Apple Inc. (Nasdaq: AAPL) investors have cringed as the stock slipped about 16% from its peak over the last two months.
But given the absence of any catastrophic bad news, why is AAPL stock tumbling? And where will it stop?
It's important to note off the bat that Apple's fundamentals are just as strong as they were last fall when the stock began its huge run-up from just under $400 to $636.23 on April 9 (it hit an intraday high of $644 on April 10).
In short: Apple still expects to make a mountain of profit this year. Apple still has over $100 billion in cash with no debt. The company's price/earnings ratio is about 13.50 for the trailing 12 months and its forward P/E just 10.
So something else must be driving down Apple stock. Some of it is logical, some of it emotional – but none of it permanent.
Let's take a closer look:
- A Parabolic Rise: First and foremost, AAPL simply rose too far too quickly. Rapid gains beg profit-taking.
"It was clear to me that this kind of reversal was coming – and sooner rather than later," said Money Morning Chief Investment Strategist Keith Fitz-Gerald when the selloff started in April. "The shares had soared 75% in just five months – one analyst actually described the performance as "euphoric.'"
- Unrealistic Expectations: Apple beat analyst expectations in the March quarter, but not as dramatically as the monster earnings it had in the December quarter. Worse still, Apple lowered guidance for the current quarter.
- Speculation and Rumors: The lowered guidance fed into existing concerns that the delay of the iPhone 5 until fall would bite into sales over the next two quarters. Skittish analysts also worried that increased competition in the tablet market would hurt iPad sales. And then there's the ongoing hand-wringing about how long Apple can thrive without the loss of its charismatic muse, Steve Jobs.
- Market Pressures: AAPL has not been falling in a booming market. In the month of May, the Dow Jones Industrial Average has slipped about 6%, the Standard & Poor's 500 index 7%, and the Nasdaq Composite 7.71%. As a global company, Apple is also exposed to concerns over the Eurozone debt crisis and the slowing China economy.
Nevertheless, AAPL's positives still far outweigh the negatives. In fact, one could easily see the current pullback as a buying opportunity.
In addition to the strong fundamentals mentioned earlier, Apple stock is undervalued as measured by the relative strength index (RSI), a scale of 100 that compares recent gains to losses. AAPL's RSI recently dipped into the 30s, close to oversold territory (it was near 90 several times during its run-up).
What's more, despite Apple's lower guidance a month ago, analysts have actually raised their EPS estimates for the current quarter over the past 30 days from $9.91 per share to $10. 34, and for the current fiscal year (which ends in September) from $44.37 to $46.99.
Analysts have also raised their price targets – the average has crept up from the $650 range in March to about $722, well above the current $555.
And let's not forget the $2.65 dividend that starts paying out next quarter.
As for its products, the iPhone has lots of room for growth, particularly in China. The iPad is the dominant tablet in a market expected to grow exponentially over the next few years. Apple's Mac business and iTunes Store also continue to grow.
You also need to somehow factor in the earnings impact of Apple's Next Big Thing, which many suspect will be a revolutionary TV.
In a report to investors this week, Morgan Stanley analyst Katy Huberty predicted an Apple TV could help Apple double the amount of money the average U.S. household spends its products from last year's $444 to $888 by 2015.
In other words, AAPL stock may be down now, but it won't be down for long.
"Apple is the most misunderstood company in the market," David Einhorn, co- founder of Greenlight Capital Inc., said in making a bullish case for Apple stock at the Sohn Investment Conference last week. "Apple is still penetrating the market and gaining share."
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