How Far Can the Mighty Apple Fall?

A worker climbs outside an Apple store in Hong Kong

Apple may be the world’s most celebrated electronics company, but its formerly high-flying stock price has plummeted to Earth over the past six months, declining 40% since last September. On Wednesday, that trend continued when Apple shares tumbled 5.5%, briefly pulling company shares below $400 for the first time since December 2011, and wiping out more than $20 billion in shareholder value.

 

Wednesday’s decline was apparently triggered by a disappointing sales forecast from one of the company’s key suppliers, which fueled fears of weakening demand for Apple’s signature iPhone and iPad products — and added to growing concern about a weakening global electronics market. Apple’s dramatic stock slide has cost the company the title of the world’s largest company by market capitalization, a distinction that once again belongs to energy giant Exxon Mobil.

 

The question now is whether Apple shares are likely to keep falling. Apple, which reports earnings results next Tuesday, is now trading at slightly more than nine times earnings making it extremely cheap relative to the broader market. Even so, many analysts are cautioning that the stock could fall further still — with some pulling out the classic warning that investors shouldn’t attempt to “catch a falling knife.” Or, as Auerbach Grayson analyst Richard Ross told Forbes: “Until this stock can show me something, there’s no reason to be a hero.”

 

Apple had already been facing growing competition from the likes of Google and South Korean electronics titan Samsung, weighing down Apple’s stock price in recent months as investors wait for the company’s next breakthrough product. Then, on Tuesday, Cirrus Logic, which supplies Apple with audio chips for the iPhone and iPad, warned of “a decreased forecast for a high-volume product” from one specific customer. Although Cirrus Logic did not name the customer, at least 90% of the company’s business comes from Apple, according to Reuters. Cirrus Logic shares fell nearly 16% on Wednesday.

 

That prompted Bernstein Research analyst Toni Sacconaghi to lower his sales forecasts for both the iPhone and iPad by one million units each. “We believe multiple news reports and checks support demand trending below our previous estimate from January,” Sacconaghi wrote in a note to clients cited by The Wall Street Journal.

 

Apple has experienced several quarters of slowing growth since its shares peaked last fall, just before the company announced the iPhone 5. Last quarter, Apple generated profit of $13.1 billion, but that was flat compared with the year-ago period — the company’s lowest rate of profit growth in a decade. And the threat from Samsung is looking especially acute these days. Some analysts believe its new Galaxy S4 smart phone could draw consumers away from the iPhone. In 2012, Samsung eclipsed Apple in global smartphone market share with 30.3% of the market, compared to Apple’s 19.1%.

 

Apple did account for 69% of the smart phone industry’s 2012 profits, according to Canaccord Genuity analyst T. Michael Walkley, as cited by Forbes. But few believe Apple can maintain an edge based solely on the strength of incremental improvement to the iPhone and the iPad. Instead, many investors feel, the company needs new breakthrough products of the kind Apple’s late co-founder Steve Jobs delivered repeatedly during his remarkable career — and current Apple CEO Tim Cook has yet to introduce a truly breakthrough new product of his own.

 

Persistent rumors suggest that the company will eventually introduce a new television device, or perhaps a high-tech watch, either of which could revive investor enthusiasm for the company. But analysts don’t expect Apple to unveil a new product until the summer at the earliest, and maybe not until the fall. Until then, the knife may just keep falling.

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