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Did You See Apple's Plunge Coming?

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Apple  (NASDAQ: AAPL  ) didn't exactly come out swinging in 2013. So far this year, the stock has closed lower on eight trading days and higher on just three. The stock opened up strong this morning but quickly reversed course, so today's final outcome is still up in the air. Despite a huge 4% jump on Wednesday, shares have lost 5% of their value even as the Dow Jones Industrial Average  (DJINDICES: ^DJI  ) gained 3%.

Zooming out to a longer-term perspective doesn't help Cupertino much. The stock is down 22% over the last three months, while the Dow traded sideways, and the underperformance stays at 23% in a six-month perspective as well.

Join the club, guys 
As an Apple bear myself, I don't feel like such an outsider anymore. More people have caught on to Apple's weak spots as they start to impact real-world business results. A year ago, I slapped a thumbs-down CAPScall on Apple, predicting some short-term upward momentum trending into a long-term plunge. Take a walk down memory lane with me:

There's a fair bit of market momentum behind this mirage. Well, tough. Market timing is a sucker's game anyway. Come back in two or three years, and I believe that the growth story will start to crumble.

The payoff is coming quicker than I expected.

Today, investors worry about the following problems:

  • Holiday-quarter demand for the cash-cow iPhone line may not have been as strong as predicted. Apple slashed component orders in the first quarter, presumably to work a supply glut out of the system.

  • In particular, consumers don't seem overly interested in the most profitable iPhones. The component cuts were specific to the high-end iPhone 5, meaning that less profitable models from prior years are selling too well. That's bad for Apple's margins.

  • And why should we buy iPhone 5? Aside from sporting a slightly taller screen and much faster processor than last year's 4S model, there's not much setting the new handset apart from the old one. Apple may be engineering the heck out of the iPhone's innards, but do consumers really care how beautifully the phone is designed on that end? After all, you need special tools just to open iGadgets up and change the battery.

  • The same story goes for the iPad line, too. The iPad 3 was quickly followed by the iPad 4 and iPad Mini -- and the market plunge continued because there's nothing special about the new devices. But the Mini does come with a price advantage to consumers, which sets it up to reduce Apple's overall profit again.

  • If the immediate demand picture weren't troublesome enough, Apple is about to feel even more pressure on its top-to-bottom margins as wireless networks grow tired of passing their profits on to Cupertino. T-Mobile USA is first out of the gate, vowing to start selling iPhones in 2013 and stop paying smartphone subsidies by the end of January. There's no telling what tricks Sprint Nextel  (NYSE: S  ) will start playing under the wing of Japanese iconoclast Masayoshi Son later this year, but it's a fair bet that we'll see totally new pricing plans. Son didn't make his personal billions and build Japan's second-largest mobile network by passing his profit on to handset builders, after all.

  • And those are just the first shots of the coming revolution. In the wireless industry, the big boys are often forced to copy the tactics of smaller and hungrier players -- or risk losing customers by the boatload. Indeed, Verizon  (NYSE: VZ  ) and AT&T  (NYSE: T  ) have both made it clear that subsidies hurt them and that they wouldn't mind following suit if T-Mobile's experiment works out. When that happens, Apple's fantastic cash machine grinds to a painful halt. Cupertino just wasn't built to operate with industry-standard gross margins.

Looking ahead
None of these worries is particularly new or surprising. They're exactly the same things I have seen coming for years and decided to take bearish action on last year. That CAPScall has been a heavy load at times, but Apple is back to just barely beating the market since the year-ago earnings report.

In next week's earnings report, Apple gets to dispel or confirm some of the current worries, and it might rise again if the news isn't too terrible. Regardless, it's still a house of cards resting on fickle consumer trends and an unsustainable margin structure. Apple may become a good value and dividend stock some day, but it will never be the trillion-dollar monster everyone thought they saw coming in 2012.

Do note that I'm still in the minority here at the Fool. Several of our analysts, including my own editors and sector chiefs, still believe in Apple going higher. This is The Motley Fool, after all.

Apple has been a longtime pick of Motley Fool superinvestor David Gardner, and it has soared more than 215% since he recommended it in January 2008. David specializes in identifying game-changing companies like Apple long before others are keen to their disruptive potential, and he helps like-minded investors profit while Wall Street catches up. Learn more about how he picks his winners with a free, personal tour of his flagship service, Supernova. Inside, you'll discover the science behind his market-trouncing returns. Just click here now for instant access.

Read/Post Comments (19) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On January 17, 2013, at 2:31 PM, Idahoave2013 wrote:

    Hell no, I did not! see it coming :(

  • Report this Comment On January 17, 2013, at 2:34 PM, iknoerle wrote:

    A house of cards? I hope not cause I have increased my bet on Apple.

  • Report this Comment On January 17, 2013, at 2:42 PM, PinkFloydRoadie wrote:

    Oh my goodness, Anders. I hope you own and wear a bullet-proof vest ;-) The iCroud is gonna get you! I'm glad you said all this and not me. Everytime I even hint that Apple has trouble down the road, I am beaten up by the Jim Jones' followers who didn't die, but are now drinking Apple's Koolaid.

    I am amazed at how many people simply will not want to believe anything bad could happen to Apple. It's like the guy who refuses to believe his wife is cheating even when he catches her in someone's lap. All sorts of excuses crop up.

    If earnings are high upon release, then they will say "I told you so.. You are wrong " ...and will ignore dark clouds on the horizon.. If earnings are bad, they will say "Oh it was just due to that bad Christmas sending."

    Even as the sky falls, you'll hear the iCrowd say that Apple will have a blowout quarter when they release the "iThis" or "iThat".

    I couldn't agree more with your comments and there is so much more you could have said that you didn't mention, probably for sake of keeping the article shorter.

    Now due to this posting, I'm tagged as an Apple hater because I cast doubt about the all mightly Apple going higher, even though I own a whole bunch of Apple products, I must be an Apple hater ;-) Go figure that one.

    Frankly I don't have the insight that you do and have no idea what will happen over the next weeks or months with Apple stock. I've been wanting to get back in it, yet every place I look, I see more reason not to buy back in that to do it. I'm looking for reason and don't see them yet.

    I'm glad there are a LOT of other fabulous stocks to invest, or else I might be tempted to pick up a glass of that red sweet drink and wonder what is in it :-)

  • Report this Comment On January 17, 2013, at 2:42 PM, cbuffool wrote:

    No, I didn't see it coming, and it still mystifies me. Isn't Apple still growing handsomely? Orders may have been cut, but weren't they orders predicated on huge growth? Maybe they're not growing profits by 40% per year any more, but they're certainly selling more phones, they're absolutely selling more iPads (if the market doubles each year, I don't think it's terrible news if your share drops from 70% to 60%), and they've usually been selling more Macs. OK, maybe the Mac number is going to get cannibalized by the iPad, but it won't be as much as the rest of the PC market. If they can hold their own in phones and eat the PC market's lunch with the iPad, then I think they've got plenty of room to go up.

  • Report this Comment On January 17, 2013, at 2:53 PM, Microwave52 wrote:

    I also didn't see Apple's pps decline coming. The iPad Mini will do great in China and the rest of the developing world due to the smaller size and the lower price point. Hopefully the developing world will get an "iPhone Mini" this summer as Apple needs to develop an emerging markets strategy. Margins may decrease, but volume will make up for the margin decrease.

  • Report this Comment On January 17, 2013, at 2:57 PM, rhealth wrote:

    I wouldn't say I saw it coming but I did anticipate a slowdown in sales and better competition eating into their profits. I really didn't have interest in buying Apple until it hit $500, at present I believe the bear run to be close to done.

    Oh, and market timing is a suckers game only if you are bad at it.

  • Report this Comment On January 17, 2013, at 3:08 PM, DoctorLewis4 wrote:

    Shorts won this round. Great use of the media to scare people into selling. Options expire on Friday. Earnings coming. We will see 700 soon.

  • Report this Comment On January 17, 2013, at 3:08 PM, Inept wrote:

    I saw it coming very clearly. Unforunately, that was in 2011.


  • Report this Comment On January 17, 2013, at 3:14 PM, differenttake wrote:

    I'd be interested in what you think are disapointing sales for i-5 and how that squares with soon to be announced numbers.

    If what you say is true and there was LARGE interest in other i-phones, to where Apple is now over 50% of smart sales then I would say they have something compelling to offer beyond the device itself.... which is the point that makes Apple not just a hardware vendor as the android makers are. A purchase for Apple is buying into the family of devices current and future being linked and complementry within the ever expanding eco system. Android is bang for buck for what's in your hand but I think we see that that is not the only yard stick. I mean really Samsung has a brick with a big screen, what's gonna be their next trick? That is hardly "innovative" nor exclusive.

    At some point the free software from Google will fall behind, we see again and again that the "spy on your web habits throw and add ad you and hope you click so we get paid" is not working on phones this is not the outcome Google was hoping for, it's a pit of profitless effort that will end, why is Samsung is now looking to go their own route on the OS? it stays competitive...good luck with experience doing this.

    This will lead to even more chaos within the Android based offerings where Apple will have seemless intergration..that is worth something beyond the simple price of a phone. Do you know the actual price differences between competitive phones it's all pretty hard to determine given deals/ subsidies ( really and incorrect term you are buying it with two year financing) do have any clue what the margins are at the pricing of an unlocked phone? Maybe Apple has that artificially high. You don't know.

    We do know Apple continues to get incremental sales of i-phones and i-pads, we do know they become i-tunes users, we do know they are more likely to do things with these devices, like buy things and web search, that is they are tools not toys or gadgets. Apple has an i-TV and it is a dream to use intergrating the phone/i-pad/i-cloud and my big screen. This is a good example of how they will be intergrated with what-ever new things come down the pike. There is a revolution going on in how we interface with any digital in our life and it is hard to see how Apple is not the best integrated company to do stupendous with this seachange.

    Just my humble opinion.

  • Report this Comment On January 17, 2013, at 3:48 PM, jordanwi wrote:

    At the very worst, I think Apple turns into a MSFT, perhaps an IBM. Not huge growers, but likely not too much downside from here. Too many people are steeped in the OS, much like the windows of old. If they become stale, the stock flounders at a PE of 10. If iPhones wow/Apple TV turns a corner, the upside is considerable.

    Those are my 2 cents, I'm long Apple, only time will tell.

  • Report this Comment On January 17, 2013, at 3:53 PM, herls0324 wrote:

    Almost as annoying as the Apple bulls are the Apple bears. I've been an investor since $24 and have seen this article before many, many times on my way up.

    These articles are written by people who don't understand the brand or the company, who are just looking at recent data and making assumptions. Apple still makes the best products in the world. They still have an unbelievable balance sheet. They have improved their R & D and marketing talent. And they have yet to penetrate the biggest markets in the world. Markets that covet Americana.

    Their ipad won't cannibalize the MacPro line because designers can't get the functionality they need out of the ipad. However, designers being who they are, will actually be more apt to buy an ipad in addition to their MacPro.

    Their phones, any number, are still the most coveted phones on the market. Google seems to be following the folly of Mr. Softy in stressing functions that can be confusing and not that attractive to the average consumer. They don't understand the importance of simplicity, design and functionality as one. People buy iphones as much as a status symbol now and will continue to do until someone figures out that the consumer isn't a bunch of tech engineers.

    Their itunes department is getting stronger, not weaker. Their ipods are surprisingly still popular.

    Granted, they clearly have a problem with the i5. But it could be any number of things. I don't see very many problems being long-term.

    And finally, beware, all you bears of that bear trap. Look at the valuation of this company. This isn't a bank. This is one of the most successful consumer products company in the world. Still.

  • Report this Comment On January 17, 2013, at 4:10 PM, jdmeck wrote:

    Why is only Apple expected to always have new and revolutionary? If apple did nothing but window dressing upgrades, did not grow market share and did not grow profits, the stock would still be undervalued. Just goes to show you that the stock market is a game of popularity that has nothing to do with real results. Case in point: Apple is down this year only because of a unconfirmed story from one media outlet. I'd love to know from that outlet how much Apple stock they bought recently. Nothing but a game.

  • Report this Comment On January 17, 2013, at 4:20 PM, fortherock wrote:

    Just to put a flag in the sand, I read an article mentioning market manipulators on the stock. 1 million calls are open at $500 and above, expiring Saturday 1/19/2013...a price below $500 Friday 1/18 close makes them all worthless. Observations? Despite a run to $550 Friday, notice all the negative news this week, starting Sunday Night about the reduction in builds for Q1 2013 (news already known) stated over and over...causing a $40 drop Mon -Tues, major drops each morning on high volume. It bounced back Wed, and stabilized just above $500 today. Expect the stock to close tomorrow just below $500 (making all those calls worthless). Expect positive news to start coming out next week, driving the stock to $550+ with a strong earnings report Wed...and everyone acting happy and surprised, to $600+ by Fri 1/25. If this does play out, it's amazing all this can happen legally - the play between calls, stock, and misleading news. Facebook has done something similar, a few months with a 50% move up with unconfirmed "news".

  • Report this Comment On January 17, 2013, at 4:26 PM, dogmatica wrote:

    Aloha Anders,

    It would be easy to be a wise guy, but I'll refrain.

    "None of these worries is particularly new or surprising. They're exactly the same things I have seen coming for YEARS..." YEARS?

    In 2009, Apple's net income was 8.24 billion; in 2010, 14.01 billion; 2011 was 25.92B; and in 2012, Apple made a pathetic 41.73 "Billllion Dollars, Mr Powers!" If indeed you saw this disaster coming, I hope you did the counterintuitive thing and "bought, bought, bought!"

    Or perhaps you saw this iPhone crisis looming:

    Yearly total for iPhone sales:

    2007: 1.39 million

    2008: 11.63 mil

    2009: 20.73 mil

    2010: 39.99 mil

    2011: 72.29 mil

    2012: 12.05 mil

    Apple will have sold more iPhones in one quarter (Q1 2013) then they did in their first three years!

    Apple will sell more iPhones in the first half of 2013 than they did for the entire year of 2011!

    You saw this impending disaster coming years ago?! Perhaps you could define "disaster" for us? With Apple's terrible performances over the past few years, I cannot for the life of me understand how you could be in the minority there at Motley! (Okay, a little bit of the wise guy showed up!)

    And PinkFloydRoadie...great name!'re not "tagged as an Apple hater because you cast doubt on the great Apple"; its because of your inability to understand simple math. Another words: if you consider Apple's historical performance dismal, then just compare Apple with anyone else out there. You'll find that Apple is valued so cheaply in comparison that it really makes no sense. But, you still have a great name for a great band. Aloha!

  • Report this Comment On January 17, 2013, at 4:29 PM, ayaghsizian wrote:

    Bullish at $495 (about 11x earnings), Bearish at $630 (about 14x earnings).

  • Report this Comment On January 17, 2013, at 4:33 PM, ayaghsizian wrote:

    There are many good things going on and a couple of things to worry about. Right now the price is cheap so I'm a buyer. In the 600's I was a seller.

  • Report this Comment On January 17, 2013, at 7:05 PM, mountain8 wrote:

    I won't believe a word either way until after this quarters report.

    I will also add that I don't know many well aged companies that didn't experience at least one serious downturn before ending up on top. Maybe in a year or two we can add Apple to that list.

  • Report this Comment On January 18, 2013, at 1:47 AM, rthedges wrote:

    Not only was I surprised, I was in denial up until last week because I thought the declines of the past couple months were due to mass quantities of sellers for tax purposes and they would not be able to repurchase until January ... so I expected a big spike through January ... still hoping that spike happens post 1/23 earnings ... perhaps still in denial and in need of counseling.

    I received a bit of comic relief from this article somewhat bragging about being bearish Apple since 2011 ... that's a rather odd thing to brag about ... an investor completing missing an opportunity to double their money ... haha

  • Report this Comment On January 18, 2013, at 1:57 AM, Velek wrote:

    I think Android is Windows 3.1 all over again. The Galaxy S3 is such a great device (yes, I have one) and Apple is such a closed ecosystem that they're getting their clock cleaned by the more open Android ecosystem.

    So, yes, I was expecting this. Not that I'm shorting. My gut feeling is to stay away.

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