Why is Apple stock turning bitter?

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  AP Apple’s abrupt descent is fuelling a debate among market watchers. File Photo
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This holiday season is shaping up to be a record-breaking period for Apple as shoppers snap up iPhones and iPads. So, why is the world’s most valuable company losing its lustre with investors?

Apple began selling the iPhone 5 on Sept. 21, the same day the company’s stock hit an all-time peak of $705.07 per share. Since then, the stock has plunged more than 20 per cent, trimming the company’s market value by more than $150 billion. On Friday last, shares were trading at around $534.

The sell-off has had broad impact. It has reached beyond Apple’s own stockholders because the company is the largest component in the Standard & Poor’s 500 and Nasdaq composite index.

Apple’s abrupt descent is fuelling a debate among market watchers. Is the stock now a bargain, as some would argue? Or, is the recent markdown in Apple’s value justified because the company has entered a phase of less innovation and slower revenue growth?

The iPhone’s early lead in the smartphone market already has been surrendered to the more than 500 million devices running on the Android software. By comparison, as of the end of September, Apple had shipped 271 million iPhones since the gadget’s 2007 debut.

Nokia phones running on the recently released Windows 8 system from Microsoft Corp. pose a new threat, especially in China, where Nokia has struck a deal with that country’s largest wireless carrier.

Now, there are signs the competition is putting pressure on Apple in the booming tablet computer industry that it launched in 2010 with the release of the iPad.

In a report that likely contributed to Wednesday’s steep drop in Apple’s stock, research firm IDC predicted the iPad’s share of the worldwide tablet market this year would decline to 54 percent from 56 percent in 2011 and would dip below 50 percent by 2016. Meanwhile, the market share of tablets powered by Android, including Google’s Nexus line and Amazon.com Inc.’s Kindle Fire, has climbed from 40 percent last year to 43 percent his year, according to IDC.

The iPad mini, which was launched as a result of the company being forced to respond to competition, has undoubtedly diverted some sales away from full-sized iPads, which sell at prices ranging from $399 to $829. That is one of the reasons BGC Financial analyst Colin Gillis expects the iPad’s average selling price to fall by about $50 in the current quarter, which ends this month. That would be a 9 percent decline from the iPad’s average price of $535 during the July through September period.

Innovation contraction

Since Apple co-founder Steve Jobs passed away, the company has mostly been fine-tuning products that were created under his visionary leadership. Some investors are starting to wonder if Apple can conjure up another revolutionary product to catapult the company on another multiyear stretch of breakneck sales growth.

Smartphones and tablets “are starting to become more like commodities,” Gillis said. “And how much upside is left if you are stuck in a commodities business?” The question is- What is going to get Apple going again?” Most analysts believe Apple’s next breakthrough will be a television that shares the same operating system as the iPhone and iPad. An Apple TV would give the company a prized perch on the biggest screen in most households and open up an array of new business opportunities.

Fiscal cliff factor

Under laws set to expire Dec. 31, profits on stocks owned for at least a year are taxed at a 15 percent rate less than the same rate for ordinary income. If Congress and President Obama are unable to reach agreement that preserves that long-term capital gains rate, investors’ tax bills will be substantially higher next year.

Gillis, though, points out that savvy investors probably wouldn’t be selling their Apple stock just to save some money on taxes if they truly believed the stock is destined to soar higher and make them even richer a year from now.

“When you get to be as big as Apple, any shift in sentiment can have a material impact on the share price,” he said.