3 Things to Think About Before Buying Apple

 

Disney (NYSE: DIS  ) CEO Bob Iger figured he would put his money where his new board seat is last week, buying $1 million worth of Apple's (Nasdaq: AAPL  ) stock shortly after being added to the tech giant's board of directors.

Let's get this straight: Iger's move was strictly symbolic.

There's no point in arguing that Disney's impressive helmsman is rich and that $1 million isn't necessarily a lot of money to him. It's always a lot of money to anyone. The reason why the purchase appears to be done primarily as a public show of confidence is because Iger has known Apple all too well for years.

It was Iger that orchestrated Disney's purchase of Pixar from majority shareholder Steve Jobs, a move that made Jobs Disney's largest single investor. Apple and Disney have been partners early and often under Iger, as Disney video content made its way to the once-fledgling iTunes digital video store when the other major studios were still unsure.

If you want more proof that Iger snapping up a chunk of Apple's stock at $375 is more for show than for investment purposes, consider that Iger was buying into dividend-less Apple around the same time that he was jacking up Disney's yield by 50%.

Bulls will argue that the circumstances don't matter. Iger is making a shrewd purchase. Apple is growing a lot faster than its earnings multiples in the low teens suggest. Apple is the undisputed tablet king, and it's raking in the lion's share of the profits in smartphones. Nearly everything Apple touches turns to iGold. Who would be silly enough to bet against the class act of Cupertino?

Well, let's go over three things to consider before investing in the world's most valuable tech darling.

1. Apple's future doesn't necessarily have to be better than its present
The head-turning days of ridiculous growth for the iPhone and iPad treated Apple brilliantly in the past, but its growth is decelerating. Analysts see earnings climbing by 25% to $34.62 a share this new fiscal year and a mere 12% to $38.86 a share in fiscal 2013.

Yes, Wall Street's targets value Apple at a seemingly cheap 11 times fiscal 2012 earnings and a little more than 10 times the following year's projected profitability, but analysts have gone from underestimating the tech giant's earnings power to overestimating bottom-line results.

After years of consistently trouncing analyst estimates, Apple came up short in its latest quarter. Investors dismissed the oversight on the iPhone 4S delay, as if analysts don't know what they're doing. Well, it happened.

Right now Apple is losing market share in both tablets and smartphones. Amazon.com (Nasdaq: AMZN  ) has reportedly shipped millions of Kindle Fires over the past month. Google's (Nasdaq: GOOG  ) Android has been gaining market share at Apple's expense for several quarters now. Android phones have gone from 25.3% of all smartphone sales a year ago to 52.5% now, according to tech tracker Gartner. The iPhone in that time has shrunk from 16.6% to 15%.

The bullish crutch is that Google may be giving away Android, but Apple's the one hogging up all of the profit share in smartphones. Well, that may be true, but as developers shift their attention to Android's wider adoption rate, paying a premium for iOS phones and tablets won't make as much sense in the future.

2. Steve Jobs is gone
Maybe it's just a coincidence that Apple's first quarterly miss in years happened under CEO Tim Cook. Maybe it's just a fluke that consumers were underwhelmed by Cook's introduction of the iPhone 4S. However, if I ask customers walking out of an Apple Store who Apple's CEO is, I'm guessing that less than half know that it's Cook.

There's nothing wrong with having a helmsman who doesn't gravitate to the spotlight. Disney is better off with Iger than it was with the flashier Michael Eisner. However, Apple needed Jobs to let consumers know that a smartphone didn't need to have physical keyboards and that a tablet was magical.

Cook will have no problem improving on Apple's product line with next year's iPhone 5, iPad 3, and full-blown high-def television. Unfortunately, the marketing message will suffer.

3. The halo effect cuts both ways
Apple has been one of the market's biggest winners over the past decade, and it all started with the 2001 introduction of the iPod. Apple's success in portable media players -- and the iTunes ecosystem that launched two years later -- created a halo effect, boosting sales of Apple computers.

The iPod has been fading for several quarters now, but the success of Apple's iPhone and now iPad are keeping the halo effect alive.

However, the same thing is happening at Amazon and Google. The success of the Kindle stirred up interest in Amazon's entry-level tablet. Google's market-trouncing popularity in smartphones is finally starting to carry over into tablets. The next Apple won't be Apple.

It doesn't matter that Apple has a growing network of namesake retail locations to keep the ambassadorships growing. Gateway and Dell (Nasdaq: DELL  ) had stores. Even Microsoft (Nasdaq: MSFT  ) is setting up in select malls. Apple is really only as popular as its ability to grow its reach, and that's easier said than done in a crowded room of halos.

If you want to see what the tech giant does next, consider adding Apple to My Watchlist.

The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Google, Walt Disney, Microsoft, and Dell. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Disney. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (30) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2011, at 10:19 AM, desertracer1 wrote:

    You know what.....we have eleven..11...Apple products in our family and love them. And most everyone I know has at least one..IPhone, IPad, IPod or Mac. Get off these stupid articles that are only intended to scare investors off. Apple is the Lamborgini, Ferrari or Cadillac of its class.

  • Report this Comment On December 06, 2011, at 10:30 AM, IraLA wrote:

    <<Apple is the Lamborgini, Ferrari or Cadillac of its class.>>

    More specifically -- and more generally -- Apple is the Lamborgini, Ferrari or Cadillac in every product cagegory it offers. If you value your time and you want virtually flawless operation from the time you open the box, then the slight premium on the front end is an investment in your sanity and peace of mind. Period. Anything else is sniping. What's in your wallet? What are you thinking!

  • Report this Comment On December 06, 2011, at 10:31 AM, neilweinstock wrote:

    There are a few items here I would take issue with:

    "Investors dismissed the oversight on the iPhone 4S delay, as if analysts don't know what they're doing."

    If you look at the history of analyst estimates, you might indeed come to that conclusion. Or, at minimum, you would conclude that analysts are definitely *not* in the business of giving the most accurate estimates possible.

    "Maybe it's just a fluke that consumers were underwhelmed by Cook's introduction of the iPhone 4S."

    Apple's marketing message might indeed suffer a bit under Cook, but that's a ridiculous example to cite.

    1) I think he did pretty well considering that he gave that presentation while knowing Jobs was on his deathbed.

    2) People like to forget that consumers were often underwhelmed by Jobs' product introductions (exhibit A: iPad).

    3) Consumers were so underwhelmed by the 4S introduction that Apple is going to sell 30 million of them (or so) this quarter.

    "...but as developers shift their attention to Android's wider adoption rate,..."

    App developers will go where the money is, and right now that is iOS. The iOS app ecosystem is consistently *far* more profitable for developers than Android's. iOS is likely to continue to be the first mobile OS of choice for developers for quite some time, despite lower market share.

  • Report this Comment On December 06, 2011, at 10:45 AM, Zankudo wrote:

    Up, up and away...wasn't that a house in a Pixar movie...amen to the comments...aapl is far and above anything anybody else has. I have had them all. There is a reason customers are loyal. The same reason stores are full and lines before a new iPhone are around the block. It may stumble. It may fumble. But Siri is the first shot of the new century.

  • Report this Comment On December 06, 2011, at 10:46 AM, SellbyOctober wrote:

    I have great respect for this web site but this article is vacuous.

  • Report this Comment On December 06, 2011, at 10:46 AM, TMFNewCow wrote:

    I don't think Rick is making an outright bearish case here, Fools. Rather, he's pointing out some very legitimate points that an investor should consider before buying AAPL, and even as a bullish shareholder myself, I agree with all 3 of his points as risk factors to acknowledge. Heeding risk factors makes you a better investor.

    -- Evan

  • Report this Comment On December 06, 2011, at 10:55 AM, JCSEN wrote:

    This article misses on the most important part of Apple. The software, it's the best in the world, very easy to use, and sticky, no one can catch up on them on software. Both the hardware and software is what makes Apple products so great. If apple had Android software in their computers they would not go very far. Disney have their own products that still work now, Apple will do the same, you can try and copy them but without the secret ingredient.

  • Report this Comment On December 06, 2011, at 11:02 AM, chitownfool68 wrote:

    "Well, that may be true, but as developers shift their attention to Android's wider adoption rate, paying a premium for iOS phones and tablets won't make as much sense in the future."

    Stupid comment! Developers go where the money is and the numbers prove iOS makes more money. The development tools are better, and you make more money. Market size matters not when everyone using the larger market are cheapskates.

    As for users, if Apple has proven anything since 2007, it's that you get what you pay for. Everyone I've known that doesn't love their Android phone (and believe me, it's MANY) understands this and are now willing to pay the premium you seem to think is too high.

    On Steve Jobs, another stupid comment. Every investor with half a brain knows that a four month delay in Apple's product cycle lead to weaker purchases in the interim. Not Tim Cook. Hell, I was even telling all my friends not to buy until the new iPhone and I own A LOT of Apple. At least twenty of my friends waited.

    On your halo effect comments, there's just so much wrong here to pick apart, it makes me think this is either just blatant Apple bias or incompetent analysis. You need to look at the numbers my friend and have a point before you speak.

  • Report this Comment On December 06, 2011, at 11:04 AM, Oldfool103 wrote:

    China!

  • Report this Comment On December 06, 2011, at 11:18 AM, CraigNotGreg wrote:

    "The bullish crutch is that Google may be giving away Android, but Apple's the one hogging up all of the profit share in smartphones."

    This isn't so much a crutch as a financial fact. It's also the reason smartphone OS market share means nothing, as long as Apple continues to increase the number of iPhone units sold.

    "Maybe it's just a fluke that consumers were underwhelmed by Cook's introduction of the iPhone 4S"

    They were so underwhelmed they limited their purchases to 4 million units on the first weekend

    "t doesn't matter that Apple has a growing network of namesake retail locations to keep the ambassadorships growing. Gateway and Dell (Nasdaq: DELL ) had stores. Even Microsoft (Nasdaq: MSFT ) is setting up in select malls"

    The Apple stores are among the most profitable retail stores on the planet, so yes the advantage they give Apple does matter. Your comment about Microsoft rolling out retail stores doesn't even warrant a response.

    Do you have any real concerns?

  • Report this Comment On December 06, 2011, at 11:36 AM, deemery wrote:

    There's reasonable things that can be said about Apple. Unfortunately, this article concentrates instead on FUD.

    For real analysis, best to go to Horace Dideu's website http://www.asymco.com, where he discusses things like 'marketshare' vs -the size of the market- (If the size of the market grows and for example Apple keeps its share, Apple still grows. And that's before you consider the relative profitability of Apple vs other offerings in a given market.)

    And let's see how well Apple does in the next quarter, as measured against their performance for the same quarter last year, before passing any judgement on Tim Cook.

  • Report this Comment On December 06, 2011, at 11:41 AM, Rokclimber1 wrote:

    Just absurd. Grant it the 3 points are something to consider but it really is mind boggling how every friggin 'investment site', just loves to rag on apple.

    Is Apples future success guaranteed? No of course not.

    NOTHING in the future is 'guaranted'....

    But by all financial metrics, apple is actually very undervalued right now, yet every single day I can find tons of 'articles', 'ANALysts' and anybody with a voice/keyboard, BASHING apple.

    All I can say, is if you like apple, buy it, if you dont, stop the bashing and put your money where your mouth/keyboard is and short apple......

    Part of me wonders if since apple stock has done great and gone up alot if many of these 'people' with their negative slants, thought apple had risen too high too fast and hence shorted apple already and now must do the 'bash apple theme' everyday to try to help their short position.

    Most have disclosure policies but not all of them so is it possible we are seeing some attempt at manipulation? No, im not some conspiracy theory nut, but lets be real, the market is all about manipulation by the big boys and anybody that thinks otherwise is wearing blindfolds......

  • Report this Comment On December 06, 2011, at 12:02 PM, 1984macman wrote:

    For a truly well-written analysis of Apple based on hard work and research rather than snide inuendo and petty snarking, go here:

    http://seekingalpha.com/article/311859-apple-unlocking-the-p...

    By this account, Apple is about to have a truly blowout quarter.

    So who are you going to believe? A dude that writes like Rush Limbaugh, or a sensible analyst who can actually admit he screwed up last quarter, and tells you exactly why?

  • Report this Comment On December 06, 2011, at 12:28 PM, deemery wrote:

    > Yup. That bandwagon sure is crowded. When a bandwagon gets that crowded, I for one am staying off of it.

    In many respects, there's more insight in this comment than in the article above. But I think there are 2 different bandwagons to consider:

    1. Individual investor bandwagon, i.e. the people who comment here and on other stock blogging sites, etc.

    2. Institutional investors and advisors.

    What's fascinating is the relatively long-term track record of each group in predicting Apple. See the most recent analysis here: http://tech.fortune.cnn.com/2011/10/19/apple-earnings-smackd... From this entry, you can get to reports on previous per-quarter analysis.

  • Report this Comment On December 06, 2011, at 12:42 PM, mjmine wrote:

    The thing about Apple is the ability of their product to engage the customer or viewer ,if you will, visually in a way that other products do not. I laughed out loud when I saw the commercial about the phone{microsoft I think} with the cumbersome graphics and the pitch that you won't have to be a slave to your phone. Clearly the competition still doesn't understand what it is about apple that mesmerizes us. It keeps us looking. All the math and science in the world is not going to replace that experience even if it facilitates it.

  • Report this Comment On December 06, 2011, at 12:52 PM, CraigNotGreg wrote:

    One more thing (as SJ used to say..),

    Motley Fool is supposed to be a site that centers on topics related to investing. It shouldn't be a forum for cheerleading for Company A or bashing Company B based on emotion. You clearly love Google and dislike Apple (I'm basing this conclusion on your last five articles) which is your right, but articles written with an obvious lack of objectivity are out of place here.

    As an example of how your objectivity is compromised, look no further than your equating Apple retail stores (wildly successful by any measure) to Gateway and Dell's retail efforts (abject failures by any measure). That bit of "analysis" is an embarrassment.

  • Report this Comment On December 06, 2011, at 1:35 PM, Risky88 wrote:

    I think consumers realize after a while that apple was a FIRST MOVER.

    But its not anymore

    Look at samsung or motorola

    their phones are way more adavanced than apple

    faster, brighter, bigger in just about every way

    apple still doesnt even have 4g?

    thats pretty much STANDARD on any new phone today

    I have a galaxy sII

    I consider it flawless

    friends with iphones ask where the heck did I get that thing because they wish theirs was this good

    period

    I call it writers block and not listening to consumers only to what you think they want

    mtv made the same mistake years ago and almost paid for with their life

    so did mcdonalds when in 2004 almost went bankrupt

    or gm

    can happen to any business

    to be a leader you have to be a follower

  • Report this Comment On December 06, 2011, at 2:46 PM, Homecooken wrote:

    I have a Droid X my son has a Iphone 4. Soon as my upgrade is here I getting the Iphone. Tired of the Droid freezing up all the time.

  • Report this Comment On December 06, 2011, at 3:03 PM, SkippyJohnJones wrote:

    @Rick Aristotle Munarriz - What's the objective of this article, other than to provoke AAPL bulls? At each point of your argument, you suggest a less bullish outcome, then immediately make a statement with no data as though it's a fact:

    ------

    1. "The bullish crutch is that Google may be giving away Android, but Apple's the one hogging up all of the profit share in smartphones. Well, that may be true, but as developers shift their attention to Android's wider adoption rate, paying a premium for iOS phones and tablets won't make as much sense in the future."

    There is no credible information suggesting that developers are throwing more attention at Android in favor of iOS. Could it happen? Sure. But you put it out there as an inevitable outcome of the market share. By most counts, Apple still has roughly twice the selection of apps on Android. More importantly, the quality of the apps (as determined by revenue) is an order of magnitude higher.

    -----

    2. "Maybe it's just a coincidence that Apple's first quarterly miss in years happened under CEO Tim Cook. Maybe it's just a fluke that consumers were underwhelmed by Cook's introduction of the iPhone 4S."

    When you use 'maybe' like that, you are leading your readers to think 'maybe not' - it's a very suggestive term. I'm a lot more concerned with the performance of the 4S than the initial response to Cook's presentation. Nobody is questioning Jobs' flair for the dramatic, but ultimately Apple is sustaining today because of the quality of its products. Customer satisfaction can't be created through marketing, and Apple's is off the charts compared to the competition in every product category. You are correlating the financial performance of a very specific quarter with a presentation that occurred in the following quarter. These are two unrelated data points. And for the record, Oppenheimer went out of his way to warn in advance that the quarter would be weaker than analyst expectations, due to a "future product transition" that everyone knew was the new iPhone. Analysts ignored his commentary, then called the performance "disappointing."

    -----

    3. "The success of the Kindle stirred up interest in Amazon's entry-level tablet. Google's market-trouncing popularity in smartphones is finally starting to carry over into tablets. The next Apple won't be Apple."

    Your first two sentences don't go together. What does Kindle have to do with Android smartphones and tablets? One is not an extension of the other. And of course the next Apple won't be Apple - it's a $350 billion company.

    -----

    You make plenty of valid points, but you undermine each argument with suggestive language seemingly aimed more at rising the ire of bulls than dispensing financial advice. I look to TMF as a teaching forum, but articles like this one are very disappointing. If you are really trying to put out a conservative viewpoint on AAPL, just keep it clinical - I'm sure you'll find the comments will still light up and the click through will still be high. Bulls are more likely to listen to an argument if it doesn't sound argumentative.

  • Report this Comment On December 06, 2011, at 4:31 PM, bailinnumberguy wrote:

    I'm long Apple and have no concerns about its ability to hold and grow its market share, maintain healthy margins and continue to innovate better than its competition.

    Of course, strictly by the numbers Apple is undervalued. You have to make several pessimistic and dubious assumptions to argue otherwise. I think a $500 price target is realistic, but will be difficult to pull off. Anyone who thinks the stock is going to $1000 needs to take off those rose-colored glasses. Apple's stock #1 w/ hedge funds and programs that regularly beat down this most liquid of stocks. Most of us have observed the process for some time now. Some negative articles, patterns of selling at the opening which trips stop-losses and the stock inexplicably starts diving inexplicably below the market. It always bounces back, but its manipulation is pretty hard to miss.

  • Report this Comment On December 06, 2011, at 6:01 PM, hbofbyu wrote:

    @ Geldej

    Every argument you make could have been made when they introduced the MAC. My guess is you are an engineer or computer programmer (something in hard sciences). This is why engineers don't make good salesmen. They don't understand the benefits of form. You don't understand marketing and image and how it changes satisfaction. In blind tastes tests Pepsi wins over Coke. In taste tests where the label is showing Coke wins every time. The Coke brand is more valuable than Pepsi. The percieved value of Apple is huge. They just need to keep backing it up with great products.

  • Report this Comment On December 06, 2011, at 6:06 PM, GregLoire wrote:

    Apple stock is so ridiculously cheap right now that practically anything negative imaginable about the company is already factored into the price.

  • Report this Comment On December 06, 2011, at 7:07 PM, racchole wrote:

    Once again - AAPL-related article, bombarded with AAPL-loving people, all with nothing of any substance to say. Why do we even bother on this site to write about AAPL?

  • Report this Comment On December 06, 2011, at 7:32 PM, Risky88 wrote:

    @ hbofbyu

    Just so you know im no where near any of the hard sciences.

    Last year at MSU Mankato

    Major in Law Enforcement and minor in Communication Studies

    I loves social sciences

    I could pick out coke from pepsi any day with a blind fold on

    pepsi: way more syrup

    just my opinion.

    fyi both of those companies competing every year with new products

    trying to follow the consumer

    Far as I see Pepsi pepsi loves making the new mountain dews

    coke loves working on the vitamin waters and healthier products

    thats just what I see though.

    Apple has great marketing: agreed

    They could put out a freakin BRICK

    and people would buy it

    but eventually people wake up

    in my opinion.

    as shown in my examples.

    im sure 30 years ago no one thought gm or mcdonalds would be on the brink of failure

    but fact is

    they were

    or RIMM ten years ago

  • Report this Comment On December 06, 2011, at 7:38 PM, Risky88 wrote:

    Nice guess though on the major, I can totally see where your coming from. My roommate won't buy a smart phone until it pretty much makes him a pizza along with doing 20x more than his hp computer.

    What is he? Engineer. lol

  • Report this Comment On December 06, 2011, at 7:46 PM, ayaghsizian wrote:

    Any stock can go up or down. With this in mind, there is no rational reason AAPL will go down anytime soon.

  • Report this Comment On December 06, 2011, at 7:53 PM, richwee8888 wrote:

    I think the author is trying to catch readers' attention by displaying his constant fear that AAPL will drop price. He's probably convinced that he needs to play the devil's advocate..

    All his reasons were lopsided. The comments that follows are very good in combating point by point the author's concerns.

    I thank you for your thoughts...but I think you didn't do good homework and neither did you consider the full picture..

  • Report this Comment On December 10, 2011, at 3:01 AM, MichaelDSimms wrote:

    Good luck Appl, I personally believe you over charge for your products. But it only proves that there is a sucker born every minute. Take them for every penny, and reap the benefits.

  • Report this Comment On December 10, 2011, at 7:50 PM, leradron wrote:

    why can't apple fans see the drastic rise in competitor softward/hardware and not see that as an indicated to sell? is the fact that apple is essentially using a 4 to 5 year old software system that looks dated compared to the competitors not a bad sign?

    think about the definition of a bubble. it's inherently not obvious.

  • Report this Comment On December 11, 2011, at 7:01 PM, singhash wrote:

    I have a new Samsung smartphone because I couldn't afford an iPhone. Big mistake. I shan't detail each of these flaws, but they stand out relative to every iPhone I've ever seen and used:

    1. It's slow, even when doing something as simple as typing.

    2. When typing, the Samsung keyboard registers far more mis-hits than Apple's -- even though I've spent far more time on the Samsung.

    3. The user-interface is inconsistent, even among the built-in apps.

    4. The Android store has apps, but is less easy to use than Apple's App store.

    5. Any particular app on the Android store has a good chance of being incompatible with my (very new) phone.

    6. The "openness" of the platform is only useful insofar as my ability to mess with files directly ameliorates the general stupidity of the apps. I don't WANT to hack about with files, but Android forces me to do so.

    7. Samsung has its own "App store" that is actually a bit funny insofar as it offers a pathetic number of largely uninspired applications.

    I am long Apple (since 1999) and I am convinced that my odds of positive returns are as good with aapl as any other stock I might pick. The company has loads of room to run, and if Samsung is the competition, then Apple has little to fear.

    My next phone will be an iPhone, even if I have to get a battered old used one.

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