Why Apple's Selloff on Friday Was Absurd

Friday was a particularly brutal day in the market, with the Dow Jones Industrial Average down more than 200 points at the low. Investors perusing the headlines and looking for a cause for the drop would find articles pegging soft earnings from heavyweights Microsoft (Nasdaq: MSFT  ) , General Electric, and McDonald's as the culprits.

The software giant's 22% drop in net income led the tech sector lower, with the tech-heavy Nasdaq Composite hitting its lowest level since August. Of course, Apple (Nasdaq: AAPL  ) is the largest single component of the Nasdaq, comprising more than 12.5% of the index. Shares of the iPhone maker closed just under $610 near its lows, down almost $23 on the day, on no news specific to itself. That was a decline of 3.6%, for those of you keeping score at home, underperforming its software rival whose results helped spark the sell-off.

AAPL Chart

AAPL data by YCharts

In essence, Microsoft's weak quarter triggered pessimism in tech, causing Apple to drop like a rock. The stock is now well into correction territory, down 13.5% from its all-time high set almost exactly one month ago. Here's why Apple's sell-off on Friday was absurd.

The whole reason Microsoft's quarter was so bad was that the PC market is simply a stinker right now. Global PC unit shipments fell 8.3% in the third quarter. Weak demand for PCs is hurting a slew of companies in the value chain. Even chip giant Intel (Nasdaq: INTC  ) just put up uninspiring figures because of the languishing PC market. The growth in its data center division wasn't enough to offset declines in the PC client segment.

The thing is that the whole reason the PC market is so lackluster is that consumers are shifting those spending dollars to mobile devices. We're talking about smartphones like the iPhone and tablets like the iPad cutting into those PC unit figures.

While the iPhone doesn't have the top spot in market share -- that title goes to Google (Nasdaq: GOOG  ) Android -- the iPhone is largely credited with sparking the current wave of smartphone adoption by popularizing the now-ubiquitous capacitive touchscreen. The iPad does have the top spot in the tablet market and is unambiguously responsible for igniting tablet adoption.

These are the primary reasons consumers aren't buying as many PCs as they used to, and it's no coincidence Apple refers to these as "Post-PC" devices. That's why it's so nonsensical for investors to dump their Apple shares on Microsoft's woes.

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Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of Apple, General Electric, Google, Intel, McDonald's, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, McDonald's, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 20, 2012, at 6:47 PM, AppleJack2013 wrote:

    The reasons why Apple fell $ 23 and so much since its recent high.

    1. You are right it is absurb. Especially since Apple is about to know the cover off the ball. But that is precisely the reason. Many hedge funds are behind this year. Since many of the indexes are greatly influenced by Apple (SP and Nasdaq) due to its weight, many are heavily invested in Apple. Some funds shouldn't have even been holding the stock as it doesn't match up with the theme of their funds.

    The end of the year is not far away and they need to come out ahead. It is my belief that they have used Apple to get those results. By pushing down this sure thing like what happened earlier this year when it touched 522 and then went parabolic to hit 705 recently, they were able to make up lost ground.

    Now with the biggest earnings ever for Apple, they are coming out with articles every two minutes usually slamming Apple. As Andy Zaky said, when CNBC slams Apple every two minutes, I know Apple is a buy.

    Steven Weiss on Fast Money said he heard traders are set to buy at 575. That would be 130 points from the high or almost 19%. That compares with 17% drop earlier this year.

    They are using everying little thing to make investers nervous. The shortage of phones, the scratches, the maps, the purple pictures taken, the riots at Foxconn, the cannibalization fo the mini ipad from the regular ipad, the death of Steve Jobs, children working at Foxconn, the high pricing, among others reasons. I read one article that said based on some metric, APPLE should be selling for just over $ 100. Mike Paulenoff of Market Watch said Apple could hit 450 if panic selling occurred when Apple hit his target of 530.

    2. Apple has gone up alot and needs to retrace to confirm and consolidate. It did go up fast. But it already went down to 522. Also it is doing well at the expense of others competitors, so if they are not doing well, Apple should go up not down. But this is not what happened after Google and MSFT missed earning targets. People are very confused and the added manipulation spelled out in point one are decreasing investor confidence.

    3. Apple's ascent is in uncharted territory. They often mention the law of large numbers. But if they are able to grow, then they should have a higher stock price. It is kind of simple. With such amazing earnings in 2013 (not bad for 2012) and cash being accumulated, they could be on their way to 200 billion in cash. They could earn over $ 50 in 2013. Andy Zaky believes $ 64 would be conservative. But lets say $ 50. $ 150 billion in cash. Alot of room to grow with China Mobile selling iphones in 2013. There is much growth ahead for Apple. They defy the market. Gartner this month said Apple's PC sales are a larger percentage of the market even though they sold less PC's. They are dropping less than others even in the area where growth is lower. An interesting metric.

    If Paulenoff is right and Apple hit 450 we would have at least a value of 350 or lower ex cash and with the present earnings a p/e of 8. If we use next years conservative earnings of $ 53.27 you have a p/e of 6.5. It could be even lower as I was very conservative with the excash number and earnings should be higher in my opinion.

    In closing, many funds own too much Apple and if no one is buying, there is always selling going on. Volume has been great lately so the sellers could be funds getting out to pick up Apple again at a lower price. With such a great profit this year, you could have many investors taking profits who are scared that Apple is crumbling like Rocco Pendola of the Street.com said. You had Cramer say "Grab Google, leave Apple" recently and also Doug Kass bash Apple. That was three Street.com people saying it. Very suspcious now that we know how Google turned out. Apple is sold out and they are making phones. Not as fast maybe but they are making them. Maybe Apple will change the coating to make it stronger during the coming year so phones will come out faster. But do you really think they won't catch up to demand? They rolled out many more countries at the beginning so they had to have some phones for them. You dont roll out and say well we are sold out so you can't buy.

    Also Apple just built a beautiful huge store in Beijing in the most trafficed retail area. They have alot of cash sitting outside the US that they need to use and will use it to help sell Apple products.

    When they asked Eric Schmidt which company he would want to run, Apple, Amazon or Microsoft (i think) he said Apple because it had so much cash. They can do big things with that cash and I believe they are presently in the process. THe dividend is going to get raised.

    Apple to 1000 my next Summer and Andy Zaky is the man.

  • Report this Comment On October 20, 2012, at 6:54 PM, Dburn2 wrote:

    The sell off wasn't absurd. It was in sympathy with GOOG more than MSFT. GOOG had a huge miss . Well over 15% from consensus. But it was more than that. There was no silver linings to speak of. All business lines are turning down.

    Then MSFT comes into play. Remember, before the sell-off, GOOG had a larger Market cap than MSFT. Index funds, Hedge funds and ETFs have AAPL , GOOG and MSFT are a huge percentage of holdings. If 2 out of 3 with a combined cap, before the meltdown, of 550B had huge misses, then it wasn't absurd that Apple would go down with them. Margin calls had to have been going off like firecrackers at the 100 largest Hedge funds who carry Apple as their top holding. That in turn led to forced selling.

    Combine all of the above with Apple's silence (perhaps due to earnings) about iPhone 5 sales, along with the the piece of crapware they replaced GOOGs map app with and they get a deserved loss of confidence in the ability of management to keep Apple on the tracks that Steve Jobs laid down.

    It wasn't just Friday. It was the drop from $705 to $632.00 that was the largest and the most insidious because it was like Chinese torture all the way down. This isn't just a correction, it's a vote of feet running in another direction than the new Management of Apple.

    People are rightfully asking; How did that Map app get out of the once vaunted quality assurance that has been a hallmark of Apple ever since Steve's return in 1997? It just wasn't enough for Steve's replacement to issue an apology. They had to have known that this app was bad when it went out and released it anyway.

    Apple customers are not accustomed to being treated like Microsoft's customer's ..ie. paying to be Beta and Alpha testers. Even MSFT is getting away from releasing crapware as they have had enough of commentary like ; "Never buy a MSFT O/S until after the first service pack."

    One can point to Earnings multiples , the cash and all the other pluses on Apple's financial status and get nowhere if people are losing confidence in Cook.

    After all, his specialty is logistics. He is sitting on what was a billion dollar + stack of Apple stock. He's not a founder. He apparently is not a product guy either. He may have been just too concerned with the stock price and let other managers who are equally concerned about the stock price go ahead and release crap to meet a self imposed deadline that could have easily been pushed back.

    Much better to take that hit, and release a "insanely great " product when it was ready, then lose all confidence and release a piece of crap because critics were saying that competitors were creeping up on Apple. . That action can be considered as nothing less than reckless disregard for the foundation that Jobs laid down which made Apple great once again.

    That's why the stock was down 10% from it's all time high before Friday. The 3.6% drop on Friday was part continuation of the relentless selling of Apple and the take down of not only GOOG and MSFT, but INTC and IBM too. Until Cook proves that he is really in charge and knows what he is doing as CEO, not just a Operations manager, the seeds of doubt will continue to grow.

    The one thing that drop wasn't was "absurd". Look for more of that too. The earnings call this week will have to be something from another planet to keep the stock from taking another plunge in this atmosphere.

  • Report this Comment On October 20, 2012, at 7:41 PM, lrd555 wrote:

    The more reason why Apple needs to go private. Apple doesn't really need to Wall Street anymore and Wall Street doesn't get Apple. A divorce in is order.

  • Report this Comment On October 20, 2012, at 7:42 PM, deasystems wrote:

    @Dburn2: "...along with the the piece of crapware they replaced GOOGs map app with."

    You've been paying a little to much attention to the FUDsters, astroturfers, and paid bloggers, Dburn2. The new Apple Maps app is based on an excellent foundation and works very well for almost all users even now. Whatever problems remain are server-side data issues that are corrected in realtime on-the-fly with no effort from users.

    Don't believe the nonsense.

  • Report this Comment On October 20, 2012, at 10:31 PM, aig09 wrote:

    The aapl sell off had its own reasons that you just did not know. iPhone 5 shortage persists so Verizon only sold 0.65 million in sept qtr and market worry this supply issue may drag into current qtr. then there is worry much cheaper tablets from Goog amen and bby will severely hurt iPad and iPad mini sales going forward, and iPad Mini may even cannabolize iPad's own sales with a lower margin. On top of that, much much cheaper google chrome book just released will definitely impact on sales of MacBook line of laptops. Aapl sentiment has not been so low since cook took over in the past yr. expect more selling next week to around 580 or below.

  • Report this Comment On October 21, 2012, at 3:06 AM, 0gre wrote:

    ... along with the the piece of crapware they replaced GOOGs map app ....

    Yeah, Apple really screwed up when they opted to use a competitors mapping software, I hear antennas are a huge problem too. If Cook keeps screwing up like this Apple is doomed.

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