Still Bullish On Apple - But For How Long?

| About: Apple Inc. (AAPL)

Before he died, Steve Jobs supposedly left the company with a running product development pipeline that was "chock full of incredible stuff" good for the next four years. Or so current Apple (NASDAQ:AAPL) CEO Tim Cook says. (He declines to go into detail.) If its plans are as good as Cook claims they are, then Apple should remain one of the most innovative and profitable companies well into the year 2020.

So it's disconcerting to see Apple's stock price go steadily down.

On April 15, 2013, AAPL stock closed at $419.85, the lowest it had ever gone since its gradual slide in September 2012 from the much higher $700. Even Apple co-founder Steve Wozniak was surprised. He rightly pointed out that Apple is quite liquid, holding onto so much cash that it "translates to one to two hundred dollars per share of stock."

Apple shares did rebound, going up by 12%-15% in the first week of May 2013. Nevertheless, as of the last half of the month, AAPL is valued at $441.35. That old $700 high now seems far away. What's going on?

Nothing fundamental about it

For now, it's all just investor speculation-frustration.

While Apple's earnings haven't grown any larger, it's still a profitable company. (For the second quarter of 2013, it's garnered $43.6 billion in revenue and a net profit of $9.5 billion). Apple now has at least $137 billion in cash. So far, there's no real crisis to worry about.

But since Jobs's death in October 2011, the company has largely been rolling out only new upgrades of the same hardware (i.e., the iPhone 4S, the iPhone 5, and the iPad Mini-a smaller iteration of the iPad). There have been no real new "game-changing" products that people have come to expect of Apple. And we're not likely to see anything new from it until late this year (or even next year). And as part of this new-product "blackout" phase, Apple has cut down this year's iPhone 5s production from 35-40 million to 25-30 million units. It's all helped fuel investors' belief that Apple won't ever be as quick and aggressive without Jobs.

Not surprisingly, AAPL's price per share (PPS) dipped from $700 to $600 by September 2012. This, in turn, prompted thousands of investors and traders who were seeking an opportunity to buy into Apple to load up on the stock. When the stock continued to fall into the mid $500s, many of the investors were rattled and began selling at prices that eager but discerning buyers wanted, which was what brought AAPL down to the $400s.

Some observers also think the current low value of AAPL has something to do with the fall of the stock price of Cirrus Logic (NASDAQ: CRUS), a supplier of audio chips for iPhones and iPads. Shares of CRUS fell by 10% after the company's March 2013 revenue dipped below expectations ($206.9 million instead of $210 million). And since Apple is one of Cirrus Logic's biggest clients-practically "dictating" Cirrus's biggest decisions-investors conclude that if Cirrus goes down, so will Apple.

Thus AAPL's PPS is due to stock market forces rather than company fundamentals (i.e., Apple Inc.'s growth and performance). Investing in Apple these days isn't for the skittish, but for those willing to stick with the company on the long term.

Defining "long term"

But how long is "long term?" I recommend buying AAPL at its lowest points, and holding onto it over the next two years at least.

Apple's next "game-changer" is rumored to be the iWatch, due in late 2014. That's nearly two years from now. While the market waits, AAPL will take a beating. As a long-term investor, you'll have to resist the urge to run, even when Apple competitors like Samsung come out with products to match Apple technology point-for-point. Recently, Samsung demonstrated its new AMOLED displays - thin, durable, and flexible LEDs used to create wearable portable screens, exactly the technology expected of Apple's iWatch. It's tempting to think Samsung is the new Apple.

But strategically, Apple is still in a better position to lead the consumer electronics market. Other tech companies have developed new technologies before (e.g., multi-touch screens), but rarely figure out how consumers will use them. Figuring that out has been Apple's core strength; it works with such technologies to revolutionize the way people use electronics (best example: the smartphone or iPhone).

"Don't be misled by the word 'watch'," KGI Securities analyst Ming-Chi Kuo says. "[It] will not be positioned as a time-telling device nor as a device that displays information from other Apple products." In other words, the iWatch will most likely help Apple Inc. redefine how we think of personal electronics yet again.

In terms of AAPL, it could just be worth a two-year wait as an investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Stacey Baterina, a financial analyst with EPE.