Can You See Apple Under $60?

by: Zach Bass November 21, 2008 | about stocks: AAPL / SPY    

Zach Bass

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I can, but first we have to deal with the next level of support, which is 74-ish. What really makes me a believer is how easily we broke through 85 yesterday. You know, 85 represents both long-term support, and an important psychological level. That’s because Apple (AAPL) hasn’t been below 85 since January 9th of 2007, the day Steve Jobs introduced the iPhone to the world. This Bear has essentially negated the iPhone premium. I want to make clear that these are the words of Rex Crum of Market Watch, not mine. Man, you’ve got to love that name!

How can this be? Apple’s fundamentals are strong, right? Yes they are. But that has absolutely no bearing here. Apple is simply falling with the rest of the market, and so long as there’s no confidence in the market, it will continue to fall. I suppose you could argue that Apple has taken more than its fair share, but trying to argue that point with the market is an argument you can’t win. You can only accept it for what it is.

The fact that we lost the 2002 Bear lows in the S&P today was a very telling event. I don’t think any technical analysts saw that coming so soon, and with such force. The downside volume was incredible, and decliners led advancers by a toxic 8 to 1! Sure, I was convinced we would soon test 775, and thought it would represent a significant challenge to the Bears before ultimately breaking through. But today (Thursday Nov 20) the Bears cut through that level like a hot knife through butter. That’s a message you’ve got to respect.

And what is that message? Are we talking recession, or are we on the brink of depression? I was watching Larry Kudlow last night and they were bantering the idea about, but universally his panel said no depression. Of course you have to realize that Larry is the ultimate Perma-Bull. And if he’s even entertaining the question, then that’s got to make you think that the possibility is there. The fact of the matter is that to date, the S&P has lost more value than any other year since its inception, other than 1931, the beginning of the Great Depression.

The only way we’re going to avoid the depression scenario is for investors to regain confidence in the markets. And the only way that’s going to happen is if the Bulls retake 775, and hold it long enough for a strong base to be developed. How is this going to happen? Good question. What we need is good news, and lots of it. It doesn’t have to be transformational, all it has to do is give investors some confidence in what to expect over the coming months. Perhaps a solid and decisive bailout plan for both the financial markets and the auto industry is the ticket.

Some have suggested that the incoming Obama administration announce its intentions, or at the very least work with a transitionary plan with the Bush administration. But that could have the effect of diminishing the Obama administration’s effectiveness if the economy should significantly deteriorate before he actually takes office. And I don’t think they want to cozy up with Bush in any shape or form. It goes against all historical precedent and may incite a public relations nightmare.

Alright, so let’s assume there’s no good news coming and we can expect to continue down this path. What is the next level of support that we can expect in the market? Well, for the S&P it’s 664-666, that represents a period in 1996 when we had multiple tops, it also represents the 61.2% retracement from the top the market achieved before this Bear began in 2007. This is where I believe we’ll find a bottom, and I said as much in a podcast I produced last week called Going To Hell and Back, a reference to the 666 level.

If we fall to the 666 level on the S&P, then this would equate to the next level of support for AAPL which would be in the 62-64 range. Although I find the support in this area to be quite vague, it wouldn’t be a stretch to see the lows of 2006 provide the next and hopefully final levels of support at 57 and 53. I know these numbers sound crazy, but who would have thought Apple would have lost over 60% of its value since its all-time high of 202 just 11 months ago. Also, if you recall, not more than a couple months back, we had respected Apple analyst Gene Munster reiterating his price target for Apple of $250! So what’s crazier now, a 300% gain to hit Munster’s target, or a 25% decline to reach 60?

Stock position: Short AAPL.

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This article has 49 comments:

  •  
    Nov 21 07:38 AM
    "What really makes me a believer is how easily we broke through 85 yesterday"

    With the way the market is (which you later state) this should not surprise you at all.. If apple came out today and announced that they were going to raise guidance the stock probably wouldnt do anything.. market right now has no logic built in.. Apple is poised though to rebound nicely in Early 09..
    Reply | Link to Comment
  •  
    Nov 21 08:02 AM
    Apple is a decent company with some good products. Still, it´s been overvalued for some time - the user/fan/Jobs premium is alive and well. Expected dividend payments from the stock in the next 5 years? $0. Mmm, nice. The market was full of amateurs (and some pros too) just imagining the logic free valuation of Apple would take it through $200 and beyond. This Bear has teeth, that's for sure, but the problem was with Apple's pumped valuation. Now the cheap money steroids have been confiscated, it could easily drift down to the low 50s. Still, it could hit 100 again in a few years (2-3). In the meantime, a lot of fairly inexperienced investors (and hey, I've taken a bath on some finance stocks too) will become seasoned investors - hard lessons though. Apple could hit $40 a at trough, and I'd say its a reasonable buy there.
    Reply | Link to Comment
  •  
    Nov 21 08:12 AM
    "So what’s crazier now, a 300% gain to hit Munster’s target, or a 25% decline to reach 60?"

    How about both?
    Reply | Link to Comment
  •  
    Nov 21 08:46 AM
    southbeach, please go look at apple's #'s. THey are growing and beating estimates year in/year out.. in Q4 they blew away expectations.. not many companies can pile up $25 BILLION of cash and no debt.. they should look at acquiring some companies right now to enhance their efficiencies.. market caps are so low now you can get a steal...
    Reply | Link to Comment
  •  
    Nov 21 08:50 AM
    southbeach... Who the hell are you, that we should believe your reason for Apple's decline and earnings projections? Truth of the matter is that Apple has grown top and bottom line at 30%+ for the past 5 years. That type of growth deserves a P/E multiple of 30+.

    However, that's not all this company has done. Cash sits at $25B and growing at a rate of $10B+ annually. Apple has more cash than any CE company and approaching MS like cash flows. Better yet, it has weened itself from its most productive product line (ipods) and added 3 more high growth product lines that are growing 50%+ annually (mobileme, app store, iphone). Additionally, their bread and butter imac is growing above industry standard and is about to become the number 2 PC company in the US. Further, Apple is the smallest player with the highest growth and gross margin, in the largest CE market and is poised to transform that market as it did the mp3 player. Don't forget that Apple is also growing its retail and global footprint that has much more upside than down side.

    Finally, with apples pending release of mobile processors created from the acquisition of PA semi, I suspect that they will produce mobile devices that are 20%+ cheaper to make which could catapult Apple into 100 million annual iphone level while also improving ipod GM. At that level and with GM above 45% look for Apples EPS to sky rock and cash flow to reach $15B annually. I personally believe Apple will have $45billion in cash by early 2010 or before. Steve Jobs is building Apple into the Samsung of the West. How about "Applesung" for a new corporate name. Recession or Depression, Apple's revenue and EPS will grow straight through it and you all will be amazed as to how they did it. Before I can believe your prognostications over mine, explain to me how Apple with only 2 years into the mobile market with only one device out sold Rimms entire line of cell phones? Until you can answer that question, please keep your dooms day projections to yourself.
    Reply | Link to Comment
  •  
    Nov 21 09:16 AM
    a lot of the new negativity for the stock market is coming via the CDS spreads.

    and the CDS spreads are saying BRKA has more of a chance of going bankrupt vs MS. this very observation is, imo, a clear indication the CDS market is too easily manipulated, and can not be trusted. But when u see BRKA achieving such spreads, the CDS market is simply wrong or manipulated to achieve a perception.

    if u r lucky enough to see apple at 60, it will be there for literally a second before major major buying takes place, seeing how it will be trading half its cash value. probably ending back at 80 within days.
    Reply | Link to Comment
  •  
    Nov 21 10:31 AM
    rd4sndk - really well reasoned fundamental analysis - thank you. But the author's point is "its going down". Its hard to believe that the investors/traders in AAPL don't know these numbers so either they are "irrational"... the numbers aren't going to happen or massive external forces are pushing this stock down. In any event, the selling has to stop before the fundamentals can reassert themselves. As for the author keeping his negative opinions to himself, I for one am grateful to hear them as well as your own, as the continued pummeling of this stock has got me puzzled.
    Reply | Link to Comment
  •  
    Nov 21 10:35 AM
    Zach, Any insight into how the new guy they hired from Yale is doing at Apple University ? With a faltering economy and apples ability to revolutionize most areas they enter into could this be the next growth engine when most of us are still focused on Consumers electronics?
    Reply | Link to Comment
  •  
    Nov 21 10:38 AM
    You Traitor! How can you be shorting Apple? I thought you were more of a rational investor. I guess no one cares about fundamentals any more. If Apple announces a deal for Iphone in China, i would suggest you cover very quickly!
    Reply | Link to Comment
  •  
    Nov 21 10:51 AM
    if the auto industry had a business model based on Apple's, we wouldn't be arguing about bailing them out and U.S. cars would still be the 'most wanted', instead of having their CEO's be the 'most wanted' for another reason.
    Reply | Link to Comment
  •  
    Nov 21 10:58 AM
    Apple is going to have a $15 billion Christmas Quarter and the stock is going to shoot through the f*cking roof... end of story,,,buybuybuy!!!!!...
    Reply | Link to Comment
  •  
    Nov 21 12:03 PM
    Hey, lets not forget the big boys in the hedge funds are still unloading all of their profitable stocks, and that they will reload when the turn comes and the market climbs back up. Apple has been down before witness a year ago when it dropped from $200 to $85 and bounced back up in the 190's again. You are right Zach, Apple is getting a ride south because of the market, not because it is losing market share or its innovative edge. It will return to higher levels when we get through this worst of times. Hang on for the long ride and you will be handsomely rewarded!
    Reply | Link to Comment
  •  
    Nov 21 12:23 PM
    Obviously you would like to see AAPL at $60. Short selling is the main reason why investors have no confidence in any stock. Why should I buy stock when people like you are allowed to borrow it (WITHOUT MY PERMISSION) and short it?

    The first thing that needs to be done to restore the confidence of the retail investor is to BAN SHORT SALES OF ALL EQUITIES.
    Reply | Link to Comment
  •  
    Nov 21 12:25 PM
    AAPL trading at 2X cash is pretty insane.
    Reply | Link to Comment
  •  
    Nov 21 12:27 PM
    Re: "So what’s crazier now, a 300% gain to hit Munster’s target, or a 25% decline to reach 60?"

    I'm not sure which is crazier, but I think we'll see $250 before we see $60.

    ------------

    Re: "The only way we’re going to avoid the depression scenario is for investors to regain confidence in the markets. And the only way that’s going to happen is if the Bulls retake 775"

    Zach, this implies the determining factor of a depression is the valuation of the stock market. Is that really what you mean?
    Reply | Link to Comment
  •  
    Nov 21 12:29 PM
    If the Big Three automakers go under, there's no reason not to see $60 for Apple. Google will be at $200. There have been claims the market will contract much further if the U.S. auto industry fails. I don't know why you people think Apple is some sort of granite rock whose share price won't continue to drop. It's not a reflection of the health of Apple as a company. The share price is just a reflection of investor panic or some hedge funds needing capital.

    Apple's stock price will not shoot through the roof no matter how good a holiday they have. No company can do this in a poor economy. I agree that Apple will have another $2 billion in cash reserve, but that's about it. Investors will see next to nothing in share price rise. Or they'll see a quick jump and then watch it disappear in a week.

    I'm only giving my opinion, not a guaranteed prediction.
    Reply | Link to Comment
  •  
    Nov 21 12:35 PM
    Considering the current economic climate, I don't see Apple as being undervalued at all. Even with the huge drop in price, it still has a PE of 15. I don't see their sales momentum continuing at its current pace. What will drive the price up though is the restoration of faith in the credit and stock markets. Who knows if/when that will happen? I wouldn't buy it at 190 and I wouldn't buy it at 140. The Pollyanna's screamed that it would never see $100.00 again. Yeah....right. In normal times, I would jump all over Apple stock at the current price. These days..... I'm not exactly excited about it. Maybe I'll buy some.... maybe I won't.
    Reply | Link to Comment
  •  
    Nov 21 01:09 PM
    Ridiculous pronouncement with no basis in fact... especially with the opening statement "decent company with some good products". Your attempt at dishing by saying "Pollyanna's screamed it would never see $100.." is sophomoric at best... the entire market has taken a steep dive. Is that something you predicted? C at $4, Ford at $1.40... of course not.. give it a rest. You obviously know nothing about this company...


    On Nov 21 08:02 AM southbeach wrote:

    > Apple is a decent company with some good products. Still, it´s been
    > overvalued for some time - the user/fan/Jobs premium is alive and
    > well. Expected dividend payments from the stock in the next 5 years?
    > $0. Mmm, nice. The market was full of amateurs (and some pros too)
    > just imagining the logic free valuation of Apple would take it through
    > $200 and beyond. This Bear has teeth, that's for sure, but the problem
    > was with Apple's pumped valuation. Now the cheap money steroids have
    > been confiscated, it could easily drift down to the low 50s. Still,
    > it could hit 100 again in a few years (2-3). In the meantime, a lot
    > of fairly inexperienced investors (and hey, I've taken a bath on
    > some finance stocks too) will become seasoned investors - hard lessons
    > though. Apple could hit $40 a at trough, and I'd say its a reasonable
    > buy there.
    Reply | Link to Comment
  •  
    Nov 21 01:38 PM
    "Zach, this implies the determining factor of a depression is the valuation of the stock market. Is that really what you mean?"

    Ya isn't that funny logic, heh.

    Unfortunately that's the way the MARKET seems to think. Aka. "If I crash so hard that people tremble in their homes, maybe I can trigger the depression by myself".
    Reply | Link to Comment
  •  
    Nov 21 01:57 PM
    @Camden "Zach, this implies the determining factor of a depression is the valuation of the stock market. Is that really what you mean?"

    What I'm saying is that investors peg certain levels in the market, the way we draw lines in the sand. And there are no lines in the sand between 775 and 666. And so long as there's nothing underneath to prop the market up, and uncertainty has pushed volatility and fear to a crescendo, then stock price has nowhere to go other than down.

    As stocks go down, so does wealth. As wealth deteriorates investment ceases and jobs are lost. As jobs are lost, money no longer flows, with no sales, things deflate.
    Reply | Link to Comment
  •  
    Nov 21 02:05 PM
    Re: "Apple could hit $40 a at trough, and I'd say its a reasonable buy there."

    Nonsense. Southbeach doesn't seem to understand what valuation means. If Apple, a company that has no debt, is bringing in $4billion of cash per quarter and still rapidly growing earnings, were to trade down to $40 it would be trading at less than 1.5X the amount of CASH currently on hand. That's practically impossible. The company is likely to have $40 billion in cash by the end of 2009. At $40/sh Apple's market cap would be less than $36 billion and trading at well below the cash on hand. That's NOT going to happen – even if Steve Jobs, Tim Cook, and two other top executives were to die tomorrow.
    Reply | Link to Comment
  •  
    Nov 21 02:10 PM
    I'll buy more, most likely during the panic following "Black Friday".
    Reply | Link to Comment
  •  
    Nov 21 02:21 PM
    Zack,

    Re: As stocks go down, so does wealth. As wealth deteriorates investment ceases and jobs are lost. As jobs are lost, money no longer flows, with no sales, things deflate."

    I agree there's a bit of negative influence on the economy when stocks fall. But I think it is established knowledge that stocks rise and fall with the EXPECTATION of companies' earnings. The rise or fall of GDP (which is is by definition the determinant of whether or not a depression exists) is not dependent on what the stock market does. GDP can rise during falling stock markets and often does.
    Reply | Link to Comment
  •  
    Nov 21 03:49 PM
    It is wuite remarkable that we are talking about a company that could write a check today and give the big three automakers enough cash to supposedly keep them in business.

    Says a lot about Apple, says a lot about the long dying auto industry.
    Reply | Link to Comment
  •  
    Nov 21 04:29 PM
    "Apple is a decent company with some good products". How any one replies to such a comment is beyond me. The guy is obviously baiting Apple supporters. I just hope Obama picks a rock solid economic team. His pick today is a good start. Sure wouldn't want his job starting the new year.
    Reply | Link to Comment
  •  
    Nov 21 09:11 PM
    you don't banter something about you bandy it about, banter is something completely different, whatever happened to literacy?
    Reply | Link to Comment
  •  
    Nov 21 10:20 PM



    On Nov 21 12:35 PM SteveTheHawk wrote:

    > Considering the current economic climate, I don't see Apple as being
    > undervalued at all. Even with the huge drop in price, it still has
    > a PE of 15. I don't see their sales momentum continuing at its current
    > pace. What will drive the price up though is the restoration of faith
    > in the credit and stock markets. Who knows if/when that will happen?
    > I wouldn't buy it at 190 and I wouldn't buy it at 140. The Pollyanna's
    > screamed that it would never see $100.00 again. Yeah....right. In
    > normal times, I would jump all over Apple stock at the current price.
    > These days..... I'm not exactly excited about it. Maybe I'll buy
    > some.... maybe I won't.


    Stevie, I dont own Apple, or a mac. I do own a bull put spread on them though.

    You need to read the financials and the earnings conferences. You see, in this previous quarter, they actually made about $2.50/share. It is purely a trick of accounting that it doesn't show up that way on the statements. Take $2.5 multiple it by 4, stick any P/E you want on that. If you get a stock price less than the current market value less the cash on hand, don't buy. Otherwise, get a brain.

    For you folks that think $60 will never be seen, there is easy money to be had selling the put spreads. Sell 40/60 or 45/65 if you like.

    I've gone with the easy money at 30/50 myself.
    Reply | Link to Comment
  •  
    Nov 22 08:58 AM
    On the other hand, maybe the market is discounting the coming Obama depression (see announced tax policies and Congressional penchants for nationalization) and AAPL is a leading indicator of things to come - as it seems (to me) to have been in the past.

    As for Obama's 'crack team', his whole Admin is beginning to shape up as Clinton redux - not very encouraging stock-wise (or any other-wise), even to a lay person like myself. Not to mention Somalia coming back into the news again - how the O and the Clinton retreads manage that will indictate how they will manage financials.
    Reply | Link to Comment
  •  
    Nov 22 10:39 AM
    Everything is relative... At $82 AAPL commands a 50% premium comparing to other good companies.

    This is a crazy market but AAPL's price is still very high. Don't just look at AAPL, look at something else too.
    Reply | Link to Comment
  •  
    Nov 22 10:54 AM
    Guys the easier the money gets the sooner its going to be wrong. Mr. Market doesn't make it easy for very long.
    Reply | Link to Comment
  •  
    Nov 22 01:31 PM
    Apple will make 6 bucks a share this year. Their cash is worth 28 bucks a share. A sixty handle would mean that they would make 6 bucks on 32 dollars of valuation, with 25% growth.

    That is insane. If that happens, I will eat my mac. Even 80 is insane, but this market is all fear right now.

    hard to believe there are so many fearful amateurs out there and no experienced investors. Buy it NOW while the panic runs red in the streets. It will double as soon as the idiots are back in gold or cash in their silly portfolios.
    Reply | Link to Comment
  •  
    Nov 22 01:44 PM
    stox2buy, You are not considering the cash on hand and the effect of subscription accounting. Even if earnings momentum slows (it will) Apple will still do well. If Apple did not sell one Macintosh this quarter it would still have positive earnings because of revenues booked in the prior eight quarters on iPhone and iTV that will be recognized this quarter.

    BTW, Mac laptop sales for October 2008 were UP 28% over October 2007.
    Reply | Link to Comment