If you go to an Apple (AAPL) store, it is easy to get excited about all the groundbreaking technology and see the crowds who are very passionate about products ranging from the iPhone to the iPad, and Mac computers. If you walked into this without any stock market knowledge, you might think that Apple shares would be trading at very lofty valuations. Many fast-growing technology stocks in the past had PE ratios of 30 or even 50, this includes Cisco (CSCO) and Microsoft (MSFT). However, this would be wrong, as Apple trades for close to 10 times earnings. Let's take another view and assume that you look at Apple without using its products, visiting its stores or seeing the passion of its customers, but rather through the lens of Wall Street.
Now you have never been to an Apple store, or used one of its products. Instead of that real world experience, you just look at Apple stock and the current valuation and chart pattern. Let's say you also hear about some of the increasingly bearish viewpoints from many analysts. Based on that alone, it would be very easy to consider this company as being in some sort of trouble. The stock chart looks terrible, the shares are trading at about 10 times earnings, competitive threats are growing and many analysts are turning negative on the stock. Some are even predicting a major drop in the stock. For example, an analyst named Per Lindberg who works for a Norwegian investment bank "ABGSC Sundal Collier" recently published a lengthy report declaring that Apple products "are no longer unique" and he put a sell rating on the stock with a $400 price target. It
is interesting that when Apple was on the upswing and trading near $700, it was easy to find analysts who wanted to "best" the others by setting an ever higher price target of over $1,000 per share. However, after a correction in the share price, it seems that the opposite is occurring now and while the extreme high and low price targets seem to generate great publicity for the analyst making the call, the reality is that something more measured is likely. With Apple shares trading well below the 52-week high, it is a good time to consider why it has dropped and even buy a little for the long-term. Here is a closer look at some issues impacting the stock and the future upside it has:
It is true that Apple is getting some competition from Google's (GOOG) Android platform and from Samsung (SSNLF.PK) as well. But so what? Competition exists everywhere and it can even be a good thing to keep Apple and its management team "on the ball". Even with other options for consumers, Apple remains dominant in smartphones and tablets. It also has one of the most loyal and passionate customer bases that any company could hope for. When was the last time you saw or heard of people waiting in line for an Amazon (AMZN) Kindle, Android device, or Samsung phone? Apple has recently launched the iPad Mini which could end up being one of the most popular gifts for this holiday season and it also launched the latest version of the iPhone a couple of months ago. Because there are no "high-profile" product launches expected soon, it is easy for investors to get impatient and take profits. Investors appear to be taking a short-term view, and that has impacted the stock.
One area that many analysts and investors seem to be missing is that Apple has tremendous growth potential in emerging markets in the next few years. While the U.S. and other "Western" markets might be seeing some saturation of iPads and iPhones, the market in countries like China, India, Brazil, and others can fuel growth, especially if Apple introduces products with lower price points as it recently did with the introduction of the iPad Mini. For example, Apple is launching the iPhone 5 in China on December 14, and it was recently reported that leading mobile phone company China Unicom (CHU) has already received about 100,000 pre-orders for the iPhone 5 (which was launched about 3 months ago in the U.S.) Since the iPhone 4 was launched about two years ago, one analyst predicts many customers who had a two-year plan will choose to upgrade to the iPhone 5 in China. Teck Zhung Wong, an analyst with research firm IDC is positive on the level of pre-orders in advance of the December 14 launch and he states:
"This implies there's some level of pent-up demand for the iPhone 5," he said. "We think (increased shipments) will manifest itself this quarter, and next quarter as well."
While the company has some competition and perhaps a "lull" in new product launches, most of the reason for the decline appears to be related to factors that it has nothing to do with. For example, the whole Fiscal Cliff issue has made investors aware of the fact that taxes are probably going higher in 2013. Since Apple has seen huge gains in its share price over the past few years, many investors are deciding to cash in for tax planning reasons before the end of 2012. This has certainly put pressure on the stock.
Another factor is that the stock has an ugly looking chart and many technical traders are seeing a potential "death cross" in which the 50-day moving average (currently around $600) is about to move below the 200-day moving average which is near $597 per share. With the stock now trading at $540, it seems like a matter of time before this technically bearish indicator kicks in and signals a confirmed downtrend for those that love charts. It also did not help that some investment brokers recently raised the margin requirements for Apple shares since this tends to cause some margin call selling and that only puts more pressure on the stock.
While the stock could remain volatile and under pressure for the remainder of 2012, it makes sense to buy the dips because some of the factors that have been pushing the stock lower should dissipate as we head into January. For example, selling pressure from investors who wanted to take profits before taxes rise in 2013, will be gone. Also, the shares should have absorbed changes to margin requirements by January as well. Finally, with 2013 arriving, investors might focus on the future and the many positives. Apple is (still) one of the fastest-growing tech companies on the planet and it is just a matter of time before it prepares to launch another major product, perhaps a new iPhone, perhaps Apple TV. We have seen Apple stock make sharp moves in advance of a major product launch, so it makes sense to be a buyer of the shares before that happens.
Another catalyst for this stock could be a stock split, which would make the shares more affordable to small investors. It would also make options contracts less expensive and probably vastly increase trading volumes. While a stock split does not change the fundamentals of the stock, it can boost and change the psychology of investing in it since Apple will look "cheaper" to the average investor. With Apple's hugely positive fundamentals and dominant grasp of the tablet and smart phone market, plus its major cash position, a price target of $400 seems more like a publicity stunt than reality. With the shares in correction territory now, and since much of the recent weakness could be attributed to end of the year tax planning and margin requirements that will fade into the New Year, it makes sense to avoid the Wall Street pessimism and buy the shares on dips.
Here are some key points for AAPL:
Current share price: $533.25
The 52 week range is $377.68 to $705.07
Earnings estimates for 2013: $49.28 per share
Earnings estimates for 2014: $57.68 per share
Annual dividend: $10.60 per share which yields 1.8%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.