Everyone take a deep breath. Before you panic about Apple’s future based on its recent nosedive in the stock market, know that it's got more to do with jittery fund managers looking at year-end benchmarks and the looming fiscal cliff than the decline of a tech giant.
Here’s what you need to remember: There is probably no stock in the world where more people have made more gains than Apple. You do the math. It’s gone from $100 billion in market capitalization several years back to north of $600 billion at its peak. Even at its current (measly) $515 billion valuation, the stock is up 35 percent for the year (that beats 2011). Depending on the price of oil it's still the most valuable company on the planet.
So what happened this week when Apple shares slid more than 6 percent, and headlines were trumpeting the worst Apple stock drop in four years?
Apple’s underlying story didn’t change. It sold a bunch of iPhones, it sold a boatload of iPads. Nokia did win a deal in China (at presumably a much lower wholesale margin than Apple would accept), but that deal was never priced into Apple’s share price to begin with, and it doesn’t preclude Apple from doing another of its own.
So why the share price nosedive? Fear on the part of institutional investors that have huge positions in Apple stock that they could blow their 2012 if Apple continues its slide. “Those guys are all thinking, 'If I get smoked in this thing in the next two weeks, it’s going to hurt me in marketing, it’s going to hurt me in raising funds next year,'” says Andy Hargreaves, an analyst covering Apple for Pacific Crest Securities. “I have to make sure that doesn’t happen.” And to makes sure that doesn’t happen, you sell and count your profits.
There are always explanations for why stocks rise or fall. Apple’s slide Wednesday was explained away as a China thing, with some perceived weakness in iPhone shipments. Maybe, but just as likely is that investors started to see Apple shares fall and they couldn’t adequately explain why, so they jumped on the sell bandwagon. Momentum is a powerful and persistent thing, it can carry a stock to highs or to the basement. Again, if you are a fund manager with a big position, you can’t afford to wait it out, especially at this time of year.
There is another contributing factor that hurts Apple, and that is the so-called fiscal cliff. The general consensus on Wall Street is that taxes are headed up, and the capital gains tax (the tax you pay on profits from investments including stocks) could go up a lot. The bottom line is, if you have made money on a stock, you will give more of that away next year assuming the capital gains tax rate goes up.
Jeffrey Gundlach, the chief investment officer of Double Line Capital, which has $50 billion under management, points to that tax uncertainty as one of the reasons he recommends betting against Apple. (If you short Apple he also recommends going long natural gas as a hedge.) Remember, no one has made more money on a stock, broadly speaking, than Apple, so the group of investors that stand the most to lose (or pay the most in tax) are those who bet on the gang from Cupertino. A few percentage points change in tax rates are billions in wealth captured or lost. There is a huge sell pressure on Apple stock for that reason alone (and other stocks that have had similarly good runs).
Are Apple’s best days behind it? Is the high end of the smartphone market saturated? Has Apple run out of mind-blowing product ideas? Maybe, maybe not. But Apple’s recent dismal run in the stock market has very little to do with the future; it’s all about the present – it’s December.
