You Think Apple’s Swoon is Epic?

Apple's (AAPL) precipitous stock decline -- down 13% since the start of the year and 35% in the past five months -- has investors unnerved and elicited a predictable barrage of doom and gloom from analysts who are openly questioning whether or not the company's best days are behind it.

But this is hardly the first time Apple and its shareholders have been down this road. And if history is any guide -- though there's at least one major difference between this latest correction and all the ones that preceded it -- there's every reason to believe Apple's shares will eventually resume their spectacular accent.

Let's start with the basics. Take a look at Apple's stock chart for the past 10 years. What you'll notice is a whole lot of up and very little down -- at least until the last five or six months. The only word that would seem to accurately sum up the stock's performance is sensational -- and that's even including this recent tailspin. Behold:

AAPL Chart

AAPL data by YCharts

However, when you lop off roughly $200 billion in market cap in less than half a year, people understandably tend to get nervous and start asking questions. That's why it's informative to take a look back at previous declines in Apple shares and examine, to some degree of detail, why they happened and how they might inform investors of Apple's long-term prognosis.

Believe it or not, this latest tailspin isn't even close to Apple's nadir. Way, way back in the day, long before the iPad or the iPhone or even the iPod, Apple investors took an even more heinous shot to the midsection when its stock price plummeted from $30 a share in August 2000 to under $8 a share in December 2000 -- a 74% implosion over the course of a four- or five-month span.

The culprit? A disastrous earnings miss compounded by glutted inventories that required CEO Steve Jobs to bite the bullet, slash prices to dump inventory or write it off altogether (remember the Power Mac G4 Cube?) and downwardly revise sales and earnings estimates for all of 2001. What did Apple earn in that meltdown of a quarter? Only $108 million on sales of $1.8 billion.

For some perspective, Apple's latest quarterly miss (a rarity in its own right considering Apple has miraculously only disappointed analysts in five of the 45 subsequent quarters) announced last month was the product of a three-month span in which it earned $13.1 billion on sales of $54.5 billion. Apple's cash on hand reached $137 billion. Yet, those figures were enough to send the stock tumbling another 12% in just a couple of weeks.

In the face of this apparent catastrophe, Jobs hinted at the greatness that was to come when he used the press release announcing the embarrassing results and outlook to tell the world that Apple was working on "the best product line I've seen in my career" and was aggressively working to ramp up the speed of the processors in its computers.

It didn't take long for Apple to deliver on those promises.

In 2001, Apple rolled out the iPod and debuted the Mac OS X operating system, two developments that would fundamentally transform multiple industries for more than a decade and create the foundation for unprecedented revenue growth for both the company's software and hardware divisions. These were game-changing product releases. They also happened to coincide, more or less, with the 9/11 terrorist attacks and the beginning of an extended downward spiral for the equities market as a whole and the information technology industry in particular.

The damage was done -- on Main Street and Wall Street -- and yet Apple largely on the backs (and promise) of these two releases managed sustained fiscal growth and improved its share price to almost $13 a share by January 2002.

The ensuing three years would see Apple's shares advance in a gradual, if unspectacular fashion. The iPod was white-hot following the launch of the iTunes Store in 2003 and, despite intense competition in the PC and laptop space amid rampant cost-cutting by enterprise customers, its Macintosh units were gaining ground in the consumer sector. Sales and earnings continued to accelerate, quarterly and annual earnings were consistently on target or better than expected and the stock rallied up to $38 a share by January 2005 and then exploded up to more than $75 a share by January 2006.

It's not until the first half of 2006 that Apple shareholders have much to complain about. The stock's been on fire, save an occasional 10% to 15% retreat that generally mirrors the overall market's performance followed by a quick recovery and then some. As you can see (chart), Apple's share price consistently outperformed the S&P 500 throughout this period despite the seasonal and macroeconomic adjustments impacting companies of all sizes in various sectors:

AAPL Chart

AAPL data by YCharts

But analysts and, subsequently, investors weren't thrilled by Apple's second-quarter results in 2006. In that quarter, Apple's sales checked in at $4.36 billion, up 34% from the same quarter in 2005, but slightly less than the consensus estimate of $4.5 billion. Earnings came in at $410 million, or 47 cents a share, outpacing those same analysts' consensus target of 43 cents a share. Top-line growth was the concern at the time as most analysts downwardly revised sales estimates for the rest of the year and a few others cut their ratings and price targets. This pattern would continue through the "modern" era of Apple's cat-and-mouse game with analysts. It seems that nothing short of exceeding their ever-escalating sales and earnings targets would satisfy the masses even if Apple, as it did that quarter, was setting all-time sales and earnings records. The stock would slump to around $60 a share within a month of releasing second-quarter results, down 21% for the year to that point.

Apple responded, as it's wont to do, by releasing the MacBook and iMac, the first Apple computers powered by Intel chips. Sales and profits resumed their impressive ascent and, by the end of the year, Apple shares were perched at $85 a share and its market capitalization continues to defy gravity.

AAPL Market Cap Chart

AAPL Market Cap data by YCharts

See Part Two of This Article Tomorrow on YCharts.com.

Larry Barrett, a contributing editor at YCharts, has served as a senior writer and editor for websites and print publications including Financial Planning, InternetNews, Multichannel News, CNet and Baseline Magazine. He can be reached at editor@ycharts.com.

Read more articles about: Company Analysis  

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