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Summary:

[qi:053] Apple shares slid 7.6 percent Friday, closing at $180 and capping an 11-percent loss in just one (shortened) week. Should investors be worried? If you figure that the setback left Apple’s (AAPL) stock at its lowest close in only one month, probably not. And considering […]

[qi:053] Apple shares slid 7.6 percent Friday, closing at $180 and capping an 11-percent loss in just one (shortened) week. Should investors be worried?

If you figure that the setback left Apple’s (AAPL) stock at its lowest close in only one month, probably not. And considering the 135 percent surge it saw throughout 2007, it was at least a little bit overdue for a pullback.

On the other hand, this is the worst one-day percentage drop that Apple’s stock has suffered since April 2005. On the 14th of that month, Apple shares fell 9.2 percent.

Back then, Apple was riding a surprisingly strong quarter on growing iPod demand, but investors didn’t like the conservative guidance the company was giving, so they sold off. It took three months for Apple’s shares to recover that 9.2 percent loss, but once they did, they caught fire. Apple closed at $37 on April 14, 2005. By the time 2007 drew to a close, the shares had risen to more than five times that price.

In hindsight, selling Apple then wasn’t such a hot idea. And this time around, the slump in Apple’s shares has little if anything to do with what the company has done. But investors are again concerned about its future — or rather, the future of the U.S. economy, which many believe will stifle Apple’s ability to keep growing.

On that front, things look very grim indeed. 2008 is off to a hard start for stocks in general, and tech stocks in particular. As Eric Savitz over at Barron’s noted, the Nasdaq had its worst day in nearly five years.

“The bottom line is that the odds of a recession appear to be rising. As I noted earlier, the biggest catalyst for today’s sell-off seems to be the latest jobs data: Nonfarm payrolls rose 18,000 in December, the worse month for job creation since August 2003. The unemployment rate rose to 5.0%, the highest level since November 2005. As I noted yesterday, Monster.com reported the biggest-ever one-month drop in its online recruitment index in December.”

That recession fears are sparking a tech selloff isn’t at all unexpected. The timing may have less to do with start-of-year portfolio allocations than growing concerns that tech stocks, some of which have risen to unrealistically high valuations, may have disappointing earnings later this month.

More surprising is that Apple shares were among the hardest hit. Shares of Research In Motion fared a little worse, falling 8.4 percent, as did Intel’s stock, which slid 8.1 percent after JPMorgan downgraded it, citing signs of sluggish orders from PC makers. But shares of other tech bellwethers didn’t do so badly: Amazon lost 6.7 percent, while Google, Microsoft, IBM and VMWare all gave back less than 5 percent.

On Friday, Apple received one fan note, from an analyst: Goldman Sachs raised its price target on Apple to $220 from $205, implying a 22 percent gain from the stock’s current level. Goldman’s reasoning was sound enough: Macworld is coming, as is what should be a solid earnings report for the December quarter. And later in the year could bring news on a next-generation iPhone and a new sub-notebook.

Some might say Apple’s shares had gotten too pricey, but its price-earnings ratio for its upcoming fiscal year is 28, lower than Google’s and half those of Amazon and VMWare.

I suppose Apple’s Achilles’ heel in a weak economy is its dependence on product upgrades — its reliance on customers buying a new iPod even though their two-year-old iPod works perfectly fine. If they hold off on buying a new model iPhone, it could hurt growth.

There is one sign that Apple is bracing for slower sales, but it’s a vague one. Catcher Technologies, which supplies metal cases for
iPods, reportedly said that Apple was cutting
back on orders
even more than it normally does in December. Such a move could reflect a new supplier or
a new iPod design, but in this climate the news has a spooky feel.

But today’s selloff seems a bit rash and could be a chance for Apple bulls to stock up. Its shares are highly unlikely to rise another five times over anytime soon. But we may be seeing a battle emerging between Apple’s innovation and an economic recession. It will be interesting to see who wins that one.

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By Kevin Kelleher

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  1. Thanks, that was a very useful article. I think mac sales are going to remain on fire, but I’m a bit worried about ipod sales in 2008. Seems like Apple is running out of “must have” upgrade features for ipods, so people will keep their ipods a bit longer before upgrading again and the ipodless population isn’t as large as it used to be.

  2. e. david zotter Friday, January 4, 2008

    Great post.

    Amazon.com shows Apple products in the Top 10, always…..
    I just don’t see any leading indicators of a sales slowdown, especially as they are accelerating in both Europe and Asia across all products. I believe comscore data also shows an explosion of online sales.

    The next few weeks are going to be a roller coaster. Macexpo will be very telling… as well as a more dramatic reaction from the fed.

  3. It is clear that the US economy which generates a good share of apple sales is going for a slow down. Add to this, the rapidly falling US dollar (set to fall further when the fed reduces interest rates at the next meeting), which makes the core components of apple products more expensive. So either apple transfers this cost to the consumer (highly unlikely in a recession) or it bears the extra cost, which eats further into its profits.

    I think apple is going to fall even further, as are all hardware technology companies. The rapidly falling value of the dollar is going to hit them hard because most of their production is overseas and demand is surely going to slow down in coming months. In addition, in a reccession, discretionary spending falls off, I mean if your home value is dropping rapidly, your job security is in question and there is no more cheap debt, the last thing you would want to do would be to buy a more expensive computer which doesnt hard significantly to your current productivity.

    So short apple, hp, dell, intel, amd stocks. For non hardware companies like google the horizon is not as bad, because the instead of the dollar affecting them, it actually enhances them, since half of there sales come from overseas. Microsoft is tightly linked with hardware sales, and its productivity products would take a hit once companies start cutting costs on discretionary spending. Amazon like other retailers would also take a hit.

  4. Kevin Kelleher Friday, January 4, 2008

    @frank

    Interesting point about the weak dollar driving up component costs. In theory, couldn’t it also help Apple in overseas markets by making its products cheaper there?

  5. Very Informative Article, Thanks!

    Nhick
    http://www.itrush.com

  6. What tech sell off? I am not sure if we are all looking at the same metrics because I saw the entire market sell off including tech, financials, biotech, oil, minerals. This article is trying to talk to an Apple sell off when there has been none relative to the market. Its like trying to explain why your house is cold by talking about plumbing when there is a snow storm outside. Context, my friend. Context.

  7. In my opinion economic slow down will affect only marginally Apple business. As someone once told me market problems are very different from business problems and I can’t see many problems with Apple.
    People will not stop buying computers and sure not phones and not music devices. There are still many markets where Apple is going to enter and their market share is undoubtely going to increase.
    They have excellent products, excellent marketing strategy and smart people working. Nothing has happened to Apple yesterday but they lost more than 7% of their value…this is more market panic than business slow down.

  8. Graeme Thickins Saturday, January 5, 2008

    repeat after me…. “Buy on the dips”

  9. Tom Shaughnessy Saturday, January 5, 2008

    No more birthdays or graduations. No more gifts of any kind for any reason. Kids save every cent for college. Lexus dealers switch to Ford. All restaurants are closing this Tuesday because because people only have enough money to buy rice.

    Zero churn – every cell phone buyer stays with their current carrier and keeps their old phone because change is bad. Gateway revolutionizes the media industry using telepathy.

    Everyone of you shorts needs to go to the mall and sit outside the Apple store this Saturday. And then go take a nap at the Dell kiosk or in the Sony store. If you have the courage, sit in on the earnings conference call – it will be scary, but we’ll hold your hand and then buy you a nano if you keep quiet and pay attention.

  10. Steven Fierberg Saturday, January 5, 2008

    Great Article, the most balanced and clear thinking I have read. And good comments, too. I have held Apple stock for over 8 years, and done extremely well. Nonetheless, I remember going into a CompUSA and seeing tons of Cube boxes sitting there unsold. I should have sold the stock that very next day, but I waited two days, not one, and the stock plummeted to 17 from 70 in the interim.
    This time, I got out yesterday at 187, half way down on the day. I think in both cases, the stock had finally risen enough to attract the speculative investors who don’t really know anything about Apple products, just that they want in on a hot stock. The value is actually 50 times current earnings, no one can be sure about future earnings. Even Shawn Wu, who has been more right than most, only had a 210 target when the stock was hitting 200, which is a tiny premium compared to when he was predicting 170 and the stock was at 120.

    Apple has several possible problems that could impinge on its success: All the other phone companies are balking at their overly onerous revenue sharing deal, otherwise, why wouldn’t they have iphones all over Europe by now– they can certainly make enough. The Hollywood studios and music companies will do ANYTHING to fight itunes, even stupid things like putting their music on sites that no one will buy from. Clearly, Steve has a terrible relationship with them right now. VUDU is a better video downloading system that all the studios support. DELL is finally designing good looking computers. FRANCE has standardized its entire educational system on LINUX (while this is better for Apple than Microsoft, it still presents a way for people to get a good operating system with a non-apple machine). Apple’s deal with AT&T, if it is for five years, will be overly limiting to their long-term growth, and so on.

    There are many pluses to Apple, I really think they will ultimately do great, but it is possible that with a strong market decline, it might be six to eight months before it begins to rise again, and it could fall a lot more before then. I personally have no intention of buying at 180. Remember, it fell to 120 only a few months ago.

    Best of luck to all of us.

    steve

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