APPLE - DOWN BUT NOT OUT

Apple Inc. (AAPL) stock dropped sharply Monday closing at $501.75, down $18.55.  Tuesday morning opening was $$498.30 and as of 11am EDT it is currently trading around $489 per share.  Shares hit a record high of $705.07 on September 19, 2012.

The Wall Street Journal reported Sunday evening that Apple had cut orders for iPhone 5 parts last month by roughly 50 percent, signaling a lower demand in the device than they had predicted.  This comes at a time when the company is facing increased competition from other smartphone makers who have eroded Apple’s market share.  In the last quarter of 2011 Apple held 23 percent of the worldwide smartphone market share.  During third quarter 2012 Apple’s market share had dropped to 14.6 percent.  Samsung Electronics has overtaken Apple as the dominant smartphone manufacturer with 31.3 percent market share in the third quarter 2012, up from 8.8 percent in 2010.

But hang onto those shares because as CNBC is reporting, Jefferies’ senior technology analyst Peter Misek puts the situation into perspective.  "We look at it as a little bit of a letdown obviously. It's not great that this happened. We thought this device would be the biggest seller of all time and in fact we think around 50 million units sold in Q4, which would make it the biggest selling electronics product of all time in a quarter," Misek said. "But there were hopes that it would be better than that. There were hopes that in Q1 that sales would be flat and instead what we're getting is a seasonally type decline in Q1." Misek expects first quarter iPhone builds to be between 35 million and 40 million.  Jefferies is expecting Apple’s stock to reach $800 per share, in part due to their substantial cash reserves. "If we look at the full year out, we think that the company can do somewhere around $50 of earnings, remember they have $100 per share of cash. By the end of next year they'll have somewhere around $150 per share of cash," Misek said. "So what you are doing is you are actually buying a stock that effectively is $400 and we think at $50 earnings for the year that it is a cheap valuation."  Apple also has new product launches planned for this year and may be making a deal with China’s largest cellular phone carrier, China Mobile.

What all of this shows us is that Apple simply overestimated demand for the iPhone 5 and is now adjusting their component purchases.  However they still reached a milestone sales number for fourth quarter 2012.  Therefore the drop in price is most likely due to skittish and uninformed investors dumping their shares at the slightest hint of trouble.  We do not believe that now the time to sell Apple stock; on the contrary it looks to be a good time to buy.