12.18.12

Behind Apple’s Big Stock Decline

Apple’s stock is down and its products are getting discounted at Walmart. Suddenly, the company is suffering on Main Street and Wall Street.

The only thing more amazing than Apple’s unparalleled ability to get customers to pay huge premiums for its laptops, phones, and tablets is its ability to get investors to pay huge premiums for its stock. Between September, 2009 and September of this year, the stock roughly quadrupled in value, hitting a high of $702.10 on September 19. Everyone was on the Apple bandwagon, with roughly one out of five hedge funds reporting Apple as one of the top ten most highly held stocks. But since September, Apple’s stock has tumbled 26 percent, closing at $518.33 on Monday. Why the big decline? Maybe Wall Street is starting to see Apple’s stock as more normal because consumers are seeing its products that way. Put another way. If Apple products are slowly starting to resemble commodities more than premium products, maybe the stock is simply following suit.

The first big data point is Walmart. The massive retailer that promises “everyday low prices” is aggressively selling Apple products, at aggressive discounts. The Bentonville behemoth and the Cupertino colossus stand squarely at opposite ends of the retail universe, which makes their partnership all the more puzzling. Apple’s entire strategy is to sell a few high quality products at margins that no other gadget manufacturer can manage. For example, Google’s new tablet, the Nexus 7, goes for $199, while Apple’s iPad Mini will put you back $329. Since Apple’s tablets, phones, and computers are so popular, it can enforce strict prices at its stores, at online retailers, and at the brick-and-mortar stores lucky enough to carry the latest iPad. Call it “Everyday high prices—everywhere.”

Apple also squeezes its suppliers. Because an Apple contract is a stamp of approval for any company in its supply chain, Apple can demand its suppliers deliver products with little-to-no profit. The difference goes right into the company’s massive revenues. Walmart is also a revolutionary when it comes to the supplier squeeze. But it does so in the pursuit of narrow margins on an unbelievably wide range of products—everything from groceries to clothes and firearms. So the partnership between the two is a little awkward. According to Reuters, Walmart is offering steep in-store discounts on Apple toys. A $499 iPad will go for $399 with a $30 iTunes gift card and a 16 gigabyte iPhone 5 will be $127, instead of $189.97.

Of course, the appeal of Walmart to branded products is that it offers a unimaginably large stream of potential customers. And yes, Apple continues to break into new markets. Over the weekend, Apple sold some 2 million phones in China, reassuring analysts who expected a weak opening. But once it has satisfied the crowd who can roll into Apple’s cuboid Fifth Avenue location at lunch to pick up a $600 tablet, then it’s onto the Walmart crowd, and that means discounts.

If it’s a harbinger of further discounts to come, the Walmart deal would be particularly worrying for Apple compared to its gadget competitors. Google, the force behind the Nexus and the designer of the operating system used on the Samsung phones that are the iPhone’s biggest competitor, is totally fine with gadgets priced more like commodities than luxury items. The money for Google is in people using the phone or tablet. The more, say, someone who buys a Galaxy S III searches using the Google app and finds restaurants using Google Maps, the more mammon the Mountain View mammoth can collect selling targeted ads. Furthermore, just by introducing a serious competitor to Apple in the smartphone and tablet space, Google can eat into some of Apple’s incredibly high profits even if it isn’t getting much from the devices themselves.

There’s another reason Apple’s stock might be flagging, which has nothing to do with Walmart of Google. Taxes. The low 15 percent top rate on capital gains is set to expire on January 1, and there’s little chance it will stay where it is. So if you’re sitting on big gains from Apple shares you bought, say, 18 months ago at $195, you may be facing a significantly higher tax bill if you wait until January to cash out. Speculation about Apple’s stock being hit by owners looking to lock in a low tax rate has been rampant since the election and there’s some evidence behind the claim. Apple’s stock declined noticeably from November 6 to November 7 (along with the rest of the stock market) and is down about 18 percent since mid-October, when Obama became a clear favorite. However, the stock really started sliding in mid-September, when it hit that $702 high.

Of course, it could just be that Apple’s stock is sliding because … it’s sliding. Stocks are imperfect measures of a company’s future earnings, to say the least. Sure, it’s not worth more than $700 anymore, but year-to-date, the stock is still up over 28 percent. Only in the totally anomalous world that is Apple, the world’s most profitable company, is this considered a signal for Englewood Cliffs to set itself ablaze. After all, when Apple reported quarterly earnings of $8.2 billion late this October, it was considered a disappointment because analysts were expecting a bit more. For Apple’s long-term shareholders, its employees, and its customers who have been able to buy a whole new round of expensive gadgets in the last few months, it’s still been a damn good year.