How Low Will Apple Go?

by: Zach Bass October 16, 2008 | about stocks: AAPL    

Zach Bass

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Please note that I’m not asking if Apple (AAPL) will go lower. I’m asking how low you imagine Apple’s stock price could eventually get. Do you think we’ll reach last week’s low of $85, or will we shoot past $85? Perhaps you believe that we’ve already reached the bottom, and that this current move in the markets is simply reflexive from that huge surge on Monday?

This past Sunday I wrote a post suggesting that AAPL and the markets have not yet seen the bottom by a long shot. And as I said, “just for kicks”, let’s make a prediction that the bottom of this bear market was not yet within our grasp, but at levels too dire to even imagine. I said 50 seemed to be the ultimate bottom for AAPL based on the charts, but I’m going to revise that upward because Apple has no debt, and most companies are getting hammered because they have debt. So I’ll put a premium on Apple of about $24 a share, which represents the cash they have in the bank.

So, for the S&P, the bear bottom I came up with was 775; this would represent fair value in terms of a price to earnings ratio at 15. Currently, the S&P has a PE of 17. So that’s another 15 percent, in terms of price, that the S&P would have to drop to reach that level. If we extended that to AAPL, with a current price around 95, that would come out to somewhere in the low 80s.

click to enlarge image

Now this is all predicated on the market gravitating towards its fair value. I don’t know if that’s a valid assumption or not, but it seems reasonable that a market would move towards that level in such a decline, perhaps even overshoot it some before settling on it.

So if we overshoot some, many stocks are going to be sucked into a black hole. Apple may overshoot 80, but it has a strong balance sheet, and good price support right around 74, so that’s where I’m going to put my money, right at 74. If it reaches there, I’m all in. If we manage to test 85, then I’m 25 percent in; if we hit 80, I’m 50 percent in.

Disclosure: Author is invested in cash

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This article has 20 comments:

  •  
    Oct 16 05:27 AM
    Gartner Group reported Wednesday that Apple’s share of the US market grew 29.4% in the 3rd quarter year-over-year, six times greater than the total growth of the US market, which is 4.6%. Therefore, it doesn’t matter much if the US market shrinks–Apple’s share of the pie is growing much faster than the pie is shrinking, so the guys who will get hurt are the runners-up. This indicates that it will be possible for Apple to outrun the bear indirectly, letting only the also-rans take the hit from the shrinking by.
    Reply | Link to Comment
  •  
    Oct 16 05:47 AM
    PS: Change the last word "by" above to "pie."

    I think the upcoming earnings report on Tuesday will reflect Gartner's numbers, and will be such a positive surprise that it will put a floor of 100 on Apple's price. (It's declined so much more than NASDAQ in recent months that it's already had its bear market.)

    Once stock analysts start catching on to Apple's ability to survive by outgrowing its competitors, they will feel comfortable in recommending the stock. (This is the "outrun the runners-up" analogy that I first posted on one of your threads over three weeks ago. I'm pleased to see that it is beginning to catch on in the business press: Here's the link:
    bigtech.blogs.fortune..../ )

    Indeed, Apple's solid earnings, its high cash flow, its good prospects, SJ's continued perkiness, and the spreading realization of the feasibility of Apple's outrun-the-competitors strategy mean that AAPL may become something of a safe haven.
    Reply | Link to Comment
  •  
    Oct 16 05:50 AM
    PPS: I'm long AAPL, as of last week.
    Reply | Link to Comment
  •  
    Oct 16 06:06 AM
    The author assumes that Apple's P/E will approach that of the S&P 500 average, but gives no reason why. Since common sense, also known as fundamental analysis, has been thrown out of the window since August; I wonder why it should return now.

    It is well known that Apple's FCF, balance sheet, income statement, and it CEO's blood pressure are solid; and that the current price is unjustified. I would prefer some more detailed technical analysis as to where AAPL is now and where it may go.
    Reply | Link to Comment
  •  
    Oct 16 07:55 AM
    I don't know how low this drop will go and don't have a clue for market financials, but I do know that if you are long on APPL when the wheat separates from the chaff, which is happening now... you will have the ingredients you need to "make some bread." (sorry, couldn't help myself)


    But seriously, as soon as the dust settles, innovative, well-run companies will remain standing and will be much easier to identify and valuate. Among them, Apple will shine brightly.

    Thanks for listening.

    VERONICA
    Reply | Link to Comment
  •  
    Oct 16 08:21 AM
    @awcabot, I've put fundamental and technical analysis on the sideline for now, except from the macro perspective. It's all about investor sentiment right now. The market is riding on pure sweet emotion!
    Reply | Link to Comment
  •  
    Oct 16 09:32 AM
    How do earnings play into this next week? Are you looking for Apple to reach $74 before earnings, or are you thinking $74 after earnings? If after, how does fair value come into play once Apple again blows out the quarter? Would the $74 be adjusted higher?

    Part of me thinks it doesn't matter at all by just how much Apple beats estimates. It's the past. Everyone is so scared about the future and guidance is key, even though we all surely know by now that Apple sandbag's it's guidance.
    Reply | Link to Comment
  •  
    Oct 16 09:49 AM
    Apple is certainly worth more than you think! They are several companies all in one. To think that $75 is fair value doesn't make sense. Subtract the cash per share and you think the whole enterprise is only worth $50 per share. The property owned by Apple is probably worth that. You also don't count any plus for cash flow. The only thing wrong with Apple is short selling. It's the favorite yo-yo of the Hedgefunds and Day Traders. If we ever get action from the SEC to curtail short selling, it will soar.
    Reply | Link to Comment
  •  
    Oct 16 10:03 AM
    While I am certain that the coming quarterly financials will be another blowout number, the stock price reflects the future, not the past. I visited the local Apple store yesterday, to check out the new notebooks, and while there were people buying them, the place was emptier than I have ever seen it before. While in the past, the available floor space is usually AT LEAST 50% occupied by customers (or wannabe customers), and usually more like 75%, yesterday it was well under 25%.

    Don't count on the Christmas quarter being anything at all like the preceding 3 quarters, and the one after that will be worse still. I like AAPL, but there's no point in foolish expectations. I'll buy in when I see consumers returning to the stores.

    Also, the lowball earnings guidance should set new lows -- it will be interesting to see how Oppenheimer pitches the guidance next week.
    Reply | Link to Comment
  •  
    Oct 16 10:19 AM
    The CFO would be wise not to offer guidance for the next quarter. Why feed the vultures?
    Reply | Link to Comment
  •  
    Oct 16 10:53 AM
    not delivering any guidance would make the stock plummet even more... As I stated yesterday on Zach's previous Apple article, the macro environment is dictating the price. With short selling bans on the financials, tech stocks are where the hedge fund managers are hiding out. Tech stocks will be the last stocks to make a recovery. As most expect a recession or minimal econcomic growth for all of 2009, I dont see Apple making any headway until 3Q 2009 since the market tends to be 6 months ahead of the macro environment. We could see the stock rally a few dollars before earnings but the best time to add shares would be after earnings where I can foresee a stock price of 80. At 80 I too will be all in and even then might be too soon. On a side note,long term investing, commodities is the best play I can see right now.
    Reply | Link to Comment
  •  
    Oct 16 11:18 AM
    Usually Zach you make good text. But this time even you expose a good strategy of buying, i don't find it a good idea in this particular case. If you found Apple is now incredibly attractive, why risk lost Apple share if market decide to buy it massively?
    Reply | Link to Comment
  •  
    Oct 16 11:47 AM
    Then let's hope it will never go below $90.
    Reply | Link to Comment
  •  
    Oct 16 11:51 AM
    I do not agree that the stock would plummet more if no guidance is offered. Any guidance will be subject to debate and uncertainty given the current market conditions.
    Reply | Link to Comment
  •  
    Oct 16 12:33 PM
    This idiot in not 'in' ever, on anything. He is a mouth that has zero (0) value to any investor in Apple.
    Reply | Link to Comment
  •  
    Oct 16 01:05 PM
    Nothing on this bog is of significant value to an Apple investor; this is a trader's blog and the comments expressed are people's options.
    Reply | Link to Comment
  •  
    Oct 16 01:14 PM
    AppleHeavy, i agree not giving guidance will be make it subject to debate but i also think not giving guidance would lead people to speculate that the outlook is even grimmer than anyone previously thought given that normal guidance given by Apple tends to be conservative and analysts projections are usually higher.
    Reply | Link to Comment
  •  
    Oct 16 01:22 PM
    Agreed Zach. The market is riding a lot on investor sentiment right now. I think a lot of emotion is having a big piece in AAPL. Investors were feeling pretty bullish at the beginning of the week but sentiment for AAPL has dropped recently quite dramatically (predictwallstreet.com/...). Until people feel more confident about Apple and sentiment becomes stronger, I can't imagine AAPL moving up that much.
    Reply | Link to Comment
  •  
    Oct 16 02:56 PM
    A strong earnings report can do wonders for sentiment. We'll see.
    Reply | Link to Comment
  •  
    Oct 17 12:59 PM
    Apple should drop deferred earnings, because analysts don't know how to account for it properly, and they should use Intel's style of guidance, where they give a range, instead of the "about one dollar" that Oppenheimer has done for the last few quarters. In science, sig figs = significant figures tells us, that "about one dollar" could mean anywhere from 51 cents to $1.49. That's the lack of precision in a statement like that.
    Reply | Link to Comment
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