# Apple's Worst Day in 32 Months

[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.