Why does Apple stock fall with new products?

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Apple is one of the most-watched — and most admired — technology firms in the world. After all, the company essentially launched the personal computer business way back in the 1970s, re-invented it with a graphical interface in the 1980s, mainstreamed the portable media player business in the 1990s, kick-started the smartphone business, and most recently jolted the tablet market into existence. The company is a world-recognized brand leader, has a huge market valuation, and develops iconic products. So when the company announces a new product or an update to an existing product, investors should jump on board, buying up Apple stock, right? That’s what happens with other technology giants.

But not with Apple. These days, when Apple announces a new product, it’s stock almost always drops, particularly the day of an announcement, and especially in the hours immediately following the introduction of a new product. Why is Apple an exception to the rule that announcing cool products will attract investors to a company?

How big is the hit?

The downturns to Apple stock in the wake of a product announcement are very real, with nearly every major product announcement in the last two years producing a significant short-term downtick in Apple’s stock price. The sole exception was the announcement of the Apple iPad 2, which saw former CEO Steve Jobs return from medical leave to make the introduction.

Apple anouncement stock price shifts

Contrast this with major recent product announcements from other companies: Amazon saw its stock up about 2.5 percent after announcing the Kindle Fire, and Microsoft saw a nearly two-percent uptick after it recently unveiled its Windows 8 Metro interface and tablet strategy. Even Hewlett-Packard saw a roughly 1.5 percent upward jump in its stock after it announced its webOS-based HP TouchPad (alas, the product is now dead). Even Canada’s struggling Research in Motion got a major kick when it unveiled the BlackBerry PlayBook a little over a year ago: Its stock jumped 4.8 percent on expectations of an iPad killer.

Non-Apple product announcement stock price shifts

In contrast, Apple routinely sees its stock price take a beating every time it unveils a new product. Unveiling hotly-anticipated iPhone 4—which has been the best-selling smartphone in history and a very solid product for Apple — made the company’s stock price drop 5.2 percent. The original iPad — which the industry is arguably still trying to catch up with — led to a 4.1 percent drop in Apple’s stock price. The introduction of the iPhone 3GS and yesterday’s announcement of the iPhone 4S were less damaging (1.3 percent and 0.6 percent, respectively), but it’s important to note that these daily figures omit volatility during trading sessions: At one point yesterday, Apple’s stock price was off by as much as 9 percent in the wake of the iPhone 4S announcement.

Is it timing?

A number of factors can impact the day-to-day price of a company’s stock, and it’s tempting to wonder if Apple doesn’t just have bad timing. Do Apple product announcements correspond with broader economic events, like banks going under, wars being declared, natural disasters damaging supply chains, or legal or financial policy shifts?

The answer is mixed. Yesterday saw Apple’s stock fluctuating wildly in the wake of the iPhone 4S announcement, but the broader Standard & Poor’s 500 index rose some 2.3 percent on the day, indicating a positive trading day across the market. Similarly, when Apple announce the original iPad its stock dropped 4.1 percent, but the broader Standard & Poor’s 500 was up slightly overall.

I can’t seem to find any major news that would have impacted Apple’s stock price significantly on the days they announced the iPad 2 (Apple’s stock price went up) or the iPhone 3GS (Apple’s stock price went down). However, when Apple announced the original iPhone 4, concerns over economic troubles in Europe sent both the Standard & Poor’s 500 and the Dow Jones industrial average to year-long lows: that market pressure almost certainly played some part in Apple’s stock price declining the same day.

Secrecy

So if Apple taking a hit after product announcements can’t solely be attributed to lousy timing, what is at fault? Largely, it’s the company’s now-legendary secrecy. Apple is famous for not revealing products until they’re ready to go on sale, or very nearly so. Until the company has a product completed, it doesn’t show prototypes, it doesn’t show works in progress, and it doesn’t speculate on its possible product directions or intentions. (The exception is its Mac OS X and iOS operating systems, which Apple does announce and preview to developers ahead of time so they can have their applications ready for launch.) Where many companies happily show off prototypes and early versions of devices in order to generate investor and market momentum ahead of a launch, Apple has always played its cards and close to its vest as it can: Consumers — and investors — see Apple products when they’re ready, and not before.

The result is that — most of the time — nobody really knows what Apple is doing, and now that the company’s profile is in the stratosphere of global business, that leads to unending speculation about what company’s plans and possibilities. (This publication is as guilty as any other of following the Apple rumor mill.) Apple fans do their own renderings of what they imagine future products might look like, and the industry eagerly snaps up any spec of information about what Apple might be doing, down to reporting when Apple execs have meetings at suppliers or other technology firms.

The wild speculation—and seemingly endless press coverage of all things Apple—potentially creates unreasonable expectations in some investors, particularly those without technical expertise or knowledge of Apple’s core industries. Once they hear Apple is allegedly “due” to introduce a new product, they may start acquiring Apple stock in an effort to make a quick buck on the announcement. Once the announcement hits, and Apple’s stock price begins to decline, these same investors may panic and sell their stock in an effort to minimize their losses. That puts more Apple stock for sale, driving down the price even further.

Speculation and profit-taking

There’s another factor in Apple’s stock price dropping in the wake of a product announcement: speculators. The chart above only goes back to the iPhone 3GS, but the general tendency of Apple stock to drop after a major product announcement is not new: It goes back to much earlier days of Steve Jobs’ return to Apple and the initial success of the company’s iMac computers. Folks who have been following Apple long term, and have a sense of the company’s tendency to evolve focused product lines rather than try to be all things to all people, tend to buy Apple stock at a low point before a product announcement is “due,” then sell it off just before the announcement actually happens, capitalizing on the wave of rumors, speculation, and innuendo leading up to the actual event. For investors who have the resources and expertise to time their sales well, investing in Apple product announcements can be a way to make easy money — even for folks who are also holding on to Apple stock long term.

Upshot

In a sense, Apple is a victim of its own success. The company’s brand is now so valuable that investors are willing to game the company’s stock price short term in order to reap quick profits from interest in the company, generated by product announcements. It also means that short-term drops in Apple’s stock price in the wake of an announcement have little to do with the company’s prospects, and almost everything to do with investors realigning after Apple does (or does not) meet their expectations. The odd factor in the process is that Apple does almost nothing to fuel those expectations: That’s almost always Apple’s own partners — and, of course, hordes of anxious fans and the media.

[Top image courtesy of jeff Metzger/Shutterstock]

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