It continues to amaze me how many people are bearish when it comes to Apple (AAPL). Talking with the bears for just a few minutes will give you the impression that the technology giant is in some sort of trouble. That couldn't be further from the truth, and recently I disproved another set of Apple bear claims. At this point, Apple is doing quite well, and the company just needs to continue as is. There are plenty of others around it who continued to flop, and today, I'll explain why that is beneficial for Apple.
Other top names flop - what it means:
First, when it comes to investing in large cap techs, and I'm referring to names over $110 billion in market cap, there aren't a ton of choices. Add in buybacks and a 2% dividend yield as another filter, and you lose names like Google (GOOG) and potentially (AMZN) if you view them as a technology company. But you do have names like Intel (INTC), Microsoft (MSFT), and Cisco Systems (CSCO). So today, where are you putting your money as an investor?
Are you really going to trust Cisco, especially after its latest guidance bombshell? Not only did Cisco miss its roughly 4% growth estimate for its fiscal Q2 period, but the company said that revenues would decline by 8% to 10%. Earnings per share guidance was also terrible. To put this into perspective, this would be the equivalent of Apple guiding to about $35 billion in revenues when analysts were expecting $40 billion. I'm also not talking about Apple sandbagging guidance like it used to and then announcing huge beats. I'm talking about realistic guidance here. There is a large contingent out there that does not like Apple CEO Tim Cook, but there have been many calling for Cisco to replace John Chambers for at least five years now. If you are looking for exposure to large cap tech, are you investing in Cisco now? Probably not, especially at a valuation similar to Apple. More on the valuation aspect later.
So how about Intel? Are you buying the chip giant, the one that just had a tremendous investor day that propped up the stock, only to see the stock fall nearly twice as much when management decided to pull the rug out from under investors' feet? Intel just announced a huge revenue warning for 2014, basically a billion dollars plus below analyst estimates. This will now be the third straight disappointing year for Intel, and 2014 could be the third straight year of revenue declines. No matter how "bad" Apple seems right now (according to the bears), Apple's revenues continue to rise. Intel's are going the wrong way, so would you really invest in Intel now over Apple? I certainly wouldn't, especially after the game management just played.
That gets me to another point about Intel. With now a third straight year of disappointments, I would think that Apple continues to be a winner here. Why do I say that? Well, Intel continues to say that it was late to the mobile revolution. Intel's tablet offerings are a bit behind, and the company is playing catch up. Well, now that 2014 is potentially doomed, how long will it be before Intel has to get into Apple? Will there come a point, assuming Intel's technology catches up, where Intel will need to be inside Apple products? Think about how desperate Intel could become, and how that could play into Apple's hands. Assuming equal technology, it might start a potential bidding war, with Apple's margins being the primary benefactor. SA's Ashraf Eassa called ARM Holdings (ARMH) the big winner from Intel's investor day, and I basically agree. Even if ARM didn't really do much, Intel came out as a loser, and that's good for ARM, which is good for Apple too.
Then we get to a name like Microsoft, which could be the biggest wildcard in this game. As everyone knows, Microsoft is looking for a new CEO, with a selection of candidates that is very broad in nature. The future of Microsoft depends on who is chosen, which seems rather obvious, but it is more important in this case. Stephen Elop is open to selling Xbox and Bing if he gets the job, and that could have implications throughout the entire technology sector. Some investors may not want to invest in a name with so much uncertainty, so that could benefit Apple.
So when it comes to the above mentioned names, why would you want to invest in them? Cisco's revenues are declining and the calls for CEO change are rising by the day. Intel's management just did a 180 on investors by announcing that 2014 will be the third straight disappointing year. Microsoft's leadership future is in question, which leads to uncertainty over what products will be sold going forward. As investors become more skeptical of these names, it makes the case for Apple look even better. I'll have more on the growth and valuation aspect later in this article.
Competition is really desperate:
When it comes to others that have been considered threats to Apple in recent years, many names continue to struggle. BlackBerry (BBRY) was supposed to come back a bit with its BlackBerry 10 launch. So far, the only company negatively impacted by BlackBerry 10 is BlackBerry. The struggling Canadian device maker hit another new low this past week under $6.00.
Then we have Amazon's line of tablets. Some called them iPad Killers, but that doesn't appear to be the case. Lately, Amazon has been giving out all sorts of deals with these tablets. Amazon has given out discounts on the price of these tablets at times. At another time, I got an e-mail from Amazon telling me that I'd get $40 in free content if I bought a tablet. Amazon also tried pairing the tablets up with the new Playstation launch. Since Amazon doesn't release unit sales numbers, we don't know how these models are actually doing. It probably is not great though, or the company wouldn't be offering many deals.
A potential deal:
Last week, Goldman Sachs stated that a potential Apple deal with China Mobile (CHL) was imminent. Goldman says that China Mobile is set to launch 4G mobile services at a December 18th event, so the thinking is that an Apple deal would be launched ahead of that. The firm noted that while Apple investors have been disappointed that a deal has not been reached yet, it still remains a large part of the long-term bull case for Apple. Also, a deal that might start the sale of phones during the first calendar quarter (Apple's fiscal second quarter) would help to reduce some seasonality impacts. I've stated in the past that I think an Apple-China Mobile deal is worth about 10% to Apple shares, so we'll see what happens in the next few weeks.
Apple still the best overall bet:
As I've detailed above, many other tech names are really struggling. Cisco is going to have a really bad fiscal year, and Intel is going to have its third straight disappointing year in 2014. Microsoft's future is up in the air, depending on who is chosen as the new CEO. The following table shows some growth and valuation comparisons among five top tier tech names, based on their respective fiscal years.
*Non-GAAP values for EPS growth and P/E.
In terms of growth, Apple slides into the second place spot. Only Google has more growth, and if you convert Google's earnings to GAAP, Google trades at a valuation nearly double that of Apple. When converting Cisco's earnings to GAAP, Cisco's valuation is close to that of Apple. The fact that Apple trades at a discount to Intel is unbelievable in my opinion, given how bad Intel has done in recent years. Intel's above numbers are likely to be cut in the next few weeks. Sure, Apple doesn't have the dividend yield of some of these other names, but Apple has a much stronger buyback right now. Apple is significantly reducing its share count right now, while these other names are struggling to get their share counts down at all. Google doesn't have a buyback or a dividend, so investors aren't getting paid to hold shares and are being diluted each quarter.
While other tech companies continue to flop, Apple just needs to stay the course. Intel and Cisco have warned for their current or upcoming fiscal years, and Microsoft's future is up in the air. Apple provides a decent amount of growth, a dividend, and a huge buyback, all at a reasonable valuation. While competitors continue to struggle, Apple raised guidance last quarter and gave solid guidance. A China Mobile deal is imminent according to one research outlet, which would provide a tremendous lift to Apple shares. Apple may not be the flashiest name out there currently, but it also isn't issuing huge revenue or profit warnings, and that's something to be positive about.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.