. The problem is certainly not valuation with Apple. The stock trades at just 9.6X the analysts' consensus estimate for fiscal year 2013 ending in September. Those same analysts project EPS growth of 19% over the next five years. Those two figures make up the basis of Apple's astounding P/E-to-Growth ratio of 0.5. Such a valuation would represent a buying opportunity in most cases, depending on the rate of growth projected. In this case, with the rate of growth estimated at 19%, the PEG ratio screams buy.
But there's an obvious problem, and it's the question of where Apple's growth will come from. By valuing the stock this way, investors are clearly questioning whether Apple can grow at 19% over the next five years. Otherwise the stock would trade closer to its projected earnings growth.
Apple could grow through global penetration, especially in China (and India according to one SA author). Apple could also grow through renovation of its current product lines, but such an effort could not bring as much new market share as a new product market entry could, especially considering how far ahead of its peers Apple's gear already is in established markets.
The problem with Apple is Apple and the growth question, as I mentioned in a previous article. Investors are curious as to whether the magic is finally wearing thin at the innovator of our age. It would perhaps be the inevitable result of Steve Jobs' passing. One thing is for certain, Apple is suffering through an innovation dry spell, and that raises questions about the future success (or lack of it) of Apple's eventual next new thing. Everyone wants to know what Apple is developing to follow its disruptive innovation in mobile music, mobile telephony and mobile computing. There's been chatter about a smart television and a watch, but time keeps passing without serious news. Meanwhile, Google Glass is on its way, and Google's shares are on the rise.
The market's disappointment is visible in its stock chart, and it is only getting worse with time and each passing speaking engagement of Apple CEO Tim Cook. This Huffington Post article illustrates the fact that the last six times Tim Cook has spoken, AAPL shares have fallen. I think it's obvious that the news that Apple has broken to the public at each of Cook's speaking engagements has been less than what the market was looking for. At this point, it's definitely a new disruptive product the market needs. Unfortunately for shareholders, it's clear that Apple didn't effectively foresee the timing of the market's new demands.
Perhaps Apple has finally become complacent. Maybe it is now more like the mobile telephony players the company displaced. That might portend that the future for Apple from here could be more like the last ten years were for Nokia (NOK) and BlackBerry (BBRY) than its own recent past. The unimaginable seems to be happening. The company has fallen behind the eight ball, where before it was famous for keeping America in a state of shock and awe.
Apple's shares will not stop bleeding until the company makes a new product market entry. I suppose it could also reach a bare bone valuation level and report results in April to remind investors that it earns a lot of money. At some point, there will be a value that fits a less innovative company and perhaps one that returns capital to shareholders in one way or another. But that's just a nightmare, not the fate I see for Apple.
The company has no major events scheduled for the spring, and it would seem unlikely that it would make the announcement we are all looking for at its earnings report in April. So the important question is how far might AAPL shares slip before settling on no news? In my last Apple article authored here on January 31st, when the stock was trading at around $450, I said, "Much of the selling in the stock should be exhausted, with perhaps another $50 at risk short-term. So long-term interests can begin to relax, but pressure should be intensified on the company. As for Apple's management team, they cannot afford to relax if they are to answer today's questions about the company's future, and give support to AAPL shares." I continue to see $400 as the bottom in such a worst case scenario, but that is simply based on an unscientific feeling about the long-term chart of AAPL. I think you can see why though.
I continue to believe a new product market entry is coming and that it will be disruptive, even if the disruption is solely based on Apple's existing and superior mobile operating system to Google and Microsoft (MSFT). Samsung (SSNLF.PK) has a smart TV, but it does not have Apple's brand strength, though it's closing in. If Apple waits too long, it may lose its opportunity to be the market leader in yet another segment, because its competitors are catching up now. If Apple acts sooner rather than later, the baton will have been passed for the next leg of earnings growth and the next run for the stock, perhaps to $1000 or more. In early October 2012, I wrote that an Apple television should be the next best thing, and that it would justify AAPL's valuation. Well, now I'm saying that the absence of its introduction justifies the stock's decline. For Apple shares, it's going to be all about the news or the lack of it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.