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The Apple Stock Drop: What You Need to Know (Nasdaq: AAPL)

As Apple Inc. (Nasdaq: AAPL) stock continues its seven-week tumble, investors want to know what is likely to happen next.

Since hitting an all-time high of $702.10 on Sept. 19, Apple stock plunged $155.04 –more than 22% to close at $547.06 on Friday.

Investors have gotten little help from Wall Street analysts, who have offered diametrically opposed opinions on where AAPL is headed.

Among the prominent bears is Doubleline Capital CEO Jeff Gundlach, who predicted on Thursday that Apple stock would continue all the way down to $425. He said that's about where AAPL was when it started its dramatic climb in January, and he expects it to return to those levels.

Gundlach is down on Apple because he thinks the Cupertino, CA-based company's new products are no longer cutting edge.

"I'm really struck by this mini iPad thing as if that's any kind of a product innovation," Gundlach told CNBC."Once you just start changing the size of your products, I really think you're not exactly innovating."

Meanwhile, some Apple bulls insisted the stock will not only bounce back, but eventually will reach beyond $1,000 a share.

Brian White, an analyst with Topeka Capital Markets, said in a note to clients on Thursday that he's keeping his $1,111 price target on AAPL.

"We believe that those investors that have missed the Apple rally over the past year are presented with a very attractive entry point heading into the strong holiday news season," White wrote.

So which story are Apple investors to believe?

To figure that out, let's take a closer look at what's been going on.

Why Apple Stock is Falling

Sentiment on Apple has soured in recent weeks for a number of reasons:

  • Sell on the News: The stock ran up in anticipation of the introduction of the iPhone 5 on Sept. 12; the selloff started just a few days later.
  • Supply Issues: Shortages of the iPhone 5 sparked concern that Apple would miss sales targets for its critical December quarter, historically Apple's biggest quarter.
  • Mapgate: Controversy over the elimination of Google Maps in iOS 6 (which runs the iPhone, iPad and iPod Touch) for Apple's homegrown Maps app renewed concern that CEO Tim Cook isn't capable of enforcing the same sort of high standards that prevailed under the late Steve Jobs.
  • President Obama Re-elected: The re-election of the president means capital gains taxes will probably rise in 2013 from 15% to 20%, with an extra 3.8% Obamacare surtax for individuals making more than $200,000. Both large and small investors with long positions in AAPL have a strong incentive to take profits now.
  • Management Shake-Up: At the end of October Apple fired two top executives, including iOS software chief and long-time employee Scott Forstall. The incident added more fuel to the worries over Cook's abilities to manage his executive team.
  • Market Share Slippage: Sales of smartphones and tablets based on Google Inc.'s Android operating system have been rising faster than those of iPhones and iPads, cutting into Apple's market share and threatening its dominance in the mobile space.

"It has just been wave after wave of bad news," Gene Munster, an analyst at Piper Jaffray, told The New York Times.

Why Apple (Nasdaq: AAPL) Will Rebound

It's easy to see why Apple stock has gotten slammed so hard over the past two months. But most of its problems are short-term, or can be fixed.

After all, despite the gloom, Apple is still raking in profits, they're just not growing at astronomical rates.

What's more, the company's fundamentals show it's undervalued.

Apple's price-earnings (P/E) ratio has fallen to 12.5, well below its historic average of about 15, and its forward P/E is about 10.

The company's cash hoard is up to $121.3 billion (with no debt), equal to about $129 a share.

And the yield is up to 1.9%. In fact, the mere presence of a dividend – and one that should rise, given the company's low payout ratio of 24% — should help put a floor under Apple stock.

Another reason not to panic is that Apple has always been a volatile, momentum-driven stock, both on the way up and on the way down.

Apple Stock Chart
(Nasdaq: AAPL)

What's happening now has happened many times before, most recently in the spring when Apple stock dropped nearly 17% in less than six weeks. Over the next six months AAPL shot up 32%.

Based on its history, AAPL is ripe to reverse course again. And one technical indicator in particular, the Relative Strength Index (RSI), suggests that reversal could happen any day now.

RSI is a 100-point scale, with numbers above 70 indicating a stock is overbought and below 30 indicating it is oversold.

Earlier this year, Apple's RSI went over 90 three times (and stayed above 65) during its run-up to $636.23. By the time it hit $530.12, the RSI was down to 10.

When AAPL hit $620 in early August, its RSI shot up to 88. It continued to bob above 70 for the next three weeks, briefly slipping below 50 before popping over 70 again as Apple stock hit its high Sept. 19.

As Apple slid downward its RSI soon slid below 30. But just this week it fell below 13 – not far from where AAPL reversed course in May.

Apple stock should see strong support at about $530, its low from May, although it could briefly dip even lower.

But when it turns, watch out. The momentum to the upside should take it quickly back over $700.

To get the price much higher than that, Apple will need at least one major new source of revenue, such as the long-rumored TV device or near-field communication (NFC) payment system on the iPhone.

Assuming Apple executes well with its current products, such a new addition could get the stock to $1,000 in another year or two.

"The bears think Apple is in the eighth inning," David Rolfe, chief investment officer at Wedgewood Partners, which counts Apple as its biggest stock holding, told The New York Times. "We think they're still in the fourth or fifth inning."

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