No stock is more widely followed or covered here on Seeking Alpha, or perhaps the broader financial news sector than Apple (AAPL). And given that Apple is the world's largest company by market capitalization, perhaps that is the way it should be. But we believe that Apple investors need to stop obsessing over every tick up or down that the stock makes, and see things in a longer-term perspective.
We are long Apple, and continue to be bullish on the company's prospects. That being said, we find it disconcerting that so many investors treat Apple as something more than a company. It is not. Apple may be a great company, and have great fundamentals. But at the end of the day, it is a public, for profit company, just like many thousands of other companies here in the United States and abroad. Investors should stop seeing Apple as something more than what it is, for doing so clouds one's judgment and ability to logically and rationally evaluate a company.
Recently, there has been a torrent of speculation regarding Apple's mini-slide. Since peaking on April 9, 2012 at a closing price of $636.23, Apple has fallen to around $584, as of this writing. We will now quickly examine some potential causes of this slide.
- NASDAQ-100 Rebalancing: Currently, Apple has a weighting of nearly 20% in the NASDAQ-100, which allows the company to have an outsized impact on the index. On Friday, April 13, the NASDAQ announced that Texas Instruments (TXN) would be replacing First Solar (FSLR) in the NASDAQ-100, due to Texas Instruments switching its listing from the NYSE to the NASDAQ, and First Solar's place near the bottom of the index in terms of market capitalization. Normally, this would not have an impact on Apple, but since Texas Instruments is about 20 times larger than First Solar, the need to buy shares of the company will likely lead to a lower weighting for the other 99 companies in the index, including Apple.
- Subsidy worries: Apple is able to control the vast majority of smartphone profits because of the rich subsidies it gets from carriers. But in the past several days, worries have surfaced that carriers may begin cutting those subsidies, as their margins have been crushed by huge iPhone sales. While iPhones are good for carriers' bottom lines in the long-term, for some the immediate impact to margins may be too much to bear. On April 11, Verizon Wireless (VZ) (VOD) announced that it will begin charging a $30 upgrade fee, placing it in line with other major American carriers. Some see this as a potential step in outright subsidy cuts, and this may have driven Apple shares down in the past several days.
- iPad demand: In an April 13, research note, Wedge Partners said that iPad sales for the first quarter may come in below expectations, and noted that Street estimates may have become unhinged from what is truly occurring with iPad demand. While the firm continues to call Apple the best name in technology, it says that iPad sales of around 11 million units (its own estimates) may be seen as underwhelming to the rest of the Street, which has consensus estimates of 11 to 14 million units. We think that Apple's guidance for second quarter iPad sales will be just as important, if not more so than first quarter sales. The new iPad is launching in 21 new countries in April, and first quarter sales figures may not be representative of true global demand.
- Simple profit taking: Investors cannot forget that Apple has had a huge run in 2012, advancing over 40% as of this writing. That is an impressive performance for any stock. But coming from the world's largest company makes it all the more impressive. Taking profits is always a wise thing to do, and Apple's recent slide may be nothing more than investors cashing in after a strong rise in the shares. Furthermore, because Apple is so widely owned by hedge funds, it could be leading to what Stern Agee calls a "snowball effect," where selling in Apple shares begets further selling.
What investors in Apple (or any stock for that matter) need to keep in mind is that the market is not always rational. Stocks can rise and fall for long stretches of time based on no news. And unless you are a high-frequency trader or technical analyst, there is little to gain by obsessing over Apple's daily price swings. If you bought the stock because you believe in the bullish thesis, then the time to begin worrying about the stock is when you no longer believe in that thesis. Furthermore, Apple has had such slides before, and has always recovered from them. The charts show this pattern.
On April 9, Apple reached its all-time closing high of $636.23, and has fallen steadily since then.
On October 18, Apple reached $422.24, which was at that point in time a record close for the company. It then proceeded to fall for over a month, falling over 13% before bottoming out and continuing its ascent higher.
And before that slide, Apple was advancing steadily through 2011, reaching an all-time high of $413.45 on September 20, 2011. It then proceeded to fall over 10%, once again underperforming the broader markets during its decline.
In each of these cases, Apple took time to consolidate previous gains before resuming its march higher. And in each of these cases, speculation swirled about what all of this meant. Were Apple's best days behind it? Was something amiss at the world's largest company?
Each of these declines proved to be irrelevant to Apple's long-term performance, and investors who held their shares through the declines were able to participate in Apple's huge 2012 rally. We think that the decline Apple has seen in the past several days may continue, before the shares once again resume their advance.
We continue to remain bullish on Apple, and believe that the company remains a good investment. But, we do not think that the mass coverage of Apple is healthy. Apple should not be treated any differently than other companies in a portfolio. Analyzing every move the stock makes for insight is not a wise thing, in our opinion, for most of the time those moves mean nothing. We have offered several possible reasons for Apple's recent decline. However, unless your bullish thesis has been shaken by them, we do not believe that the recent decline represents any breakdown of Apple's fundamentals. This represents our third article on Seeking Alpha directly about Apple in the past 9 months. We fully believe in Apple's long term potential, and that is why the stock is our largest individual holding. That being said, we think it is unwise for investors to constantly obsess over each tick in Apple's stock price. Investors are attempting to find meaning where there is none. The declines Apple sees are often merely consolidations until the next run higher. We will not be worried about them until Apple reports a quarter that contradicts our bullish thesis, and believe that Apple investors are better off focusing on the long-term picture, and not each move the stock makes. Such a mindset leads to Apple being placed on a pedestal, and injects emotion into the investment, which can cloud investors' judgment. Apple investors would be wise to remember that as solid an investment as Apple is at this point in time, it is, at the end of the day, one of thousands of companies that can be invested in. The daily gyrations in Apple's stock price are not what will prove or disprove the bullish arguments for investing in Apple. It is its quarterly earnings releases that investors should look to in seeing whether or not their opinion of Apple is still intact.
Additional disclosure: We are long VZ via the SPDR Dow Jones Industrial Average ETF