Apple: Yawn

About: Apple Inc. (AAPL)
by: Dana Blankenhorn

Apple is still being priced at less than 12 times earnings.

Investors no longer expect growth, just a stream of fat profits.

One big announcement could change this, but Godot never showed up.

What has made Apple (NASDAQ:AAPL) a battlefield stock over the last month is the continuing argument between growth and value.

Apple is a value stock. It pays a dividend. The dividend is very safe, covered more than six times during the last quarter by earnings. Apple carries a legendary cash hoard that can sustain investment for years. Apple has a secure niche, the most valuable one in technology, and the potential to expand it in many different ways.

Goldman Sachs (NYSE:GS) thinks Apple may be worth 38% more than it is, which would be a market multiple of about 15 times earnings. Its momentum over the last month has only taken it from 10x earnings to about 12, and the market preference for value over risk has even taken IBM (NYSE:IBM) to 11, from 9.

Nothing has happened at the company to explain this move. The latest product announcement actually drew laughter from public radio - a vinyl wristband? Smaller iPhones to go alongside bigger ones? How many people are going to sleep over in front of an Apple Store for that?

That is pretty much the bearish case. Eagle Ridge Investments is just one of several funds reducing their holdings in the stock. Apple is being seen as a place to park money rather than as a place to make money. Most fund holdings in the stock represent just 1-3% of fund totals now. It's like a utility stock.

What Apple has to combat this is the old law firm of Fear, Uncertainty and Doubt. It has filed a patent for a virtual keyboard. It encourages speculation about an Apple Car. The next iPhone may ditch the earphone jack in favor of Bluetooth. There will be a second version of the Apple Watch.

The problem is most of these items don't move the needle. They don't represent vast new markets, higher sales or richer profits. Apple is now just a consumer products company, in that it produces products for existing, well-defined niches. Like Apple TV, whose new ad campaign will feature "celebrities." When you have cutting-edge technology, you don't need celebrities.

The question about Apple today is, what is this kind of stability worth? Is it worth 10 times earnings, 12 times, 15 times? The answer to that depends on the market, because it's the market that defines value. In the end, this tells me that Apple will rise and fall with the market, that it will follow trends instead of making them.

Until, that is, it thinks of something different. When it does, when it even seems to buyers that it might, the stock can explode. Microsoft (NASDAQ:MSFT), after all, is currently selling at a P/E near 40.

Which is why you don't need to be all-in on Apple, but you should still have some around.

Disclosure: I am/we are long AAPL, MSFT. 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.