If Apple Has Reached Its Bottom, Is It Time To Buy Again?

Jul. 9.13 | About: Apple Inc. (AAPL)

For the past year, nothing seems to be going the way of Apple (NASDAQ:AAPL) shareholders. There have been countless articles discussing whether or not Apple can ever make a comeback, or whether or not they will succeed without Steve Jobs as CEO. The rest of the market has performed well, but what was once the market's favorite stock, is now down over 20% YTD. Unfortunately, the conference call several months ago with Tim Cook did not seem to have as much of a positive effect on the stock as Apple was hoping for.

Latest Developments

Things may finally be looking up for Apple nevertheless. According to a recent article in Forbes, Apple may finally have a game changer for TV. Tim Cook has been quoted as saying "The TV has been left behind" in regards to innovation. This is especially true when comparing the progression of television to other technologies. The functionality of the TV has stayed relatively the same for decades, leaving an opportunity available to innovators. Tim Cook has also stated "Our whole role in life is to give you something you didn't know you wanted. And then once you get it, you can't imagine your life without it.…And you can count on Apple doing that." Let's hope Apple finally gets back to doing just that.

1.) Apple's latest patent application leads us to believe that Apple TV will get a large redesign in the latest model. The patent states that Apple is developing a remote control "wand" with a fingerprint sensor. The importance of the fingerprint sensor for users of Apple TV will be the ability to be able to authenticate parental controls and buying controls. Parent's or authorized user's fingerprints will be instantly recognized for access to certain programming or for buying movies and TV shows. This technology has also been rumored as a potential new feature to the next iPhone.

2.) The iWatch is something that has also been speculated about greatly. There has been confirmation that Apple did file a trademark in Japan, Russia, Mexico, and others. Apple's patent describes how "With a touch screen user input a user can accomplish a number of different tasks including adjusting the order of a current playlist, and reviewing a list of recent phone calls. A response to a current text message can even be managed given a simple virtual keyboard configuration across the face of the flexible display."

3.) Tim Cook has recently hired Paul Devene, who is the former CEO of luxury brand Yves Saint Laurent. Devene's role has been loosely described as "special projects" by Apple, but speculation lies around the iWatch product release. Devene has a history of success in marketing luxury items, and that is exactly what Apple needs. This hiring could also mean that Apple is looking to get back to an exclusive luxury image, which it has lost to some extent since the passing of the late Steve Jobs.

4.) Tim Cook has recently held a meeting to announce his displeasure in the amount of iPhone sales that are taking place from inside Apple retail stores. Cook reportedly stated that too many sales are occurring in outside locations, which decreases the amount of cross selling that may have occurred if the consumer was shopping inside the Apple store. Incentives for getting consumers into Apple stores may be in the works.

Speculation of a lower priced MacBook Air has also been discussed. Apple could remove Intel as the processor for their MacBook Air, and use chips manufactured in house. They could lower the price point of their already successful MacBook Air in order to reach even more consumers. MacBook Air already has 56% of the ultra-thin laptop market share.

The greatest catalyst of all is Apple's secrecy. The ideal situation for Apple investors is a new product that no one even knows is coming. Time will tell for Apple.

Don't Sell Yet…

1.) Buybacks- A few months ago Apple announced share buybacks on their conference call with Tim Cook. The buybacks haven't currently had a major effect on the price of the stock yet, but over time it will. Buybacks are the sign of a solid, confident company with shareholder friendly management. As the number of shares decrease, naturally the price of each outstanding share should increase.

2.) Dividend- Apple's dividend yield continued to increase as the share price tumbled down to $400 a share. On April 23, 2013 Apple announced a 15% increase in the dividend payout, which equates to a cash value of $3.05 per share. Companies that continually increase dividend payouts and have large amounts of cash are typically great investments for the long term. The safety level of Apple's dividend is high, thanks to Apple's large cash position.

3.) History- Apple was once the most popular and favorite stock on Wall Street, making it one of the decade's most compelling success stories. Shares rose 100x from September 2002 through September 2012. Products like the iPhone and iPad broke sales records consistently, and analysts even predicted that Apple would be over $1000 a share. The Apple brand is still something that is envied by many, and remains a very powerful asset for the company.

But What About….?

1.) Competition- The market that Apple's products and services lie in are extremely competitive. Markets are often characterized by frequent product innovations and technological advances that can add new features and make current products seem obsolete. Price competition from rivals like Google (NASDAQ:GOOG) has hurt Apple, particularly in the Smartphone market. Apple first released the iPhone six years ago, and the iPad is now three years old. This lapse in time between major innovations allows the competition to respond and develop similar devices. Even Apple's "refreshed" versions of the products are not enough to keep competitors at bay. With such fierce competition on similar products, the high prices that Apple have enjoyed and made Apple so profitable are more difficult to justify. Its latest earnings report showed that Apple's wide margins have begun to narrow.

2.) Innovation- Innovation for Apple has been no where near where it was during the Steve Jobs CEO tenure. "Refreshed" versions of current products have not been enough to spur enough growth in sales to move the stock. Apple needs another game changer that tells the public what they want, and leaves other companies rushing in an attempt to try and catch up. iPod, iPhone, and iPad were all successful in this respect.

3.) Global Markets- There has been speculation that Apple will be releasing a lower priced iPhone model, particularly to cater to emerging markets. The success or failure of launching the iPhone and iPad in these developing countries will have a huge influence on whether or not Apple's stock rallies. Apple is faced by aggressive price cutting and frequent innovation in alternative global markets, making it more difficult for their current products to compete. Apple's success in the global economy depends heavily on its ability to ensure timely production of new innovative technologies at prices competitive with Google and Samsung (OTC:SSNLF). Apple has stated that their designs, reputation, and overall build quality will help them build a competitive advantage in their respective markets, while their competition focuses solely on pricing. Products that imitate Apple's functionality and innovation but undercut Apple's prices are a huge problem for Apple right now.

With such fast growth in the past, Apple has now reached a tremendous size, which limits continued exponential growth. Apple had consistently doubled their sales and earnings, but this is a feat that can only be done a certain number of times before it becomes very difficult to double such a large amount. Expansion becomes much more difficult when you must create hundreds of billions of dollars in new sales in one year, while Apple was used to doubling revenues numbers in the millions. Considering price movements in stocks are largely based on revenues and earnings, the stock was bound to slow down.

Profit takers are also another factor that has hurt Apple. Many people who got into Apple early have since taken their profits. Not to mention, as Apple's returns continued to grow, Apple became a disproportionately large portion of many people's portfolios. With too much exposure to one company, a portfolio becomes riskier. In order to balance a portfolio in this condition out, Apple shares would have to be trimmed.

I think the days of unbelievable growth for Apple are more than likely over. Steve Jobs was the visionary and such an intricate part of why Apple was such a great success. History shows that when Apple ousted their founder in 1985, the company performed very poorly. After re-hiring Steve, Apple began to outperform. Steve Jobs did however recommend Tim Cook as his successor, and I think Cook has potential to do great things with Apple. This information alone is not enough to label the stock untouchable.

Financially, the stock is dirt cheap

Financially speaking Apple is in excellent standing. Apple trades at a P/E of just 9.97 compared to an industry average of 16. Apple's relative P/E ratio (PEG ratio) is about .62, which shows that Apple is trading a multiple nearly half its growth rate. Both revenues and earnings per share have been steadily increasing year over year. Apple's dividend yield of 2.92% is also higher than the industry average of just 2.24%. Return on equity for Apple is nearly 40%, compared to an industry average of just 16.87%. Financial ratios show that Apple is highly undervalued when compared to its industry competitors. Considering Apple was once, and arguably still is the best of the breed company in the industry, these comparisons make Apple seem largely oversold.

Unseen Markets

For a different perspective, there are still many options available for Apple that no one has discussed. There is always the possibility that Apple will make an attempt to get into the gaming industry again. Their failed Apple Bandai Pippin was discontinued in 1997, but this may be a market that Apple decides to enter again. Apple had attempted tablets long before the iPad was released with little success, so it's possible Apple makes a comeback attempt in the gaming industry as well. Competitors would include Sony (ADR) PlayStation and Microsoft (NASDAQ:MSFT) Xbox, but portable gaming controllers that connect directly to your iPhone or iPad could give Apple a competitive advantage.

The possibility for Smartphone integration throughout your entire house is another untapped market by Apple. I'm not referring to using your iPhone as a remote control for your iTunes or your Apple TV (which is currently available to consumers), but using your iPhone and iPad to check the status of your laundry, or to view recipes on the stove as you cook. This allows consumers to bring all of your home electronics together with simple integration across all appliances and consumer technologies.

This is merely speculation, but it is always interesting to try and predict what Apple may come up with next.

Time to Pull the Trigger?

Apple certainly doesn't have it easy from here, but the picture isn't as bleak as many people paint it. Apple's products are still widely used and sought after, and the App Store and iTunes are two of the best and widest used digital marketplaces in the world. The balance sheet's cash position is incredible, standing at about $143 billion. In addition, the stock did see growth every year from 2003 until 2012, and revenues during the same time period jumped from $6 billion to over $180 billion.

CNBC reported on Monday that Apple may finally be at the bottom. "Among the reasons Apple fans say to buy the stock now: a record-breaking stock buyback program, an amazing valuation, a technical breakout in the stock chart and a ramp-up in the current uninspiring product cycle. Plus, Chief Executive Tim Cook is finally stepping out of Steve Jobs' shadow." CNBC analysts are predicting Apple to be over $500 a share before the end of the summer. Forbes published a similar article on the same day, highlighting that Apple's main competitors - Samsung and HTC have reported lower than expecting earnings.

Click to enlarge

Chart Courtesy of CNBC

Even hedge funds and large institutional buyers are getting back into Apple, the valuation and potential new products make it too good to ignore. Technical analysis above shows a head and shoulders pattern for the stock, which could ultimately lead to a breakout up towards $500 a share.

Whether or not to pull the trigger on Apple ultimately depends on your risk tolerance. I think Apple may be on the right path, and definitely has some surprises in the works that should be announced soon. Valuation and balance sheet are too good to ignore, and history has shown that buying a good company during a bad time has proven profitable.

Conclusion

Apple is a tricky stock to consider investing in. Fellow Seeking Alpha writer Ashraf Eassa thinks that Apple stock is "dead money" and should be avoided. However, he also states that Apple's outstanding cash position and current product line should be sustainable for Apple in the coming years. Personally, I agree. The dividend, share buybacks, excellent cash position and current product offerings are all strengths for the stock. New products and emerging market growth are the two largest catalysts for Apple, which make it an investment based on conviction. Many analysts rate Apple a "Buy", but I am on the fence between a buy and a hold. Investors have adjusted to a life without Steve Jobs however, and new product cycles and incredible valuation make the stock appealing again. Tim Cook has been incredibly confident and enthusiastic about what is to come for Apple, and if his predictions are correct, Apple should be a great stock to own.

This article is for information only, and is not to be considered advice to buy or sell a particular stock. Consult your financial professional before investing.

Disclosure: I am long AAPL. 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.