01.14.13

Why Apple’s Stock Is Down

Apple’s stock price took another hit Monday, but its continuing decline is months in the making.

Legend has it that Sir Isaac Newton detected the force of gravity in a falling Apple. Stock-market analysts can now detect the same force at work on the stock of Apple.

Since late October, the company’s stock price has dropped some 18 percent, wiping out more than $100 billion of market capitalization. And more curiously, the drop appears to be purely the result of Apple-specific issues—not the economy, or the woes of the tech sector as a whole, as the chart below shows. Technology companies have done pretty well, while Apple’s stock has been sucking air.

AAPL Chart

AAPL data by YCharts

But what’s the culprit of its recent decline? The proximate cause, at least for its 3.6 percent drop Monday, was a story published today in The Wall Street Journal reporting that Apple had cut orders for iPhone 5 components. This came after months of grumbling about disappointing iPhone sales, and reports of a possibly too-small opening in China. This is important for two reasons: the iPhone brings in a huge proportion of Apple’s revenue, and Asia is a place where Apple’s growth has been sluggish and where its competitors are going gangbusters.

In the 2012 fiscal year, Apple sold just more than 125 million iPhones, bringing in $80.5 billion in net sales from the phone and services, making up just more than half of its total net sales for the year. The haul from the iPhone grew 71 percent from 2011. The iPad told a similar story: 58 million units sold and $32 billion in net sales in 2012, and 59 percent year-over-year growth. Of its total net sales, around 80 percent came from those two products. Everything else— MacBooks, iMacs, iPods—came to just one-fifth of total sales.

But even 2012 showed a slowdown in the rate of growth of net sales: from 2010 to 2011, net sales grew 66 percent, buoyed by 311 percent year-over-year growth in iPad sales. But from 2011 to 2012, overall net sales growth was “only” 45 percent.

In the Asia-Pacific market, not including Japan, Apple had net sales of $33 billion in 2012, making up 23 percent of its total sales. Sales in Asia grew at nearly the exact same rate as sales overall, 47 percent compared with 45 percent. But between 2010 and 2011, Asian sales grew 174 percent compared with 66 percent overall. We knew this in October, when Apple published its annual report and released “disappointing” quarterly earnings. The day before its fourth-quarter earnings came out, Apple’s stock closed at $616. On Monday, it closed just above $500. 

Apple’s stock runup—peaking at just more than $700 a share in September—was based on its continuing market dominance and high margins. Both are eroding before our eyes.

It seems that Apple’s competitors have finally figured out a way to, well, compete in areas that the company dominated. Apple’s share of global tablet sales has fallen from about two thirds to half; meanwhile, Google’s Android operating system has about 75 percent of new sales in the smartphone market.

Meanwhile, Samsung is doing well with its Galaxy Note II, a “phablet”—a screen larger than any smartphone but smaller than the iPad Mini’s eight inches. Apple doesn’t even have a competitor for this class of product. And Samsung’s Galaxy line of smartphones, a direct and cheaper competitor to the iPhone, just crossed 100 million units shipped. It has become the most dominant smartphone manufacturer by market share, even if Apple enjoys higher profit margins. Apple’s stock runup—peaking at just more than $700 a share in September—was based on its continuing market dominance and high margins. Both are eroding before our eyes.

There’s another problem. Apple’s main operating-system competitor is Google, whose Android operating system is found in its Nexus line of smartphones and tablets and in Samsung’s mobile device. One of its main tablet competitors is Amazon, which makes the Kindle Fire HD. Both of these outfits aren’t really trying to profit on the hardware they’re building. Rather, like razor manufacturers who give away the shaver and charge a lot for the blades, they’re trying to get devices into the hands of consumers in the hopes of providing them with services down the road. Google is able accept much lower margins on smartphones, tablets, and even laptops in order to get more and more people in the Google ecosystem of email, chat, maps, and everything else.

Similarly, Amazon sells the Kindle Fire HD at $199 (compared with $329 for the base-level iPad Mini) because it wants more people to buy ebooks and stream movies and TV shows from Amazon. An iPad is a nice way to watch Netflix; the Kindle Fire HD is explicitly designed to pipe as much Amazon content to the customer as possible.

And so Apple is in the unfamiliar situation of having to adjust to an evolving market—rather than simply creating the market and watching its competitors stumble as they rush to keep up. It’s as if gravity is finally exerting its force on the massive company, pulling it back to earth. The same powerful force is evidently at work on Apple’s stock.