Apple (AAPL) has had a rough couple of months. After hitting an all-time high of $705 in September, an underwhelming iPhone 5 release and disappointing earnings combined to end a rally that some thought would never end. A drop of over 35% since September has shed $200 billion from Apple's market cap, while Google (GOOG) has gone on to hit a new all-time high and the newly rebranded BlackBerry (BBRY) has rallied in anticipation of the release of the BlackBerry 10.
When it comes to investing, I try to emulate Warren Buffett. This means looking for quality companies at attractive prices. With a P/E ratio around 10 and over $130 billion in cash, I believe that Apple still has a lot to offer, and that it has been oversold. However, Apple's inability to compete internationally with Google in the smartphone market is holding me back from purchasing Apple. I believe that producing and selling a cheaper iPhone would provide Google's Android OS with legitimate competition in the smartphone market globally.
Apple now controls the majority of the smartphone market share in the U.S. (51.2%), but it cannot be denied that Google is in a better position outside of the U.S., where it has held a dominant position for years. Although the American consumer has driven growth around the world for decades, rapid growth in emerging markets combined with economic troubles in the U.S. paint a different picture moving forward.
The biggest and best example of that change is China. The push from the Chinese government towards a more consumption-based economy has helped to quadruple the average income in China over the last ten years. Having surpassed the U.S. as the largest market for smartphones in the world by volume, it is clear that Chinese consumers should be the #1 target for smartphone manufacturers going forward.
What Apple has failed to grasp so far is that China's newly enriched consumers cannot afford its products. With the cheapest iPhone available priced at $495, it should not surprise anyone that Apple only controls 12% of the smartphone market in China. At its current prices, Apple simply cannot compete with the open-source Android operating system, which can be put on cheaper phones without much of a drop-off in quality.
Were Apple to release a cheaper version of the iPhone targeted towards consumers in emerging markets, it would be able to set itself up for the future by establishing its brand abroad. While this goes against the traditional Apple ethos of being top quality (for top dollar), that is just the type of change that the company needs. Steve Jobs was able to bring Apple to prominence two separate times because he was willing to innovate and take the company in different directions.
The biggest knock on Tim Cook so far has been a tendency to play it safe, and a cheaper iPhone would be just the type of move that Jobs would make. A recent meeting between Cook and Xi Guohua (the head of China Mobile (CHL), the largest mobile provider in the world) is a sign that Apple is willing to explore its options in China. Apple has the cash on hand and the brand to make it work, and such a move would open up Apple to a whole new group of consumers that are being priced out currently. It would allow Apple to grow its revenue stream, even if its profit per phone would fall. Investors are punishing Apple for being complacent with its pile of cash, and a move to sell to consumers in emerging markets would be just the right move for Apple. If news comes out announcing a new cheaper iPhone, or of any progress on a deal with China Mobile, I would definitely look to purchase shares of Apple.