Product Questions and Threats of Higher Tax Hit Apple Shares

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Correction Appended

Autumn is traditionally the time of year when people start snapping up Apple products. It's also when investors, in anticipation of another blockbuster holiday season from the company, do the same with Apple shares.

But this year, even though Apple's iPhones and iPads don't seem to have lost any of their allure for holiday shoppers, its stock seems headed straight for the discount rack.

On Wednesday, Apple's shares slid 3.8 percent. They outpaced a broader decline in the stock market set off by investors' uncertainty about how the outcome of the presidential election will affect taxes and consumer demand for the types of products Apple sells.

During the campaign, President Obama proposed increasing capital gains tax rates for people earning over $250,000 to 20 percent from the existing rate of 15 percent, and his re-election Tuesday night may have prompted some investors to unload shares in anticipation of a broader sell-off in stocks ahead of a tax increase, analysts said.

Owners of Apple shares would have good reason to fear higher taxes on capital gains. Apple shares have appreciated mightily since 2005 when they were about $35 apiece; they began this year at $411 and peaked at more than $700 in late September. The drop on Wednesday only added to what has been a grim few weeks for Apple shares, which have fallen over 20 percent from that peak, to $558 on Wednesday.

The decline has followed a sequence of seemingly unrelated events, including a broader-than-normal overhaul of its product line that is expected to hurt profit margins in the near term and a rare shake-up in Apple's senior ranks.

"It has just been wave after wave of bad news," said Gene Munster, an analyst at Piper Jaffray.

The events also do little to diminish the questions reflecting longer-term concerns with which investors pepper analysts like Mr. Munster. How much bigger can Apple -- with a $525 billion market value, the biggest of any corporation -- get? Won't Apple soon run out of people to sell iPhones, iPads and Macs to?

Those concerns have been one of the biggest reasons Apple's stock has long traded at a discount, strange as that may sound, to its peers in the tech business. Apple's forward price-to-earnings ratio -- the value of the company's stock divided by its expected earnings per share for the coming year -- is just under 10.

That figure is 14 for Google, 32 for Facebook and 131 for Amazon. Steve Dowling, a spokesman for Apple, said the company generally did not comment on its share price.

Apple executives have said they still see huge opportunities for the company and it is still growing at a remarkable clip for a company its size. During its last fiscal year, which ended Sept. 29, Apple's revenue jumped 45 percent to $156.51 billion and its profits rose 61 percent to $41.73 billion.

While Apple's most recent financial report was mostly in line with Wall Street forecasts, the company warned that its profit margin would most likely decline in the holiday quarter because of a sweeping refresh of the company's iPad, iMac and MacBook laptop lines.

Apple products often cost more to make during their first months on the market, but those costs come down as the process becomes more efficient and volumes increase. The company said its new iPad Mini would be among those products with low profit margins, raising concerns that Apple will make less money as it competes in lower-priced segments of the mobile market.

Apple's worrisome financial report came just days before Apple announced the departure of Scott Forstall, the head of its mobile software development, in a move that it said was aimed at increasing collaboration between departments at the company. Apple split the responsibilities of Mr. Forstall, who was a divisive figure at the company, among an array of other Apple executives.

The surprise firing of Mr. Forstall was unusual for Apple, where turnover in its senior ranks is rare compared to other big technology companies.

Then late last week, the research firm IDC reported that 75 percent of smartphones shipped in the third quarter were Android phones, the main rival to Apple in mobile software. A year earlier, Google, the maker of Android software, had market share of 57.5 percent. The iPhone's share rose at a much slower pace, jumping to 14.9 percent of shipments from 13.8 percent, IDC estimated.

But Apple is still making huge profits from the mobile market, far more than Google is. Even with the recent decline in its shares, Apple's stock is still up 38 percent for the year.

David Rolfe, chief investment officer at Wedgewood Partners, which counts Apple as its biggest stock holding, said he remained confident that Apple was one of the best investments around.

"The bears think Apple is in the eighth inning," Mr. Rolfe said. "We think they're still in the fourth or fifth inning."

Correction: November 7, 2012, Wednesday

This article has been revised to reflect the following correction: An earlier version of this article misstated Apple's increase in profit in its last fiscal year. The company's profit rose 61 percent, not 70 percent.

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This article originally appeared in The New York Times.


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