Apple's Recent Dip Shouldn't Alarm Investors

Competitors have yet to put a serious dent in iPhone 5 momentum, says Morningstar's Brian Colello.

Brian Colello, CPA 10 December, 2012 | 12:28PM
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We are maintaining our fair value estimate for Apple (AAPL) despite a 9% stock decline last week and a bout of recent selling pressure. We believe many factors are at play regarding the stock price decline from an intraday high of $705.07 on Sept. 21 to an intraday low of $505.75 on Nov. 16.

Investors Locking in Gains

Primarily, we believe investors have been taking gains in Apple, as the September price of $705 represented a 74% gain in nine months. We believe that such profit-taking was exacerbated in early November by US President Barack Obama's re-election, which appears to have heightened concerns about the US fiscal cliff and higher tax rates on investment capital gains. Since Apple was probably the largest investment holding and/or the biggest 2012 winner for many investors, we suspect the stock has likely been a casualty of any profit-taking or trimming of holdings by large investors. More recently, we suspect that technical investors are steering the Apple boat, as evidenced by the massive recovery in the 12-trading hours following the Nov. 16 low of $505, as the stock catapulted back to $566 by the end of the following trading day.

We believe investors have been taking gains in Apple, as the September price of $705 represented a 74% gain in nine months

Other nontrading data points have come out in recent days that may have contributed to Wednesday's steep slide. Taiwanese trade paper DigiTimes reported that Apple's component suppliers might expect a 20% drop in component orders in the March quarter, thereby hinting at a sharp decline in Apple production and, ultimately, sell through. We aren't sounding the alarms for Apple on the basis of this report, as DigiTimes' sources have not always exhibited an accurate record and component orders are always subject to change based on improving or deteriorating forecast product demand. 

Competitive Pressures

Another potential negative catalyst was Nokia's (NOK1V) agreement with China Mobile (00941 or CHL) to sell the Windows-based Nokia Lumia 920T on the carrier's TD-SCDMA 3G network. We don't believe that this deal prohibits Apple from someday selling the iPhone with China Mobile, which is a key catalyst in our thesis for further iPhone growth in the long term, given China Mobile's massive subscriber base of more than 700 million people. At the same time, we are taking a wait-and-see approach toward Nokia and Windows phones in general, and availability with a given carrier is not a guarantee of future success. 

Finally, at an investor conference Wednesday, the CEO of AT&T's (T) AT&T Mobility , Ralph de la Vega, hinted that the carrier expects to sell 26 million smartphones in 2012, which implies 9.3 million devices in the fourth quarter, about equal to smartphones sold in the fourth quarter of 2011. Given the high proportion of iPhones sold by AT&T as a percentage of total smartphones, one could interpret this to presume that the iPhone 5 launch is not faring significantly better than the 4S launch in 2011. We view this data point as a slight negative, as it would imply that Apple and its loyal base of iPhone customers with AT&T might not wildly exceed expectations. However, we certainly don't see this news as a death blow either, as we think these comments still point to solid iPhone 5 sales with the carrier.

More important, the comparison with the year-ago quarter at AT&T and Apple is not exactly apples-to-apples, as the iPhone 5 was launched Sept. 21 and initial sales were included in AT&T’s third-quarter results, versus the 4S launch Oct. 14 where opening weekend sales were captured in the fourth quarter. Additionally, while AT&T is a key iPhone carrier and the US is Apple's most important iPhone market today, we can see a scenario where iPhone sales at Verizon Communications's (VZ) Verizon Wireless or Sprint Nextel (S) exceed expectations and contribute to an overall strong iPhone 5 launch. We also have not seen enough evidence that Nokia's Windows phones, Google's (GOOG) Nexus 4 phones made by LG, or Samsung's relatively older Galaxy S III phones are putting a serious dent in Apple's iPhone 5 momentum just yet.

We are keeping a close eye on the competitive dynamics of the smartphone market, especially during this important holiday season, but we are maintaining our fair value estimate for Apple at this time.

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The original version of this article was published on Morningstar.com, a sister site to Morningstar.co.uk.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alphabet Inc Class A164.96 USD1.05Rating
Apple Inc231.30 USD1.65Rating
AT&T Inc21.26 USD-0.51Rating
China Mobile Ltd73.65 HKD-1.93Rating
Nokia Oyj4.09 EUR1.79Rating
Verizon Communications Inc43.19 USD0.44Rating

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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