Apple Officially Enters Correction Territory -- Is It a Buy?


Just over two weeks ago, Apple (NAS: AAPL) shares briefly touched their current all-time intraday high of over $705, incidentally the same day that it launched the newest iPhone 5 in numerous countries across the world. Since then, shares have been incredibly weak and have traded as low as less than $637 (which occurred as of this writing), down over 2% from Friday's close.

Apple is now down approximately 10% from its peak, officially entering correction territory. What's been causing all the pessimism? More importantly, is this pullback an opportunity in disguise for investors?

Half-empty iPhone
The latest bout of pessimism kicked off when Apple announced it had sold "only" 5 million units of the iPhone 5 during launch weekend. While that handily topped records for prior models, it still disappointed investors who were hoping for that figure to reach as high as 6 million to 8 million units. Those hopes were boosted by the fact that Apple had 2 million pre-orders in the bag, but due to low supply, many of those pre-orders never made it out on launch day.

CEO Tim Cook made it clear: "While we have sold out of our initial supply, stores continue to receive iPhone 5 shipments regularly and customers can continue to order online and receive an estimated delivery date."

Even two weeks after launch, supply remains constrained and new orders are estimated to ship in 3 to 4 weeks.

Source: Apple.

That's a double-edged sword, though, because while it shows that demand is robust, it unfortunately remains mostly unmet.

Who's to blame?
While Qualcomm's (NAS: QCOM) new baseband chip in the iPhone 5 was initially considered a possible bottleneck, the in-cell touch display appears to be the most likely culprit. Apple is tapping Sharp, Japan Display, and LG Display (NYS: LPL) for these panels, and Sharp was the weakest of the three. Sharp's production bottlenecks are reportedly clearing up, which is good news for the supply/demand imbalance.

However, there's another possible hurdle to producing the iPhone 5: Apple itself. Over the past week, there have been reports of worker strikes at the Foxconn plant where the device is built, in part related to dramatically increased production quality standards that Apple is reportedly enforcing.

In the iPhone 5 marketing video, design head Jony Ive said Apple now measures the variance between units in microns. He goes to length to describe Apple's obsessive manufacturing processes, and even sounds borderline insane by implying Apple won't accept a unit that's one-millionth of a meter off. Add in user complaints of their shiny new devices coming with minor scuffs right out of the box, and it's not hard to think that Apple is exerting additional quality pressure on its manufacturers. China Labor Watch reported that Apple's standards needed production models to be within 0.02 millimeters of specification, or 20 microns.

Component yields for the expected iPad Mini are also rumored to be low, similarly threatening the device's prospects of successfully trouncing 7-inch rivals like's (NAS: AMZN) Kindle Fire HD and Google's (NAS: GOOG) Nexus 7. The Wall Street Journal claims Apple is targeting 10 million iPad Minis for the fourth quarter, an ambitious goal for the new device considering that's almost as many as the 11.8 million iPads it sold in the first quarter.

Is it a buy?
It's common for Apple to experience the "buy the rumor, sell the news" phenomenon after product launches, and this time is no different. Regardless of the reason, there are supply constraints right now that undoubtedly threaten to hold back Apple's performance in the short term as unmet demand is being left on the table.

Key words: "short term." This isn't the first time Apple's been hit with supply constraints leading to unmet demand, and it won't be the last. It's now a distinct possibility that Apple could "miss" iPhone unit estimates in the fourth quarter -- which would be three misses out of the past five releases -- and analysts are scaling down their best guesses.

Investing is about the long-term, though, and Apple's growth story remains intact. Muted near-term expectations aside, analysts are still confident on the big picture. iPhone buyers are a loyal bunch, and those sales are delayed, not lost. The recent bearishness has brought Apple below the $600 billion market cap threshold and its shares now trade at less than 15 times earnings.

This 10% correction is giving investors an opportunity. It's just like the one the market presented after last quarter's earnings when shares fell to $570 on the "miss," only to proceed to rally to aforementioned all-time highs topping $700 (a 23% rally) shortly thereafter.

Buy now, or forever hold your peace.

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Evan Niu, CFA, owns shares of Qualcomm and Apple. The Motley Fool owns shares of Apple,, Google, and Qualcomm. Motley Fool newsletter services recommend, Apple, and Google. 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.

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