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A report that Apple is cutting component orders for the iPhone5 because of weakening orders hasn’t helped the share price.


For years, Apple Inc. shares were a one-way ticket to riches, with the stock going from strength to more strength.

But lately, shares of the world's most valuable company have been taking an uncharacteristic beating. They fell below the psychologically important $500 (U.S.) mark in trading Tuesday for the second session in a row, and had their first close below that level since last February.

It's a far cry from Apple's all time high of $702, reached as recently as September, when some in the analyst community were predicting the shares were on track to approach the $1,000 mark, thanks to the soaring popularity of the company's iPads, iPhones and other electronic devices.

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The downdraft over the past two days follows reports that Apple is cutting component orders for its new iPhone5 because of weaker than expected sales, rattling investor confidence.

But the longer term decline that started last fall is raising a question: Might the few lonely bears on Apple stock actually be right for once?

Being a contrarian on Apple has definitely been a solitary occupation. Of the analysts Bloomberg tracks, 53 say the stock is a "buy," eight rate it a "hold" and only two are telling investors it's a "sell."

Those questioning Apple are worried that the company is going to face the same type of headwinds experienced by Research In Motion Ltd., the Canadian smartphone provider whose once cutting-edge technology, consumer image and market share have been diminished by competition.

The two bears on Apple are Edward Zabitsky, chief executive officer of Toronto-based ACI Research, and Per Lindberg, telecom analyst in London for ABG Sundal Collier.

Mr. Zabitsky has gone even further than calling Apple a "sell." He's recommending selling the stock short, a riskier strategy designed to profit when share prices fall. Short sellers borrow shares from a broker, sell them, and hope to buy the stock back later at a lower price to close out the transaction with a profit. Shorting a stock through the purchase of put options can do much the same thing with more leverage and higher potential profits.

In the interests of full disclosure, Mr. Zabitsky said in an e-mail that an employee of his firm "has a negative trading position" in Apple. He has a $270 price target, nearly 50 per cent below where Apple has been trading recently.

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Mr. Zabitsky says he's gloomy on Apple's prospects because the company is facing a huge challenge from South Korean phone maker Samsung, a company he considers the "leader" in the smartphone space. The iPhone represents about half of Apple's revenue, so any erosion of its market share will hurt the stock.

"High-end competition from Samsung is slowing [Apple's] unit growth," he says, while also saying that the Cupertino, Calif.-based company faces an additional threat from Microsoft.

Mr. Lindberg has a $400 target, pricing Apple at a 10 times multiple to his estimated earnings of $40 a share in fiscal 2014. The company reported $44.15 in 2012, suggesting that if Mr. Lindberg's estimate is correct, earnings will be contracting, not something most people consider a possibility at fast-growing Apple.

"Given incontrovertible evidence of competitors' vastly enhanced product offerings, early signs of 'commoditization' and soaring costs for R&D, marketing and sales, Apple, we believe, will pass through the peak in this earnings cycle in fiscal 2012-13," Mr. Lindberg said in a recent note to clients. He estimated earnings would fall again in 2015 and 2016, a shrinkage in profitability that "would not be consistent with current expectations," he says.

To be sure, the negative take on Apple is a minority opinion. For the bulls, the recent selling presents a buying opportunity.

Typical of the bullish view is Canaccord Genuity analyst Michael Walkley, who has a "buy" rating and $750 target, which if attained, would take the shares to a new record high.

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He isn't overly worried that Apple's domination will be eroded by rivals. He believes Apple's top-notch software and hardware "will lead to a strong product cycle for its key products," according to a recent note. His earnings estimate for 2014 is upbeat, at $57.45 a share. "Apple remains a compelling investment," he says.

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