The Biggest Threat to Apple's Share Price

While Apple (NASDAQ: AAPL  ) has faced its share of headwinds over the past few months, having slid 40% from its historic high above $700 per share last September, the company seems to still be facing some real challenges. There is a real concern among investors and industry-watchers that the company's innovation rate has slowed significantly. Where Apple was once known not only as a technology leader but for its ability to remain focused on great projects, the company has become more reactionary, trying to compete with increasingly well-executed competition. Despite all of these issues, however, the single largest threat to Apple's share price is the health of the overall market.

Historic levels for the Dow
Tuesday's trading session has seen the Dow Jones Industrial Average break through all-time intraday highs, trading at levels not seen since 2007 and on pace to close above the record close set Oct. 9, 2007. Much of the run has been triggered by general optimism about the prospects for the economy looking ahead. The rise puts the index up over 8% so far this year and is marked by money moving into stocks. Reuters quotes Russell Investments' Chief Strategist Stephen Wood, who admits the move is not totally supported by fundamentals: "There is a lot of momentum and rotation going into equities from cash and bonds, and right now sentiment seems to have the upper hand over fundamentals."

While some disagree, many commentators attribute the rise to action of the Federal Reserve and Chairman Ben Bernanke. Recently, whenever the market has even paused for a breather, the Fed has aggressively pushed to keep the rally alive. Those who take a softer view see Bernanke's actions as providing liquidity only, and not being a driving factor in the rise. In either case, the Fed has played a significant role in the process, suggesting that any major policy shift has the potential to be a blow to the overall market.

The skeptics point out that these types of peaks often precipitate significant declines; the October 2007 peak came before stock indexes were essentially cut in half. While market internals are solid, the psychological impact of these various factors should not be ignored. Even if the rally has some room to run, the dance between the Fed and the market should be watched.

The Google effect
Over the past several months, as Apple has languished, Google has surged to its highest level of all-time. Apple has stagnated to some extent, reporting its lowest growth statistics in recent memory, while Google continues to find growth and innovation. Though the connection itself may be coincidental, Apple's troubles are certainly not hurting Google's ability to fight higher.

Can we all have a little patience?
UBS analyst Steve Miluovich reiterated his buy rating on Apple Tuesday morning, setting a $600 price target, but warning that investors will need to be patient: "The only way out might be innovation in new categories, which will require investor patience. Most companies would rush out a 5-6" phone; Apple probably won't." With investors clamoring for an iWatch, a cheap iPhone and Apple TV, Apple seems content to press forward at its own pace.

The threat of $400
Despite all of the above, the biggest threat to Apple shares at this point is a sell-off or correction in the broader market. Some would argue that after a 40% decline, the shares should be well insulated from the vagaries of the major indexes. Apple shares had no problem declining as the market fought to the new historic highs, so why should they have a problem moving higher if the market comes under pressure? The problem is that, as things stand, the company is not standing out as the beacon of technological progress that it once did.

If Apple is able to bring a new product to market and attract some positive attention, this may be the catalyst needed to put the stock back onto its own trajectory. If, however, as Milunovich suggests, Apple takes its time bringing anything new to market, that could trigger a disconnection from the broader trend, a correction will likely see shares dragged lower. If the psychologically important $400-per-share level is breached, you should expect a spike lower, if only briefly. Stops losses will be triggered and some investors will see this as a sign that the stock is in trouble. This spike, if it occurs, will likely be the best buying opportunity available for some time. Overall, the general market's direction remains the biggest threat to Apple going lower, so macro factors should become increasingly important to Apple shareholders.

There's 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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (5) | Recommend This Article (3)

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  • Report this Comment On March 06, 2013, at 3:00 AM, fauxscot wrote:

    +10 points for stating the obvious.

    I think I would have worded it "The biggest risk to the share price is what people are willing to pay for a share". Much more obvious, but as an engineer, I am a pro.

    Kidding aside, there is no reason Apple is trading where it is. Fundamentally, it is without peer nor even a remotely comparable historical case. With Google and Amazon trading at breathtaking levels and by comparison, doing nothing, Apple sits at 430 while making a billion dollars a week 1q2013. WTF?

  • Report this Comment On March 06, 2013, at 3:35 AM, thethreestooges wrote:

    AAPL share price going down because the company innovation is slowing? Then why other companies without any innovation and their price climbing higher? What kind of fool would say that those other companies will have highest rate of innovation since they are currently at zero level?? Who care about innovation as long as you control and lead the market now. AAPL is making tons of profits why other wannbe lost money except Samsung. And Samsung copied AAPL, not a real innovator, they are very good at copying and making it better. Innovation means original. Samsung is not.

  • Report this Comment On March 06, 2013, at 5:02 AM, CrewLJ wrote:

    The two biggest problems I see with AAPL is 1) the perception that the company is going to turn into a MSFT without Jobs around anymore and 2) As financial managers they have no fricking clue what to do with the mountain of cash they are sitting on. On the later they are a bit boxed in because it would very difficult to pull off an acquisition that would fit into the company's culture while being big enough to have an impact on their future. Then, pumping up the dividend to 50% of their current cash flow would be taken as an admission that they no longer grow substantially given their size.

    The holy grail of entertainment and information technology is the intergration of the TV and the internet. But remember Steve's "go to market" conundrum? Right now the peripherals such as Satellite TV and Apple TV, Roku are sniffing all around it but so far it's not to the point where I would call it seamless intergration. Not bad but there is definitely room for improvement as well as opportunity fro both hardware and software integrators as well content providers.

  • Report this Comment On March 06, 2013, at 7:40 AM, rkiefl wrote:

    The perception is that the innovation rate has slowed, perhaps, but if you actually measure their rate of innovation you'll find that should they release a blockbuster this year that they are right on track. I'm not saying it will happen I'm just pointing out the fact that their 'rate' of innovation is about 3 years.

    I also completely disagree with the authors assertion that Apple has been reactionary. In fact they have been anything but save for the iPad mini. And I think it is this fact which has frustrated short term investors.

    I'm a shareholder of Apple since this crash but hardly a fan. I think that as a company with its own vision I applaud their defiance of shareholders who's only vision is $$$. And though many don't like Tim Cook I'd encourage them to put their emotions aside and listen to what he communicates.

    In my opinion the biggest threat to AAPL has a lot more to do with the short term emotional state of that market surrounding AAPL and the shorting sharks who continue to stir the pot.

  • Report this Comment On March 06, 2013, at 10:51 AM, hlouiq wrote:

    @rkiefl The iphone now makes up over 50% of Apple's revenue. Iphone had no real competition for the first five years of its existence. It now has competition which often surpasses it in quality while offering a lower price point. That means the iphone is in trouble. The ipad is experiencing a similar problem.

    Apple historically advances through innovation, not through the reactionary creation of cheaper versions of its products. That means it is, and was always, a risky proposition, as no one can predict whether a new product will fill a need the way iphone or the ipad did.

    Its watch had better hit, and hit VERY big, with the understanding that if it does hit, Samsung, etc., will offer superior products with lower price points within 18 months of its release. If the watch doesn't hit the way the iphone did...ouch.

    The other rumored offerings in both the iphone and the ipad lines will be merely catching up with the competition. Yes, they will sell, but with competition, their success will in no way mirror the success of the very first iphone.

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