AAPL is nicely valued, and the company has oodles of cash, but is Apple past its prime?
The old joke that if you lined up 1,000 economists, you would get 1,000 different opinions, certainly applies to Apple (AAPL ) stock.
Under the leadership of the late CEO Steve Jobs, the maker of the iPad, iPhone and Mac could do no wrong. His successor Tim Cook, in the view of his detractors, can’t do anything right. Last quarter, iPhone sales failed to meet analysts’ expectations. In 2013’s quarter ended in March, AAPL reported its first decline in quarterly profit in more than a decade .
Apple stock also even been killed when the company didn’t announce deals — such as the one with China Mobile (CHL ) — when investors expected .
Is the investing public’s love-hate relationship with Apple stock a little crazy? Of course. AAPL certainly is a victim of its own success. Still, investors are fascinated with Apple and wonder whether it will ever become the once-great growth stock it was … so we’ll look at the pros and cons of Apple stock and see whether the scorn leveled at Cook & Co. is still justified.
3 Pros of Apple Stock
Valuation: One thing fans and foes alike should agree on is that Apple stock is dirt cheap. AAPL trades at a forward price-to-earnings ratio of 12.5, well under Google’s (GOOG ) 22 and Facebook’s (FB ) nearly 50 figure. Moreover, Apple stock is trading at more than 20% below its 2012 peak of $700 a share. (Though it should be pointed out that analysts do expect single-digit growth for Apple vs. double digits for those aforementioned tech giants.)
Technological Prowess: Apple’s stock has skyrocketed in recent years thanks to revolutionary product (iPod, iPhone and iPad) after revolutionary product — but also on their many iterations. Next up for the company is likely the iPhone 6, which according to MacRumors is expected to launch Apple into the big-screen phone arena (something many Apple fans have yearned for), and should utilize a faster chip than current models. However, AAPL also reportedly is in talks with Comcast (CMCSA ) about developing a video streaming/cable alternative that would presumably take on Netflix (NFLX ); working on developing specialized applications for cars known as telematics; and has brought streaming capability to iTunes to further assert its musical dominance.Reports that the company’s best days are behind it seem harsh.
Cash Hoard: Apple has $160 billion in cash and investments that has been
gathering dust for quite a while. The aggregate number certainly is huge — more than the GDP of Vietnam currently. Out of its cash and short-term investments alone, Apple could buy either Twiter (TWTR ) ($27.5 billion), Tesla (TSLA ) ($25 billion) or eBay (EBAY ) and still have plenty left. Of course, AAPL can afford to buy plenty of its shares — its most recent program was for $14 billion in Apple stock. Between dividends, buybacks and acquisitions, Apple has a lot of dry powder, and a lot of places to potentially use it.
3 Cons of Apple Stock
Market Share Erosion: Apple continues to lose ground in the smartphone and tablet market to Android. The latest IDC data shows that Android had 78% market share to Apple’s 17.6% in Q4 — a decline for AAPL from 20.9% in the year-ago period. Meanwhile, about 121 million Android tablets were sold last year vs. 70.4 million iPads. This represents a sea change from 2012, when Apple’s iOS held an 8 million-tablet lead. Granted, Apple is much better at turning a profit off its devices than Android developers, but the company can’t continue to lose share indefinitely.
Paranoia: Apple’s penchant for secrecy is legendary. It began under the megalomaniacal Jobs and continues to this day. The secrecy has spawned a cottage industry of websites dedicated to unearthing every scrap of Apple rumors. Investors are forced to rely on these outlets to get a clear idea of what the company is up to and why. A lack of transparency — no matter how well-intentioned — isn’t a good thing for Apple stock investors, who can be taken for a ride on conjecture.
E-books: The company’s e-book business has had more intrigue than a John Grisham novel. Recently, it was hit with an $840 million judgment for price-fixing and now faces a class action lawsuit from consumers. Apple has bitterly fought government monitoring and lost badly in court. I don’t know if Apple is trying to prove a larger point here, but the time has passed for the company to settle this mess.
Apple is neither the technological messiah the bulls claim nor the basket case portrayed by some in the media. Nonetheless, it’s still has the potential for surprises and has more than a few tricks up its sleeve.
So should you buy Apple stock? Yes — for now, it seems the rewards far outweigh the risks.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.