Why Apple’s Stock Fell Despite iPad 2′s Success

Apple shares have been pummeled this week, marking their largest decline in nine months. It’s not something you’d expect given the iPad 2 launch was an unmitigated success. So why are Apple shares taking the hit, dropping 2.3 percent on Tuesday, and 4.5 percent on Wednesday?
Analysts point to several causes. JMP Securities’ Alex Gauna downgraded Apple on Wednesday because of concerns over slowing growth at Apple’s main supplier, Hon Hai Precision Industry (also known as Foxconn), as Android’s huge success starts chipping away at iPhone sales.
Guana is among the few naysayers who doubt that Apple can continue to outperform the market. But Asian firm CSLA counters that the JMP analysis ignores the fact that Apple doesn’t represent a significant portion of Hon Hai’s sales (Apple accounted for about 24 percent of Hon Hai’s total 2010 revenue, according to CSLA). If so, that’s definitely not enough to infer a direct one-to-one relationship between the fortunes of the two companies.
CSLA offers a second, more convincing reason behind Apple’s recent slump. CSLA firm analysts Chitra Gopal and Steve Fox argue (and, to be fair, Gauna also mentions this) that Apple’s heavy reliance on Japanese components is causing investor jitters in light of last week’s earthquake and tsunami. Here’s an excerpt from their full note on the subject (viaSAI):
A4 /A5 CPUs are made by Ibiden, and ACF films for displays are 100% sourced from Japan (Sony Chemical and Hitachi). This will affect practically all manufacturing, not just Apple plays. Apple related stocks are getting hit today – I guess one reason could be Apple historically has operated a lean supply chain (carries much lower inventory vs. other consumer electronics/PC makers) – so concerns are the Apple’s shipments could be worse hit.
The Japanese market represents about a 6 percent share of Apple’s overall sales. Obviously, Apple’s sales in the country will be affected following the disaster, and the iPad 2′s launch in that country has been delayed indefinitely. But here’s the rub: the disaster’s fallout is hardly limited to Apple, and it’s hard to see how Apple could possibly be more affected than the majority of its competitors in the consumer electronics and computing market.
So what else could be behind the stock slide? Michael Shulman of InvestorPlace offers four other reasons. Maybe his most salient point is that many simply believe that Apple’s growth will inevitably slow, so why not now? Shulman, for one, isn’t buying it. He points out that Apple owns a fraction of the worldwide cell phone and personal computer market share, giving it plenty of room to expand its business, something which it could easily accomplish if it continues its trend of bringing lower-priced offerings to market.
Apple’s stock is up about 2 or 3 percent today as of Thursday morning. Overall, tech stocks are trading low (down half a percent today) as a result of concerns of market instability following the earthquake in Japan. If anything, the clear evidence of Apple’s success with iPad 2, combined with what I think is an undervaluation based on JMP’s downgrading make this a perfect time to buy Apple stock if you’ve been looking for the opportunity.