Apple's Outlook Didn't Surprise Investors Who Were Watching

(Bloomberg) -- The lower outlook for Apple Inc.’s revenue sent shares plunging, but it wasn’t a surprise to some money managers.

“Warning flags were flying,” William Fleckenstein, a Seattle-based money manager who has shorted Apple for the last three months, said in a telephone interview. “You could see the deterioration in the lack of unit growth over the last couple of years and the market share loss. It was only the mania that held the thing together and now that finally blew.”

Apple sank as much as 8.5 percent in after-hours trading Wednesday following Chief Executive Officer Tim Cook’s announcement of a reduced revenue outlook amid slowing iPhone sales, weakness in China’s economy and supply constraints on other products.

The Cupertino, California-based company dropped the biggest hint that iPhone sales weren’t going well in November, saying it would no longer report unit sales -- a veiled suggestion it was bracing for a slowdown. Other indicators came from a growing roster of suppliers cutting their own revenue forecasts for the year-end quarter. But, analysts and investors speculate that Apple held out until the end of the quarter in vain hope that last-minute holiday shopping would turn the tide.

‘Good Look’

“I think this is after they got through Christmas,” David Katz, chief investment officer of Matrix Asset Advisors in New York, said in an interview. “They had a good look at where the world is. I think they’re properly disclosing.”

The company probably wasn’t hiding anything, Katz added. “We’re not a conspiracy theorist,” he said. “It wouldn’t have helped if they lowered guidance two weeks ago and then had a robust Christmas season -- you don’t want them to give too much info too soon.”

Jeffrey Gundlach, CIO of Los Angeles-based DoubleLine Capital, said he was unsure the company should or could have disclosed negative information sooner.

“Economic things have been changing quickly,” he said in an email.

As one of the most widely held stocks by both passive and active funds, Apple’s share plunge is reverberating across investment portfolios already reeling from rising market volatility that kicked in last year. Some of the world’s biggest asset managers, including Vanguard Group, BlackRock Inc., State Street Corp. and Fidelity Investments, felt the pain when Apple announced it was cutting its quarterly sales guidance.

Read More: Vanguard, Fidelity Among Asset Managers Stung by Apple’s Plunge

With the latest sell-off, the stock may have dropped to the point that it’s now a buying opportunity, according to Jerome Dodson, manager of the $4 billion Parnassus Endeavor Fund.

“It’s certainly a much better deal at $146 than it was at $232,” he said in a phone interview. “In my opinion, it’s a pretty good value down here.”

‘Value Trap’

Yet Fleckenstein warned that Apple may be a “value trap” if it fails to take steps to regain market share, such as lowering prices or innovating new products, especially if the global economy slows.

“You’ve got them losing market share in a good period,” he said. “What’s going to happen in a bad period?”

One reason the market may be taking the news so badly: The technology giant’s warning was its first in almost two decades.

“It’s hard to believe that a miss of this magnitude was not evident in December but we are dealing with a company that has no experience in how to guide down,’’ analyst Walter Piecyk at BTIG said via email.

--With assistance from Mark Gurman, Matthew Burgess, Vildana Hajric, Sarah Ponczek, Divya Balji and Nishant Kumar.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Ross Larsen, Paul Armstrong

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