Recent trading activity for Apple (NASDAQ:AAPL) has been a cause for concern among Apple shareholders.
In the wake of a disappointing Maps application, an apology from Apple CEO Tim Cook, and probable supply chain disruptions due to striking Foxconn employees, the stock has taken a veritable swan dive off its all-time high of above $700 per share.
There has been other bad news for the company as well: namely, reports that a more expensive iPhone 5 is eating into expected profit margins, prompting revisions to Wall Street guidance on Apple's biggest cash cow, and analysis after analysis confirming that Apple's mobile market share pales in comparison to that of Google's (NASDAQ:GOOG) Android. Research in Motion's (RIMM) unveiling of Blackberry 10 is only months away, and Nokia (NYSE:NOK) and Microsoft (NASDAQ) have joined forces to raise yet another challenge to Apple's iPhone hegemony. Add to that the newest "purple flare" complaints about the iPhone 5 camera, and the many complaints about the susceptibility of the outer casing to scratches, not to mention the one year anniversary of Apple visionary Steve Jobs' passing, as questions as to whether Tim Cook can handle the job continue to be raised.
It's true, Apple has lost the long-awaited iPhone 5 "bounce" it received upon its announcement of the new device, and it might seem like many investors have begun to seriously consider whether the stock is headed back to pre-recession levels. In response, I have only this to say: Apple is a BUY, and here's why.
For Apple's precipitous rise, we have the Apple consumer to thank. The Apple consumer explains not only why Apple is destined to reach $1,000 per share, but also why Apple's market share relative to the Android platform is not a major cause for concern. The Apple consumer is not fickle. The Apple consumer doesn't just buy an iPhone. The Apple consumer buys an iPhone to go with an iPad, both of which will be synced with the Apple consumer's brand new MacBook Air. How will the Apple consumer do this? Over iCloud. The Apple consumer also explains why the grand opening of an Apple store is such a big deal pretty much anywhere in the world, why throngs of people sit outside waiting for them to open on big release days, and why Chinese mobs bum rush Apple stores in a mad dash for lusted over products! The Apple consumer explains why people upgrade from the iPhone 4S to the iPhone 5 when they have absolutely no need for a new phone, why carriers pay the highest subsidies in the industry in order to offer iPhones to its customers, and why Apple could bail out a couple of banks with all the money it has (unfortunately, Apple Bank already exists).
For the precipitous drop in Apple's stock price, on the other hand, we have the Apple investor to thank. It's more than likely that the cause for the recent deterioration in Apple's stock price has been investor's profit-taking desires, which to be sure were completely justified. After all, even a cursory glance at the Apple chart shows that the stock has moved in fits and starts throughout its meteoric rise to the $600-$700 per share range. In April of this year, the stock dropped off its high of $630 to $530. Sound familiar? When a stock rises 500 points in less than three years, you have to expect that investors will get a bit skittish now and again. You can also expect a fair amount of savvy investors to be attempting to sell at the peaks and double down after the dips. A mixture of these two trends is precisely what's happening now. As the heavy hitters pile out at new highs, they are just as likely to pile back in when the stock is both cheap and ripe for holiday earnings, and those that thought Apple had seen its best days are likely to follow suit.
Granted, there are some causes for concern, but they don't speak to the company's fundamentals. Yes, there are more phones out there running Android than iOS, but that statistic is an apples/oranges comparison. Android is just a platform, and Google doesn't make the kind of money from Android that Apple makes on iPhone. The reason for that is the same reason that Google's platform is so pervasive; Google's open source platform is flexible and operable on most hardware, so they get the market share, but not the profit. So who cares? Meanwhile, Apple's marriage of software and hardware exclusivity gives it the star power, customer retention, and brand resonance most smartphone makers dream of. Maps is not nearly as big a problem as people have made it out to be. Part of the problem is adapting to a new application that has replaced Google Maps, a very effective and heavily relied upon application. While the decision to dump Google Maps may not have been timed very well, it's very unlikely to hurt overall iPhone 5 sales. Meanwhile, surface scratching can be fixed by better covers, and purple flare can be sorted out by avoiding taking pictures of the sun! Why on earth would you do that?
Apple's price-to-earnings ratio is 14.79 as compared to Google's 22.06, and that's in a pre-iPhone 5 earnings world. When Q4 earnings factoring in iPhone 5 sales from the holiday season are released, you can expect an even better number. Then of course there is Apple's extensively covered cash hoard, which was around the $100 billion range several months back. Some have predicted that this mountain of money will double by next year, and come to represent an increasing percentage of Apple's overall stock price.
What this all really comes down to is expectations; consumers and investors alike have been wowed by Apple's amazing success story, so much so that they have come to view Apple as the perfect company. News flash: it's not. That company doesn't exist. But Apple does exist, and guess what? It's cheap.