Apple's market capitalisation has fallen by $165 billion over the past eight weeks - or more than the value of Rio and Telstra combined. Photo: AP
Gravity has taken hold of Apple, and a lot of investors have been smacked on the head.
Apple, the largest US stock by market value, posted its eighth straight week of declines last week, as the rush to secure profits before a potential hike in capital gains taxes next year has investors dumping the market favourite.
Since hitting a record high of $US705.07 a share in September, Apple has lost about a quarter of its value. The stock's descent has vastly outpaced those of the S&P 500, which is down just under 7 per cent in the same time frame.
"No individual investment can defy gravity," said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank, in San Francisco.
The declines have shaved about $US170 billion ($165 billion) off the company's market capitalisation - or more than the entire value of Rio Tinto ($88.4 billion) and Telstra ($51.6 billion) combined. Apple is still currently worth about $US493 billion, about $US100 billion more than the second-most valuable US company, Exxon Mobil.
Taxes on capital gains and dividends are likely to rise next year as part of an expected deficit-cutting deal to avoid the US fiscal cliff of scheduled tax hikes and spending cuts.
With a stock like Apple, where investors may have large embedded capital gains as a result of its stellar run, selling now locks in gains and offsets the possibility of higher taxes next year. The uncertainty over the outcome of talks in Washington over the fiscal cliff has sapped the natural inclination to buy declining shares.
"Some of the selling is being driven by these tax decisions, but the flip side is there is not a lot of buyers because the buyers are procrastinating to see how the negotiations come out," said Bucky Hellwig, senior-vice president at BB&T Wealth Management. "You probably have an inordinate effect to the downside because of these tax strategies."
The current 15 per cent tax rate on dividends and capital gains is scheduled at expire at year end, and the two items are to revert back to being taxed as ordinary income, which means the highest earners would face rates of 35 per cent.
The recent plunge is a reversal of fortune for high-flying Apple, though the shares remain up about 30 per cent for the year so far. Apple shares have rise every year since 2003 with the exception of 2008, when the market was struck by the global financial crisis.
"If you've got all these gains - which a lot of Apple investors have because it's done very, very well - then you're going to see selling in the likes of Apple and other companies that have had good runs," Mr Davidson said.
Apple's stock has been below both its 14-day and 50-day moving average for over a month, suggesting both the short- and mid-term momentum is negative.
Despite the declines, Thomson Reuters StarMine estimates the stock's intrinsic value is about $US833.90 a share. That figure is derived from analyst estimates for growth over the next five years and StarMine's expected growth rates for several years after that.
Given that the stock is likely worth more than where it is trading, tax concerns are probably playing into the recent weakness, said Phil Orlando, chief equity market strategist at Federated Investors, in New York.
"I think the stock is worth $US750," Mr Orlando said. "If you are sitting here looking at Apple trading at $US500, you say, 'Well the stock ought to be 50 per cent higher over the course of the next year or two,' so the stock looks pretty attractive."
Late October, Apple disappointed Wall Street by delivering a fourth-quarter profit that was slightly below analyst expectations, despite jumping 24 per cent, largely because of a surge in sales of the iPhone, a product that now accounts for nearly half of the company’s sales.
Apple said its net income was $US8.22 billion, or $US8.67 a share, compared with $US6.62 billion, or $US7.05 a share, a year ago. Revenue for the period rose 27 per cent to $US35.97 billion, and revenue for the full fiscal year was $US156.5 billion.
To put that in perspective, Apple’s revenue for the year exceeded that of Microsoft, Google and Facebook combined.
But analysts had expected Apple to report earnings of $US8.75 a share and revenue of $US35.8 billion. The results were well ahead of Apple’s own forecast of $US7.65 a share in earnings and $US34 billion in revenue for the period.
Apple has struggled to deliver enough of the new iPhone 5 to meet customer demand, making them tough to find in many retail stores.
In a conference call with analysts, chief executive Tim Cook said that demand for the new iPhone was “extremely robust” and that the company had a significant number of back orders for it. He said production had picked up substantially since earlier this month.
Underscoring how drastically Apple’s business has been transformed by mobile products, revenue from the iPhone rose 56 per cent to $US17.13 billion, making up 48 per cent of the company’s total revenue. It sold 26.9 million iPhones, 58 per cent more than a year earlier.