Is Apple a Falling Knife?

| About: Apple Inc. (AAPL)

It's quite remarkable when a company does what Apple (NASDAQ:AAPL) has done over the last week. Yet the stock falls from a high of $361.67 on March 7 to an intraday low of $326.26 as of midday Wednesday. In this regard, I guess AAPL has acted like a falling knife ... but what's done is done, so looking forward becomes the going concern.

On Wednesday, JMP Securities analyst Alex Gauna downgraded AAPL from "market outperform" to "market perform," citing three primary concerns:

  1. A slowdown in manufacturing at Foxconn (OTCPK:FXCNY), a producer of Apple products.
  2. Weakness in computer sales due to increased demand for tablets.
  3. "Product transition risk around the iPad 2."

As for the risk associated with Gauna's first point, we'll have to wait and see. I emailed Brian White of Ticonderoga Wednesday morning for reaction. He replied with recent comments he published regarding AAPL and the iPad 2. He remains bullish with a price target of $550, and notes that the Japan situation could negatively impact the supply of passive components, such as lithium ion batteries and semiconductors. White believes Flextronics (NASDAQ:FLEX) and Molex (NASDAQ:MOLX) could be among the hardest hit. As for AAPL, White wrote in a report dated March 14:

Apple is a big consumer of passive and active components, which could constrain supply for the company; however, we would expect Hon Hai Precision (OTC:HNHAF) to make every effort to procure components for its most important customer.

Hon Hai Precision is a subsidiary of Foxconn. Most of Foxconn's operations exist in China. On this front, a wait-and-see approach is likely best. Wednesday afternoon, a reply to Apple's plunge came across's InPlay service from White:

Ticonderoga says given the weakness in the overall market today, supply chain concerns in Japan and general analyst noise, Apple's stock is down nearly 4% today. Firm says as such, Apple is now trading at just 11x their CY11 pro forma EPS estimate (excluding net cash per share of nearly $64) or 10x their CY12 pro forma EPS estimate. The overwhelming success of the iPad 2 launch over the past few days and another day of iPad 2 stock-outs this afternoon at Apple stores provides further evidence of the momentum Apple has in the marketplace. As a new growth driver for Apple, the momentum of the iPad franchise is the most important intermediate-term data point as it relates to the fundamentals of Apple; the remaining data points are just short-term noise. Firm asks how many other companies in the world would consumers be willing to wait in line for six hours or more to buy a new product?

As for Gauna's two other areas of concern, I, like White, wax skeptical. It's all "noise."

The weakness in computer sales due to tablet growth, particularly iPad sales, has yet to impact Mac sales. Recent numbers show Mac growth actually outperforming upticks in other firms' desktop and laptop sales.

Gauna probably needs to do a better job explaining the notion of "product transition risk around the iPad 2." Granted, I did not see his entire report, so maybe he did, but most companies would jump at assuming the risk associated with the iPad 2 release: blowout numbers resulting in inventories selling out at both Apple Stores and other retail outlets; the need to creatively manage new iPad 2 shipments; shipment delays for online orders because of massive demand; and the creation of pent-up demand for a product that already defines the meaning of pent-up demand.

If AAPL is a falling knife, stab me in the chest. I still contend that the stock's recent woes represent a buying opportunity. I guess this is what happens when you're the man at the top. Everybody expects perfection, even if a lack of it is not necessarily your fault, but results instead from your total domination of your market. I still view AAPL at any level below $350 a screaming bargain basement buy.

Of course, Gauna's words had an impact, but events out of Japan surely have added to the downward pressure on the stock. With that in mind, I still think investors should look at a culturally-iconic company, growing its multi-billion dollar bottom line with startling consistency, as a flight to safety during times of uncertainty.

Disclosure: I am long AAPL.