Apple (NASDAQ:AAPL) designs, manufactures, and markets mobile communication and media devices, personal computing products, and portable digital music players. Its most notable products include the iPhone, iPod, iPad, and iMac. The company also offers a range of software products, including iOS and OS X operating system software; server software. It also sells digital content through the iTunes Store.
At the time of this article, Apple's current price was $390.53 - close to its 52 week low of $385.10 - with a current PE of 8.85, a forward PE of 7.97 and a dividend yield of 2.7%.
While the fundamentals may appear to make Apple a good investment, fundamentals were not the reason for the stock price bubbling at just over $700 in September 2012. Fundamentals will therefore not be the reason for the deflation of the Apple bubble. Based on the following analysis, the stock price has a long way to go down before becoming a rational investment again.
Not about the Fundamentals
Steve Jobs Made Apple - Steve Jobs was the cofounder and director of Apple until resigning in 1985 after falling out with the then current CEO. During his first tenure at Apple, Jobs spearheaded the development of the Macintosh, a computer he did not create, but saw more potential in than other projects at that time. The Macintosh was greeted with much fanfare, especially after the famous "1984" commercial aired during the Super Bowl in January 1984. The Macintosh was later demonstrated by Jobs during the first of his now famous Mac keynote speeches. While the Mac gained an immediate and enthusiastic following, it was not without serious weaknesses.
After Jobs left Apple to set up his own company, Apple had success with the Macintosh line for several years. As interest in the Macintosh waned, Apple experimented with various other consumer product offerings such as digital cameras, CD players, speakers, video and TV appliances. Enormous resources were also invested in a PDA division called Newton based on unrealistic market forecasts. These products were all flops and Apple's market share and stock price slid as a result.
At the same time Apple's main competitor Microsoft continued to gain market share with its Windows software on cheap commodity personal computers. Apple never developed a competitively priced option to Windows and instead relied on suing Microsoft for using a graphical user interface similar to the one used by Apple. The lawsuit dragged on for years before it was finally dismissed.
Jobs returned to Apple in 1997 and oversaw its turnaround beginning with co-development and release of the Microsoft Office software for Macintosh. Other releases included the iMac in 1998, the opening of Apple retail stores and the iPod in 2001, the online iTunes store in 2003, the use of Intel processors in 2005, the iPhone in 2007, and various revisions to these products in subsequent years.
Since the passing of Jobs, the pipeline of products offerings has again diminished into the mundane. And a similar attempt to enter the low-end market with a plastic iPhone will likely have the same results as the low-end Macs of the 90s. Apple resorted to a lawsuit against Samsung for possible patent infringement.
Steve Jobs created markets for Apple's products while Apple now has to adapt to an evolving market that is better prepared to compete head to head in product offerings.
Brand Loyalty can Change Quickly - The unveiling of each new product was much anticipated and enthusiastically received. Everyone remembers the images on TV and the internet of people waiting long hours in line in inclement weather to be the first to buy the newly released Apple product. Without a continuous stream of innovative offerings, this loyalty will migrate to companies that do innovate. This currently appears to be the case at Apple with a lukewarm reception on their potential new offerings like the plastic iPhone.
Competition is Increasing - Samsung's new products, namely the Galaxy Note II, are becoming the market leader. Samsung's smart phones are cheaper and able to grab more market share while Apple is relying on high profit margins on their iPhone. These margins are now eroding as Apple's market share has fallen.
Apple is also facing competition from the Google operating system Android and Amazon's Kindle. Both these are grabbing market share at the expense of lower margins in order to lock these consumers into their operating system. As more consumers become familiar with these lower cost options, they will be less willing to learn a new system.
Apple's Customer Demographic Shift - According to Brandindex, "Apple's biggest supporters are consumers 35 years and older. Meanwhile, the younger age group of 18 to 34 - once the demographic most smitten with Apple - has trended downward. This reverses the positions of the two age groups before last July." This trend reversal was never fully explained, but likely it is because the 18 to 34 age group is likely unemployed and saddled with student loan debt. These consumers cannot afford an $800 iPhone and settled for a less expensive alternative from Samsung. Increasing Costs - Apple products are almost exclusively manufactured in China. With the appreciation of the Chinese Yuan (NYSEARCA:CNY) against the US Dollar to a 19 year high, labor and raw material costs will likely eat into margins. While this will also affect Apple's competitors, Apple will suffer more as it has a lower volume / higher margin mix. Apple's competitors appear to concede margins for higher market share (at least for now).
Apple could have a winning strategy in either its current projected offerings or future ones. These may allow Apple market share to stabilize or gain ground against its competitors.
Investors should avoid considering the fundamentals on this stock as a basis for investment. The forward earnings estimates will likely be revised downward and the huge cash position will likely be squandered in unprofitable consumer projects. An enticing dividend may lure income investors, but once this company loses it's loyal following the dividend will likely be cut as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.