What's Depressing Apple's Shares?

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) has been going through some tough times lately. Where shares of the technology giant have easily beaten each and every benchmark over the past decade, things might be starting to change. Shares of Apple are finally regressing back to the mean. Take a look at the chart below.

<img alt="" src="http://chart.finance.yahoo.com/z?s=AAPL&t=1y&q=l&l=on&z=m&c=SPY,SSNLF&a=v&p=s&lang=en-US&region=US" />

Since November 2012, Apple's shares (in blue) diverged from the SPY 500 trend-line (in green). While the SPY gradually climbed by an impressive 20%, Apple's shareholders had to settle for a 30% decline in the price of their shares. In the face of such a decline, Samsung (NASDAQOTH: SSNLF) Apple's fierce rival, shines like a bright star. The Korean technology giant has easily beaten the benchmark by a wide margin of 20%. That's phenomenal. This brings us to explore the two main causes behind Apple's decline and to check whether or not they are sustainable.

Cause no. 1: Patent infringements

Technology companies generally do not have wide economic moats. That's because everyone with some sophistication and the right tools can copy the original gadget and mass manufacture to the public at a much better price because he didn't have to incur the R&D expenses to develop it. That's why patents are so important in the technology sector. It's the patents that provide protection and resemble the closest thing to an economic moat. Apple has been losing ground in this battlefield.

Apple has lost a ruling by the International Trade Commission (ITC) in a patent dispute with its rival Samsung. The panel ruled that Apple infringed on a Samsung patent. The ruling would bar the importation of certain iPhones and iPads made to work on AT&T's network. Among them are the iPhone 4, the iPhone 3GS, the iPad 3G, the iPad 2 3G and the iPad 3. Samsung, which is battling Apple in court in some 10 countries, had also accused Apple of infringing on three other patents, but the ITC found that Apple did not infringe these. Rest-assured, Apple did get hit, but the skies aren't falling. This ruling by the ITC is likely to lead to monetary damages only and not to any sale bans. That's good news for Apple.

Also, you should always consider these patent suits in perspective. Every major tech player has been sued, and sometimes convicted, of this wrongdoing. It's almost an integral part of the business. Take Microsoft (NASDAQ: MSFT) for example. Last month, Copytele, a “patent enforcement entity” based in New York, had filed a patent infringement suit against Microsoft in connection with its Skype IP calling and messaging service, now used by 280 million people every month. This might interrupt Mr. Softy with the integration of Skype with its software package, but it's likely to only cause a short halt and some monetary damages. Eventually, Skype will be integrated in Microsoft and two years down the road, no one's going to remember that such a suit has ever been filed. In the long run, Innovation usually beats legality. 

Cause no. 2:  Bonding with Apple

For the first time, Apple issued debt on Apr. 30, in a total amount of $17 billion. Part of the issuance was for a 30-year period. It's no secret that Apple’s bonds have lost more than 10% of their value. Because the bonds were offered when interest rates were near historic lows, they have been especially sensitive to interest rate swings. In addition, Apple's $106 billion in long-term marketable securities is invested mostly in long-term U.S. Treasury, U.S. agency, municipal, corporate, and mortgage-backed bonds. This means that these investments are just as vulnerable to the bond market’s recent decline as Apple’s own bond offerings have been. In other words, Apple got hit twice. First, by its long-term investments, and second by the deteriorating price of its bonds that is scaring shareholders away.

I believe that the decline in the price of bonds should also be taken in perspective. First, Apple isn't the only tech company that's sitting on piles of cash invested in U.S bonds. Microsoft is currently sitting on a $70 billion stash, part of it is certainly invested in U.S treasuries, considered a "safe heaven." Put simply, the problem isn't unique to Apple. Second, there's nothing really wrong with apple's bonds losing steam. Quite the contrary - Apple successfully completed its debt round at the best price possible. If it wishes, it can now redeem the bonds at a much better (cheaper) price. This will create a capital gain to Apple, not a capital loss. Not many people grasp this concept. 

The Fool looks ahead

Apple is here for the long haul. The temporary decline in the price of its bonds as well as its loss to Samsung on the patent infringement suit, will not change that. I recommend to investors to take these two events in the right perspective. Simply do nothing. Sit back and enjoy the ride. 

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus