In the course of 2012, shares of Apple (AAPL +0.94%) 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.
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. Amazon.com (AMZN +0.20%) 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.
