Apple – Time for a reflexive bust?

I sold my Apple shares a few weeks ago, and I am growing more convinced that it was a wise decision.

Why? I am not convinced on the performance of the stock for the foreseeable future.

I still believe the company has great prospects, and will continue to make a lot of money. But I do not believe that the stock price will continue to rise as it has in the past.

Apple has continually benefited from a positive relationship between expectations and reality. The company provided guidance that was conservative, and analysts began to ignore the guidance. But, for several years straight, analysts’ expectations proved to be conservative as well, as Apple continually blew away earnings expectations.

However, this is changing. Because of its continued earnings beats, the analyst community has gotten used to less and less conservative expectations. And now, the company has changed its earnings guidance policy.

The change was noticeable on the prior earnings conference call. Apple revised guidance upwards for Q4, which caused analysts to overshoot that guidance. As a result, Apple did not beat the analysts expectations for Q4. The stock subsequently dropped from the 420 range to sub 400.

Apple management pointed to the delayed launch of the 4S iPhone, and upped guidance for Q1 2012, based on high expectations for 4S sales.

Now, this puts tremendous pressure on the company to perform. Analysts will still expect higher earnings than the guided figures. If Apple cannot meet these figures, it could set off a drastic change in events.

Why drastic? Because the fundamentals of Apple’s operation are directly tied to its stock price. Ever since 2001, the fundamentals of the company and the price of the stock have enjoyed a positive reflexive relationship.

Apple has been a net seller of shares every quarter. As expectations increase for the company, the stock price increases, and Apple can issue shares at a higher price, raising more capital for research and development and operational costs.

Apple’s continued growth drives costs higher and higher, but so far, these costs have been mitigated by the simultaneous rise in stock prices. However, if stock prices should begin to fall, operational costs will become a larger and larger burden on the company, and could begin to drain its vast cash reserves.

Now, of course, Apple is not wanting for cash. Its $81.55 billion would be able to cover its 2011 operational costs ($19.5 billion) four times over. However, it partially financed those costs with $831 million of stock issues.

Recent news seems to point to 4S sales not being as robust as previously anticipated:

http://www.forbes.com/sites/ericsavitz/2011/11/09/apple-reportedly-tells-iphone-parts-makers-to-delay-shipments/

“sales of the iPhone 4S have not been as strong as those concluded in the pre-sales period”

Right now, the risks to the stock price are too large. Though Apple would seem to be a value play at its current prices, it does not pass a sufficient margin of safety. There are far better opportunities in the current market. We will have to wait and see if results can again surpass expectations for Q1 2012 to tell if the Apple juggernaut can continue.

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