Apple (AAPL) is experiencing quite the post-Thanksgiving weekend hangover. After a fantastic few weeks of price increases, Apple stock took a tumble yesterday. The stock went from $119 on Friday, down 6% to $112.50 yesterday morning. It recovered slightly by the end of the day, but is still trading $4 lower today at $115. So, let’s talk about what matters to us: why did Apple drop and what does that mean for an investment position?
My initial answer is, I don’t know. There was nothing sufficiently scary that happened yesterday to justify such a big drop. That said, there were a few small events that took place that could have worked together to cause the dip. Here are my thoughts on each of those possible culprits and whether they make me consider selling the stock:
The optimistic bank. Yesterday, Barclays’ analysts increased their previous $120 price target on Apple stock, and now expect the price to rise to $140 per share. In theory this would have caused Apple’s stock price to rise yesterday instead of fall, but investors have a bad history with Apple price target increases. A few years ago, analysts were calling for price targets of $800-$1000 (or $142-$143 in today’s terms after Apple’s 7 for 1 stock split). Instead of increasing to those targets, Apple’s price crashed to the $400’s. Investors today might be worried analysts are getting carried away again.
Does it make me want to sell? No. I get that the market is dictated by human behavior, but I’d rather make my trade decisions on data and company fundamentals than psychology. Also, that $800 price prediction from a few years ago did come true (a post-split share today is worth over $800 is pre-split terms), investors just had to hold on through the Apple crash to see it.
The pessimistic bank. Also yesterday, Morgan Stanley downgraded its view of the technology sector, and reduced its position in Apple by 1%.
Does it make me want to sell? No. Apple is a different stock than many other companies in the technology sector. Unlike many of its higher-growth technology peers, Apple has incredible amounts of cash and a very low price to earnings ratio (indicating you are paying a low premium for the stock based on its earnings). And Morgan Stanley’s reasoning for the decrease in its Apple position was that the stock is performing too well. Ok…
Weak Black Friday Sales. Black Friday weekend sales were down 11% from last year, leaving investors worried that retailers (and by extension here, Apple products and retail stores) aren’t performing as well.
Does it make me want to sell? No. As I pointed out yesterday, the drop in Black Friday sales could actually be a good sign for retailers, as it means consumers are less reliant on deals. Plus, this year retailers stretched out their Black Friday for so long that many sales likely happened on Monday-Wednesday, and wouldn’t be counted in the numbers.
From an Apple specific perspective, Apple rarely offers great discounts on its new products anyways, which means most consumers have to buy them full price if they want the latest model (with the exception of phones, which are mostly bought via upgrades). So weakening trends on a discount holiday doesn’t tell me much about Apple’s generally full price products.
Declining iPad Sales. According to a report last week from International Data Corporation, 2014 will be the first year of a decline in Apple iPad shipments. Overall, they expect the worldwide tablet market to grow only 7.2%, down from 52.5% in 2013. The decline in tablet sales is likely because consumers are holding on to their tablets longer than producers expected (they expected consumers to replace tablets at the same rate as cell phones, or every 2-3 years).
Does it make me want to sell? It concerns me slightly, but no. IPads aren’t a huge revenue driver for Apple right now, and only account for 12% of sales. Plus, the decline in iPad sales is being compensated for by the fantastic iPhone 6 sales. Since the iPhone 6 is almost big enough to be a tablet, I think some of these iPhone 6 sales are cannibalizing iPad sales (which sounds bad, but is better than the iPad sales just disappearing).
I’m also not so concerned about iPads because Apple has a lot of rumored new product launches in 2015. First, there’s the Apple Watch, which I am very optimistic about. Even if it’s hard to use, it just looks so cool that non-techies should be interested too. Then there are rumors of a new iPad model, the iPad pro, and even a new iPhone 6s next year. The last two are very hypothetical, but the Apple Watch is happening and I expect it to be big.
Phew, that all was quite a long way of saying that I have no interest in selling my Apple shares anytime soon. I still love Apple’s core business, and you just can’t beat its financial fundamentals (cash on cash on cash). When I see a random dip like this, with no reason that makes sense to cause the dip, I look at is as an opportunity to buy. I actually picked up a few more shares of Apple yesterday and I’ll be looking out for more dip buying opportunities in the next few months.