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Apple Inc (AAPL) is one of the most popular stocks among the investors worldwide. In recent weeks AAPL has been surrounded by some concerns which have had an adverse impact on the stock price. The stock is down 25% from its all time high achieved couple of months back. Some of the concerns include the slowing innovation process at AAPL, the pace of geographical expansion, rising competition, squeezing margins and the presence of excessive $121 billion worth of cash on the balance sheet. In this article I will discuss what to expect in 2013 and different valuation scenarios.

Following is stock price chart for AAPL since reaching all time high in Sept.
(click to enlarge)
Source: Yahoofinance.com

AAPL can benefit from smart phone market share gain, achieved through geographical expansion and industry growth. AAPL is aggressively rolling out iPhone 5 into international markets to grow its sales. By Dec 31st, the company is scheduled to introduce iPhone 5 in 100 countries. It launched iPhone 5 in China on Dec 14th, and within first three days of launch it posted record sales of 2 millionhandsets. The launch is considered better than the iPhone 4S. If AAPL is successful in tapping market space available in the Chinese market, this would mean great success for the company. China accounts for 15% of AAPL's total revenue and by the end of this year the country is expected to become the world's top smart phone market. The company has been penetrating the Chinese market with the help of China Unicom and China Telecom; collectively, these two network carriers have more than 350 million subscribers.

However, Apple still has to strike a deal with China mobile, the world's largest carrier, to launch its iPhone5. If China Mobile goes ahead with the iPhone 5 launch, this would certainly give a boost to AAPL's sales and earnings (as China Mobile has more than 700 million subscribers). Analysts anticipate that a deal between AAPL and China Mobile could take place in the second half of 2013. If AAPL fails to come to terms with China Mobile in next the two quarters, I see a significant impact on AAPL's growth rate and competitive position in the industry.

Growing competition is a threat to AALP and could limit its growth potential. AAPL's main competitors are Samsung, Research In Motion Limited (RIMM), Nokia Corporation (NOK), and Microsoft Corporation (MSFT). Samsung, AAPL's direct competitor, offers products with a wide price range. Samsung smart devices including Galaxy S3 and Galaxy Note 2 are posting strong results and are a risk to iPhone 5's success. In current fourth quarter, Samsung is expected to ship more than 60 million smart devices.

I believe that in order to address the growing competition and to grow geographically AAPL will have to compromise on its premium brand status and come up with low cost smart devices. AAPL has already launched iPad mini and I believe that in order to penetrate the emerging markets and compete successfully, AAPL might even announce a low cost iPhone. That is why I believe AAPL will not be able to maintain its current high margins in future.

Given the growing investor concerns and competition threats, innovation at AAPL will be a likely catalyst for the stock's performance. The next big thing in the bag for AAPL is an iTV, which is expected to be launched in 3Q 2013. According toMorgan Stanley analyst Katy Huberty, a market of 13 million units exists for iTV in the U.S. alone and consumers are willing to pay a premium of up to 20% for the product. Given these numbers, iTV can bring in $13 billion in revenues and $4.5 in earnings per share for the company.

Furthermore, as I mentioned earlier, low price iPhone could also be announced by the company in the following year. Due to order reductions to iPhone suppliers for the March quarter 2013, it is also speculated that an early launch of new iPhone (iPhone 5s) in the June quarter next year is highly likely. According to a reportearlier this week, AAPL is planning to introduce the 5th generation iPad in March 2013. iPad approximately contributes 20% to total revenue of the company and its successful launch would fuel growth for the company.

Significant Cash Holding
AAPL has a significant cash holding of $121 billion which the company can use to strengthen its supply chain, inject in R&D or distribute it to share holders (in the form of dividend and share buyback). AAPL's CEO announced that in the next year, the company will bring back some of its production of Mac computers to the U.S. and will be spending over $100 million in this process. Given its significant cash position, dividend increase is also an option to attract income seeking investors, however expected dividend tax increase to almost 40% can form a hurdle in dividend increase process.

Valuation
Currently AAPL is trading at a forward P/E of 9x and has a PEG of 0.5 that seems to be inexpensive for a company like AAPL given that fact it has zero debt, ROE of 42% and five years expected growth rate of 20% per annum. That is why I believe AAPL would experience P/E expansion in near future. I will discuss three valuation scenarios for AAPL; base, bullish and bearish case scenario. In all three cases discussed below I used S&P 500 forward P/E of 13.8x as a bench mark for valuation.

Base Case
Given the fact that AAPL has strong balance sheet and high growth rate expectation by analysts, the company is likely to experience P/E expansion as new products are likely to drive up earnings and create value for shareholders. For base case valuation I am using S&P 500 forward P/E of 13.8x and 2013 EPS consensus of $49 to get a target price of $675.

Bull Case
In bullish case scenario I believe upside from base case is likely to be driven by gross margin improvement, continuous product innovation and market share gain. Also, AAPL needs to get a favorable deal with China Mobile that would create incremental iPhone demand of 15 to 20 million units annually. This would help the company to grow at better than expected rate, that is why under bull case scenario I believe the stock would trade at premium to the broad market and I applied 20% premium to S&P 500 forward P/E (13.8*1.2= 16.5). Using forward P/E of 16.5x and 2013 EPS consensus of $49 a price target of $810 is calculated.

Bear Case
In future if due to intense competition AAPL losses market share to Android phones and tablets, innovation slows down and AAPL is unable to reach a favorable deal with China Mobile this creates a bearish case scenario for AAPL. For bearish case price target calculation, a discount of 20% is applied to S&P forward P/E (13.8*0.80=11). Using discounted forward P/E of 11x and 2013 EPS consensus of $49 a price target of $540 is calculated.

Conclusion
I believe that AAPL will do better in 2013 given the expected launches of iTV, iPad and new iPhone devices. However, I also believe that due to growing competition and in effort to penetrate in emerging markets (especially in Asian markets) the company needs to come up with new products with different price ranges. But, these measures will result in lower margins and AAPL will lose its premium price brand tag.

Key performance catalysts for AAPL are penetration in emerging market, launch of iTV in late 2013 and innovation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.