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Bracing for Apple's Earnings Report, Academics React to Stock's Falling Price

Some academics are blaming the irrational exuberance of retail investors combined with the short selling of hedge funds for the decline in Apple Computer's stock price last week.

Apple Computer’s brutal fall in stock price on Thursday — a fall of 2.7 percent to close at $393.05 a share —has attracted comments from many experts who are speculating on everything from rumors of CEO Tim Cook’s ouster to weak demand for the iPhone5 as factors in the market’s reaction.

And with the Apple due to report earnings on Tuesday, pundits are analyzing the company’s prospects.

“Apple appears to be a company in crisis as the stock closed at $392.05 Thursday, down a whopping 44% from its lofty heights in late September 2012,” wrote Darren Hayes, a professor at Pace University’s Seidenberg School of Computer Science and Information Systems in New York onThe Hill's Congress Blog . “The only people happy about this move are the short sellers who are having a field day. Many have forgotten how fickle consumers can be about technology and brand loyalty is incredibly difficult to sustain. Michael Dell can attest to that,” added Hayes, a former investment banker, who began his career in the financial services industry with Cantor Fitzgerald at the World Trade Center.

On Thursday, the stated reason for the knee jerk decline was a glut of audio chips at a supplier, suggesting that sales of iPhone5s would fall below expectations.

Yet, seven months ago, Apple’s stock had surpassed $700 a share, setting a new record high on Sept. 12, the day the company’s iPhone5 was released making it “the most valuable stock on the planet, wrote The New York Times on Friday. In a report entitled ”After Apple’s Rise, A Bruising Fall,” the Times notes that although the company is enormously profitable and admired for it success, altogether $290 billion has been erased from Apple’s value, making it the biggest loser in the stock market over the past seven months. Even though Apple has been the “iDarling” of Wall Street, Wall Street has turned on Apple.

So where did Apple go wrong? Professor Hayes wrote that there have been “ominous signs of trouble,” for some time. In ticking off a number of those reasons, Hayes’ points to missed opportunities in China, weak penetration of the business sector and inflexible pricing policies have hurt consumer demand.

From The Hill blog:

Also, under Steve Jobs Apple continued to wow consumers with the release of blockbuster products, such as the iPad, Apple TV, iMac, but recently the company has decided to bring on revisions of existing products. It’s possible that consumers cannot tell the difference between iPad 2 and the iPad 3 or the iPhone 4S and the iPhone 5, notes Hayes.

Yet the company is bigger and stronger than ever, selling more iPads and iPhones while expanding its global reach. The puzzle is why its stock price keeps falling?

Although Apples shared soared to $700 a share, one academic told The New York Times that “irrational exuberance on the upside leads to herd reactions and panic selling during the correction.” Two warring forces are also a factor: One issue is that Apple is the favorite stock of retail investors who piled into Apple stock last fall. Seeing this happen, hedge funds began shorting the stock, pushing in the opposite direction. Too much enthusiasm by retail investors coupled with the short selling by hedge funds, may have caused others to sell their stock.

A professor of finance at NYU University told the Times that the uber-enthusiasm of investors buying the stock led him to sell some of his holdings when the stock was at $610.

From the a href= https://www.nytimes.com/2013/04/19/technology/after-apples-rise-a-bruising-fall.html?pagewanted=all&_r=0 target=”_blank”>New YorkTime’s DealBook: “I was terrified by the kinds of investors coming into Apple’s stock. Now only were they coming in with unrealistic expectations, they were at war with each other,” Aswath Damodoran, a professor of finance at New York University told the New York Times in Friday’s report.

In meantime, the company is sitting on hordes of cash and could return that with a dividend to shareholders. But that alone won’t be enough to propel Apples’s shares into the stratosphere again. Some are expecting the company to report an 18 percent decline in net income for its second fiscal quarter as sales of less lucrative products erode its profit margins, an analyst told the NY Times. Meanwhile ,with 17 percent of the stock in the hands of individual investors, some are bent on punishing the company for slower growth. Apple faces stiff competition from Samsung, Google, and other hardware manufacturers that are offering lower price points.

Thus, Wall Street is bracing for the quarterly earnings report and some say it could be a disaster, while others speculate that Tim Cook’s job is in jeopardy. Of course, if Apple introduces a few spectacular products in the next few months, the naysayers could all be wrong. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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