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Analysts Are Chasing Apple's Price Chart

In the course of 2012, shares of Apple (NASDAQ: AAPL  ) rocketed from a little above $400 to a peak just above $700 in September. The stock price has proceeded to fall even faster, plunging to a new trading range in the low $400s recently.

AAPL Chart

Apple Price Chart by YCharts.

In trying to keep up with the latest moves in Apple's stock price, analysts have had to make some rather embarrassing changes to their price targets. Long-term investors should more or less ignore these frequent price target revisions. There are plenty of reasons to believe that Apple is still a long-term winner, and that the hiccups that have caused Apple's 40% fall are just a bump in the road.

How much has really changed?
Peter Misek of Jefferies cut his Apple price target to $420 this week, citing numerous challenges for the company. These include: 1. the mythical "iTV" being delayed to 2014, 2. the iPhone 5S being pushed back until later in 2013, and 3. a shift in consumer preferences toward larger screen sizes, particularly "phablets". Misek's recent bearishness is all the more odd because as recently as December he had a $900 price target on the stock. Since then he has cut his price target to $800, then $500, and now $420, as he has become more progressively more bearish.

What really seems to be happening is that Misek -- like many other Wall Street analysts -- is chasing the Apple price chart, which is ultimately a measure of current investor sentiment. It is very reasonable for Apple investors to be worried about Samsung, and other Google Android smartphone vendors. However, the outlook has not changed that much over the past year (let alone the past three months). There is no plausible long-term logic to back up the significant drops in Wall Street price targets recently.

The bigger picture
To better understand the problem with Wall Street's short-term mentality, let's take a look at Misek's phablet thesis. He has argued on several recent occasions that "Apple is losing the screen-size war." There are at least two major flaws in that statement. First, true phablets like the Galaxy Note are still niche products compared to the iPhone. It took two months for Galaxy Note II sales to hit 5 million, something that the iPhone 5 accomplished in less than a week. Moreover, Samsung has estimated the Galaxy Note II's lifetime sales at around 20 million, less than half of the number of iPhones sold last quarter! Clearly, the Galaxy Note is not popular enough (at least for now) to be a major drag on iPhone sales.

Second, while some users clearly want a larger phone, whether it is a full-blown phablet or a phone with a 4.7-inch to 5-inch screen, there is no moat protecting the producers of these phones. If Tim Cook and his team decide that they are losing sales by not having a larger phone, you can be sure that they will introduce a new model to capture that market. In the grand scheme of things, it will not make much difference for Apple shareholders whether the company releases a 5-inch iPhone tomorrow or next year.

There is no reason to believe that Apple would be unable to create a successful larger-screen smartphone. (NASDAQ: AMZN  ) shook up the tablet market in late 2011 when it released the Kindle Fire, a 7-inch tablet that retailed for $199, 60% less than the iPad's $499 starting price. However, while the Kindle Fire performed better than other Android tablets, the first generation only sold a total of 6 million to 8 million units (Amazon never released official sales figures). This was well below the 58 million iPads sold during Apple's FY12. Nevertheless, Apple decided to meet the 7-inch tablet threat head-on and released the iPad Mini last fall. Apple is believed to have sold at least 8 million iPad minis in the holiday quarter, and that number was depressed by significant supply constraints.

In other words, the shift in consumer preferences toward larger phones has not been as clear-cut as panicked analysts seem to assume. Moreover, just as Apple was "late" to the 7-inch tablet market but still gained a big share after entering it, Apple will not suffer any long-term damage from being late to the 5-inch phone market.

Ride the wave
Investors should not worry too much about the short-term logic of Wall Street price target changes. Investing is about long-term trends and competitive advantages. Apple owns iOS, a popular ecosystem that will drive a reliable upgrade cycle for years to come. By contrast, Android vendors who offer larger screen sizes have no moat: Apple can simply follow suit whenever it wants to.

There are several potential catalysts that could boost Apple sentiment later this year. Whether it's the launch of a new product line, a more ambitious return of cash to shareholders, or an iPhone launch at China Mobile, a strong catalyst could quickly reverse Apple's recent losses. With the company trading for less than 10 times earnings despite having lots of opportunities ahead of it, long-term investors will be rewarded for sticking with Apple.

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

Read/Post Comments (9) | Recommend This Article (2)

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 March 13, 2013, at 8:48 PM, myeerah wrote:

    At last an article that truly points out why apple is not in trouble.Personally I have to fit other stuff in my pockets and a larger phone will not fit! Buy American! Long Apple!

  • Report this Comment On March 13, 2013, at 9:14 PM, LordSquidworth wrote:


    The biggest problem is a lack of leadership. Apple had a good run on Jobs legacy. Now that it is running low, they're looking to see if Cook can step up to the plate or continues being... rather bland.

  • Report this Comment On March 13, 2013, at 9:18 PM, Jjkiam wrote:

    For once a balanced longer term perspective that doesn't follow the analyst meme of the inevitable Apple demise! Yes the stock is currently broken but the company isn't and has lots of catalysts at it's disposal to begin the new meme for the analysts to do an about face. Do these people think that all the employees and management team at Apple are simply sitting with their thumbs up their butts and not working at all since OMG Steve Jobs is gone. Please

  • Report this Comment On March 13, 2013, at 9:32 PM, TMFGemHunter wrote:

    @ LordSquidworth: I don't think there's a leadership problem (more on that in my next article). The reality is simply that Apple needs a somewhat more conservative perspective now that it has two incredibly successful and profitable product lines. Apple needs to continue improving iPhone and iPad to drive future upgrade cycles, but can't get so radical that it cannibalizes its profit centers (i.e. a $199 unsubsidized phone or tablet).

    People tend to forget now that Apple came out with its fair share of bad and/or uninspiring products in the Steve Jobs days. MobileMe is one of the first things that pops into my head.

  • Report this Comment On March 13, 2013, at 9:36 PM, TreyAnas wrote:

    Setting the specifics of AAPL aside for a moment, I enthusiastically agree with the point that most analysts react to the stock price more than they either 1) do quality analysis of the underlying business or 2) make worthwhile forecasts of the stock price.

    I've been watching the market and reading the analysis for 35 years and have yet to see an analyst make recommendations in advance of price moves or business changes - with any consistency. They're good at analyzing the status quo, but are less than worthless looking ahead more than a quarter.

  • Report this Comment On March 13, 2013, at 10:13 PM, myeerah wrote:

    Agreed Treyanus! I would love to an analyst.An analyst is like a weather man that steps outside and sees that it is cloudy and then goes to the office and reports that it is cloudy.The moment that Tim Cook proves the company can innovate without Steve Jobs the share price will spike.I have 463 share riding on the gamble that he can.....knock on wood!

  • Report this Comment On March 13, 2013, at 10:47 PM, nlosborne wrote:

    This is article is complete garbage. It assumes 2 products(the iTV and iPhone 5S) that apple has never even acknowledged their existence! And about phablets… In the last quarter, the iPhone 4S using a one and a half year old phone sold MORE than any other phone except the iPhone 5! How is this not enough evidence to send apple back up?

  • Report this Comment On March 13, 2013, at 11:19 PM, h8stockanalyst wrote:

    I liked the article. Pointed out about facts rather than speculation. What does an analyst know about running a company? Analyst are missing the biggest product catalyst Apple has every invented and it is iCASH. $137B to date is not a company fault by no means. Show me another company that is doing revenues in the $$Billions$$/QTR.

    So I would like to ask the analyst and the SEC how is shorting a stock an investment??

  • Report this Comment On March 14, 2013, at 4:24 AM, singaporenick wrote:

    I think being an analyst for the US stock market is the only job in the world where you can get paid big bucks for continuously being wrong.Power without responsibility....The smart investor should just ignore them ,as long as one is thinking medium or long term

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