I Love Apple. Sell It.

Why is Apple (NASDAQ: AAPL  ) going down?

  • Chinese sales are disappointing.
  • The China Mobile deal hasn't come through.
  • They refreshed their product line too fast.
  • They aren't innovating anymore.
  • Apple Maps.
  • iPad Mini is going to eat into iPad Mega's sales.
  • Siri won't actually teach me the guitar.
  • Google's Android is dominating.
  • Galaxy III rocks! Even LeBron loves it.
  • Their products are way too expensive.
  • Wal-Mart's no-contract, $45-a-month deal will kill them in the U.S.
  • Microsoft's Windows Surface is awe... er, never mind, nobody says that. 

We've heard all of these reasons, and many more, to explain why the stock price of Apple is going down. I'm sure that the people and institutions who are selling Apple's shares have done so for these reasons (and others).  Of course, there is no one single reason. What matters is that the perception has changed in the marketplace and the people who were once willing to buy shares are either no longer buying, or selling outright.

There are more sellers than buyers.

If you believe that stock market prices are a forecasting mechanism for the future of our economy or the fortunes of an individual company, you can only conclude that as soon as the market saw what the iPhone 5 had to offer in September, it looked to the future and said, "Not as bright." The shares are down 26% since the recent high of $705.07 , while the S&P 500 is higher.

What to do?

First of all, don't ignore what the market is clearly telling you. No matter how bullish you may be, please at least consider the possibility that the naysayers are right, at least for a while. Second, try and imagine what possible catalysts there might be that would change the minds of everyone who has sold recently and get them to buy shares again. Without more buyers than sellers, the stock isn't going up. 

The naysayers' argument is multifaceted. For one, bears argue that iPhone sales will fall short of expectations, largely because of softness in China. Carriers will slow their subsidies of phone sales here in the U.S., forcing Apple to either accept fewer unit sales or to lower their prices, which will hurt margins. The introduction of the iPad Mini and a brand new iPad 4 on the same day are creating significant customer confusion that will cause a dent to be put in iPad sales in favor of the lower-margin Mini.  Android devices continue to outsell iOS devices due to the significantly lower price tag. The world will come around to the "good enough" argument and stop paying huge premiums for the "insanely great."

It's hard to look at these potential stumbling blocks and call any of them unreasonable. If these things are true, Apple will need to do any number of things that could act as catalysts to get the stock back on track. I'm probably stating the obvious, but here goes:

Reduce prices: Lower the price of their phones and tablets to be ultra competitive, take the hit on margins, and allow people to get "insanely great" for about the same price as "good enough" which will then, obviously, no longer be good enough. I personally believe this is what Apple should be doing, either through across-the-board price cuts or at least offering a lesser version of their latest phone for a very competitive price.  I don't think they will do it in time to stop further decline in the share price, and even if they do, it will take some time to make it up in volume.

Dominate Asia: Everyone is assuming that demand is much lower than previously hoped for in China. If Apple reports that China is on fire, and combine that news with a China Mobile deal, the perception will change quickly. Everyone is expecting the China Mobile deal to come, but I imagine it will come with significantly lower margins than what is currently being modeled. 

Wow us with iPad:The potential exists in the education market and in other business settings (medical, supply chain management, etc.) for the iPad to take hold in a way that none of us could have thought possible. But with Federal funding for education in limbo and lower-priced Android tablets available for kids to use, the window is probably pushed out six to nine months or closing on them until they can offer schools a more affordable version. The tipping point here will be when the school systems can stop buying hardcover books and instead offer a simple tablet with all of the books on it electronically. This will happen, but not yet.

Apple TV: I personally can't wait for this, because I am hoping they will bring an incredible OLED display in a big-screen TV that comes with a content licensing deal that will allow me to purchase all of my shows a la carte, or in some form of package that I choose. In the game to "own all the rectangles," I think this is an important one that Samsung seems to be winning, but is actually stumbling on. Somebody needs to disrupt cable and television's stranglehold on media in real time. As much as you may love Netflix, it's the stock market equivalent of 20-minute delayed quotes.

And just one more thing: Steve Jobs is sadly gone. Last year, I rebuffed early criticisms that Apple could no longer innovate now that Jobs had passed, but it won't be too much longer before you have to start worrying. Apple's incredible run is built on the iMac, iPod, iPhone, and iPad, all Jobs' creations. The magic has always been 3 parts incredible design, 2 parts fulfilling the unspoken desire, and 1 part Ron Popeil "turn." Apple will always have the opportunity to blow us away with something we never expected. Will it be another "rectangle" like the purported iWatch recently rumored, the iTV, or maybe something completely different? A major surprise that opens up entirely new markets for Apple would certainly be a catalyst. This is true for all companies, but somehow seems slightly more possible for Apple. Still, I'm skeptical.

When I consider the naysayers' argument, look at what the market is trying to tell me with price, and then imagine the possible catalysts that could mitigate these things, I'm left with the empty feeling that we're only a few weeks away from Apple trading into the $400s -- and maybe significantly lower. I hope I'm wrong, but until we see some of these catalysts materialize and until the stock price begins to show some sustained enthusiasm, I'd be staying away from Apple shares. 

I love Apple, but I don't love the stock right now.

2013 and beyond
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (15) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2013, at 9:01 PM, 170833147 wrote:

    Brilliant article. It captures what many Apple investors are feeling right now. It is beautifully written and thoughtful. I am critical of Apple's seeming inability to counter the negative psychology and frank market manipulation with a statement, press release, anything. Nope, Cook says nothing while his company's stock has taken it on the chin. Thanks for the great writing.

  • Report this Comment On January 14, 2013, at 9:52 PM, JHawkinTexas wrote:

    To the previous commenter, CEOs can't get caught in the trap of responding to every frisbee that Wall Street (or the market) throws at them. That's not their job and, frankly, they would spend all their time trying to please a taskmaster that can't be pleased.

    To the author, what were your thoughts about Apple when they dropped about 19% from their intraday high in April to their intraday low in May...just before they began their climb to their new all time high at $705? Investors might keep that in mind before they rush to take your advice and sell at the low before a renewed climb to a new all time high.

  • Report this Comment On January 14, 2013, at 9:52 PM, iknoerle wrote:

    I'm not as worried about margins if they continue to own the premium niche. Apple needs a bigger screen phone to continue to own the premium niche though. They can do whatever else but that's a key factor that they have to do. The stock price can be illogical longer then the hedge funds can remain solvent so it could continue to go down.

  • Report this Comment On January 14, 2013, at 10:18 PM, miracast wrote:

    actually Tim Cook has spoken about points 1,3,5 and 6

    and obviously cannot speak about point 2

  • Report this Comment On January 14, 2013, at 11:15 PM, ChanHol wrote:

    "There are more sellers than buyers." Love this one. LOVE IT. Doesn't matter the company. Analysts/reporters act like there are shares laying on the floor of the exchange at the end of the day. These bozos don't understand that every share that was sold today/this week/this year had a buyer.

  • Report this Comment On January 15, 2013, at 12:02 AM, XMFBogey wrote:

    "To the author, what were your thoughts about Apple when they dropped about 19% from their intraday high in April "

    Here is a link to what I wrote in May - http://www.fool.com/investing/general/2012/05/07/apple-as-go...

    More open-ended about where I thought the stock was going, but an earlier version of what I thought the major issues were.

  • Report this Comment On January 15, 2013, at 12:06 AM, XMFBogey wrote:

    "These bozos don't understand that every share that was sold today/this week/this year had a buyer."

    This is the usual yang to the "more buyers than sellers" yin and illustrates that many market participants don't understand how the market works. Obviously there are buyers and sellers for every trader, but the trade that initiates the transaction is the important one. If I sell 50,000 shares of AAPL, my market maker at Ameritrade is the one who has to buy them from me, and s/he is none to happy about that, so s/he is going to drop the price, and drop the price, and drop the price until they can absorb all of my shares (they are the "buyer" in this case) and then sell them back to some other retail or insitutional buyer at a markup.

    Yes, there is a buyer and seller for each trade, but the initiating trade determine where the price goes.

  • Report this Comment On January 15, 2013, at 11:26 AM, Thomas10Parker wrote:

    I just bought more. I feel like a kid in a candy shop. Apple's now trading at 6.5-7X FY12 earnings excluding cash.

    When all this technical selling settles out, I think there will be a huge rally back to $600 or even $700.

    http://alturl.com/vtur5

  • Report this Comment On January 15, 2013, at 12:28 PM, StopPrintinMoney wrote:
  • Report this Comment On January 15, 2013, at 12:28 PM, pondee619 wrote:

    "I love Apple, but I don't love the stock right now."

    So, the company is not broken, the stock is? If APPL is still a good comany with a broken down stock price, doesn't that make it a buy.

    " but until we see some of these catalysts materialize and until the stock price begins to show some sustained enthusiasm, I'd be staying away from Apple shares."

    Are they going to ring a bell when this happens?Do we wait until after the up move has played out? Do we all fall for the "head fake" that may or may not happen?

    " I love Apple, but I don't love the stock right now"

    Why isn't this the call to buy?

  • Report this Comment On January 15, 2013, at 12:29 PM, StopPrintinMoney wrote:

    @Thomas10Parker - You keep buying, there is gotta be even more at a lower price.

  • Report this Comment On January 15, 2013, at 1:47 PM, Darwood11 wrote:

    Good article.

    Here's the crux of the problem for Apple investors, from my perspective.

    1. If you thought that Apple was Steve Jobs, then you should have sold on the day he died.

    2. If you think Apple can continue it's high margins with its current product offerings, then you should sell.

    Here is the core problem. Tablets and smartphones will soon become commodities, if they haven't already. The world is watching Foxconn and other so called "sweat shops" and so extracting high margins via the underpaid labors of others is going to become increasingly difficult.

    In other words, Apple needs another high margin, unique product to continue on its path. Will it be Apple TV? I don't know the future, but I am sure the Applephiles will buy whatever the company produces. Will that be enough to propel Apple forward?

  • Report this Comment On January 15, 2013, at 2:36 PM, XMFBogey wrote:

    "So, the company is not broken, the stock is?"

    Fool co-founder David Gardner has a now famous equation around the halls of FoolHQ - Happiness = Reality/Expectations.

    I think the problem with Apple right now is in both the numerator and the denominator, and it's not clear the magnitude of how "off" each is. The reality is deteriorating relative to things like past market share of the mobile market, gross margins, year-over-year revenue growth, etc. So, reality is falling, and expectations I think are still too high as evidenced by the majority of analyst target prices.

    "Are they going to ring a bell when this happens?"

    In a manner of speaking, yes. I've laid out some fact-based things to look for on the fundamental side, as well as guidance on what to look for technically, and said that I think both need to happen together.

    One Fool's opinion...

  • Report this Comment On January 15, 2013, at 3:51 PM, pondee619 wrote:

    Can a stock with a trailing P/E of 11, and a forward PE of 8.5 have expectations that are too high?

    Do you feel that APPL will have a growth rate less than 10% giving it a PEG of over 1?

    Aren't expectations more accurately reflected in earnings estimates and not target prices? Do people really look at target prices? I'm not paying for a target price, I'm paying for future earnings. If APPL had a high PE we might agree that expectations were too high. Priced as it is, APPL's expectations could not be lower and anything positive will be well recieved

  • Report this Comment On January 17, 2013, at 4:42 PM, XMFBogey wrote:

    "Priced as it is, APPL's expectations could not be lower and anything positive will be well recieved"

    I think investors need to put more emphasis on near term earnings expectations and less emphasis on out years. The current quarter and next quarter growth estimates for AAPL are negative. In the last 30 days, 4 analysts have lowered expectations for the current quarter and 11 have lowered for next quarter. Full year expected growth is 9.5%.

    It's undeniable that, at least in the short-intermediate term, Apple's growth is slowing/stopping. What would you be willing to pay for negative earnings growth in the coming 6 months?

    The real reason to own Apple will be your feelings about the future product cycle beyond and I hope I laid out what I think could go right to act as growth catalysts for the revenue/EPS and share price.

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