Would Apple Be Twice as Good at Half the Price?

Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:

  • To make the stock look cheap.
  • To increase liquidity.
  • To meet stock-exchange listing requirements.
  • To express a bullish management sentiment.

Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.

Just the other day, an analyst at Bernstein Research said it was his heartfelt belief that Apple (Nasdaq: AAPL  ) was ready to split its stock sometime in the next six months. While the iPhone and iPad maker has publicly given no indication that it intends to do so, it also wouldn't be an anomaly: It last split its shares in 2005.

The Bernstein analyst says Apple is putting out feelers about a split, and the last time it did that, it had to do with a dividend, which investors got shortly thereafter. Put the two together -- paying a dividend and a lower share price -- and you have a strong candidate for index inclusion.

A split decision
Earlier this year, Apple launched the third-generation iPad, and over the coming months we should see the iPhone 5 hit the street. In its rare earnings miss last month, it reported selling "only" 26 million iPhones -- much less than the 28 million or 29 million Wall Street was anticipating -- because consumers were reputedly waiting for the next iteration to drop. The iPhone 5 is expected to sell as many as 50 million units at launch, making it perhaps the greatest consumer-electronics gadget debut ever.

Some think that with Samsung, Nokia (NYSE: NOK  ) , LG, and other handset makers coming out with new models every other month, Apple needs to speed up its refresh cycle, too. I've argued that doing so would reduce its iconic phones into just another commodity no longer able to command the premiums they currently enjoy. Even though Google's (Nasdaq: GOOG  ) Android platform dominates the market with a 56% share, that's spread over numerous handset makers. Apple's iOS is obviously home to just one and places second at 22.9%.

Keeping tabs on the competition
It's in the tablet market that Apple rules the roost, where two-thirds of the global market is the iPad. Far behind with a 7.5% share is Samsung. When it comes to tablet computers, Apple is the market. Indeed, when you look at individual regions, there's virtually no competition. In China, market researchers at Analysys International say the iPad commands almost three-quarters of the industry. Lenovo, which is made in China, has only an 8% share.

The popularity of the iPad is more than just a consumer phenomenon, as businesses are increasingly using it as a tool for productivity. To seriously crack that market, Apple needs to prove it is a secure product, which was the driving force behind its decision to buy AuthenTec (Nasdaq: AUTH  ) , an end-to-end security specialist best known for its fingerprint identity systems, such as those commonly found on Dell (Nasdaq: DELL  ) laptops.

It's also a chance to tweak the nose of rival Samsung, since the handset maker had recently signed on for AuthenTec to provide security across all of its platforms. Analysts believe that it won't use the service if Apple owns it. Of course, others have speculated that it may turn around and try to outbid Apple for the company.

Even as analysts predict Apple will benefit from the coming business boom, CAPS member TheGIJane thinks it may even become the standard: "... as more and more small business owners realize that going Apple means; A. Minimal training time for new employees, and B. The entire IT department can be slashed from the budget, and C. No more down time from crashing computers, Apple should be outperforming on [its] way to replacing Microsoft as the computer standard."

Price is what you pay
At 11 times earnings estimates, Apple seems cheap, but when you consider that its enterprise value trades at just 12 times the free cash flow it generates, this is a bargain-priced stock. At $620 a share, many investors might balk at buying in, though if it split 2-for-1 it could become more enticing at $310. Pricing its shares at $60 after a 10-for-1 split just might ignite a buying frenzy.

I've already rated Apple to outperform the indexes, but do you think a split is on the horizon? Tell me in the comments box below what ratio you think would balance Apple's needs against the desires of the market.

Split the difference
Apple remains one of the greatest plays in all of tech and is ready for a new run. You can grab the Fool's new premium research report on the company that details all the risks and opportunities -- including the three areas you must watch -- by claiming your copy today. To make things even better, you'll get 12 months of updates afterwards.

Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio . The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Google and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | 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 August 11, 2012, at 1:08 AM, JohnChisum wrote:

    I think a split would be beneficial. The lower price would attract more investors.

  • Report this Comment On August 11, 2012, at 3:57 AM, H3D wrote:

    It's always suspicious when someone list the advantages of the subject of an article, as you do for a split, but then fails to list the disadvantages.

    So lets make a start on the disadvantages..

    A split would increase the trading costs for some investors, particularly options investors, and since options investors are substantially net long, that counts as a significant block of investors. Increasing trading costs discourages investment.

    A split takes work that costs money, for Apple, for the market, for investors. Millions of dollars would be wasted.

    A split causes investor confusion. Confusion is always negative.

    While all the reasons for a split are basically vapour, the first two of these reasons against ate very real.

  • Report this Comment On August 11, 2012, at 6:07 AM, ajaykc wrote:

    <<Even as analysts predict Apple will benefit from the coming business boom, CAPS member TheGIJane thinks it may even become the standard: "... as more and more small business owners realize that going Apple means; A. Minimal training time for new employees, and B. The entire IT department can be slashed from the budget, and C. No more down time from crashing computers, Apple should be outperforming on [its] way to replacing Microsoft as the computer standard.">>

    Why would someone not need to learn how to use iPad, Mac or any apple device if they have to learn how to use a PC?

    Do you know IT guys hate apple? A PC can be repaired part by part and upgraded as per the consumer/business owner's wish but for apple products to be repaired, you need to buy a new one or send it to apple.

    Do you know how costly is that? Do you know businesses are super cheap when it comes to spending money? I had gone to Chase Bank like 3 months ago and they are still running XP and this is not even a cheap bank by any means. Now I am thinking about small businesses.

    Do apple fans love in some sort of bubble or away from reality?

  • Report this Comment On August 11, 2012, at 10:58 AM, deemery wrote:

    I think ajaykc missed the point: With Macs you have -less need- for IT guys. I observed this in a mid-sized (5000) person corporation I used to work for. Anecdotally, the Mac contingent required very little tech support; most of the time if you had a problem you just asked another Mac user. The only time we ever got the CIO to actually put forward comparative support costs was for Y2K remediation. The estimated cost for a PC was 2 hours; for a Mac was 30 minutes of IT time. However, observing the people in my department, all of us running Macs did this in 15 minutes - most of that updates to Microsoft Office. I don't think anyone got a PC finished in less than 3 hours, and the worst case was one guy who was down for 2 days.

    I'm firmly convinced the main reason "IT guys hate apple" is because they perceive them as -threats-. If the hardware is more reliable (another anecdotal observation), there's less need to do repairs or replacements. If the software is more reliable, there's less need for help desk staff. Since 'power' is often measured in corporations by 'size of your staff,' less people in the IT department represents a loss of power for the managers.

    And on the subject of the article: What are the advantages -and disadvantages- of adding Apple to the Dow? H3D did a nice job discussing disadvantages of the split to the business, are there disadvantages to a stock for being in the Dow or similar index?

  • Report this Comment On August 12, 2012, at 8:54 AM, Mathman6577 wrote:

    Regarding any particular stock performance, I don't think a split is as important as paying and constantly increasing dividends, buying back shares and growing earnings, at least over the long haul. However, in Apple's case a split would allow more retail investors to get in. It may also allow Apple to become part of the Dow. Whether or not it should be in the Dow is a different discussion.

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