It's Time to Buy Apple

This is just getting silly.

Over the past six weeks, Apple (Nasdaq: AAPL  ) has seen the mother of all sell-offs, pulling back over 20% from its all-time high and officially entering "bear market" territory. So far today, shares have traded as low as $541.19. That's a solid 23% lower than the intraday all-time high of $705.07 set on the very day that the iPhone 5 launched at the end of September.

AAPL Chart

AAPL data by YCharts.

That also represents a loss of $154 billion in market cap. That's nearly 50% more than Intel's (Nasdaq: INTC  ) entire valuation lost in a matter of seven weeks.

Why ask why?
As far as culprits for the pullback, there are a number of candidates, some more legitimate than others. However, even the ones that make sense are entirely short-term in nature. Let's go through them.

The most viable source of pessimism is that the iPhone 5 remains supply constrained. The device was launched over two months ago, sold 5 million units over its launch weekend (which disappointed investors), and to this day remains constrained. New orders on Apple's site are still quoted shipping times between 3 and 4 weeks, and we're almost halfway through the fourth quarter.

Just this week, Foxconn Chairman Terry Gou said that his company has been having difficulty manufacturing sufficient quantities of the iPhone 5, saying the company was "falling short of meeting the huge demand." As Apple's most important product by far (over half of last year's revenue), continued shortages are definitely bad news. Having too much demand is a problem that most companies are envious of, but it's still a problem nonetheless.

There was also the management shakeup: iOS chief Scott Forstall is on his way out. Forstall's duties were split up among remaining execs -- most notably with industrial design head Jony Ive taking over "human interface." The move streamlines Apple's organization structure, but also adds a touch of uncertainty.

Apple also unveiled the iPad Mini, but played its launch figures close to the chest. This device is also somewhat hard to come by. While that addresses concerns that it's priced too high, Apple could still be facing unmet demand.

To the extent that Apple's obsession with quality entails supply constraints, that focus becomes a risk factor.

One of these is not like the others
Let's back this up with some valuation figures to drive home just how cheap Apple's become over the past two months.

Company

P/E (TTM)

P/S (TTM)

EPS Growth (TTM)

Net Margin (TTM)

Apple

12.6

3.4

62.0%

26.7%

Intel

9.1

1.9

(1.1%)

22.1%

Microsoft (Nasdaq: MSFT  )

15.7

3.4

(32.8%)

21.7%

Google (Nasdaq: GOOG  )

20.9

4.6

8.8%

22.2%

Source: Reuters. TTM = trailing 12 months.

It's hard to argue that Apple isn't a downright steal right now. It's more profitable than these other tech titans, trounces them in growth, and is cheaper than Microsoft and Google. Intel's cheaper but its bottom line has been flat in the face of a struggling PC market. Microsoft has blown billions trying to compete with Google in online services and advertising. Google remains top dog in online ads but is facing growth deceleration.

Apple? Never been better.

Source: Apple 10-K. Fiscal years shown.

What's even more mind-boggling about the recent weakness is that investors are currently staring an all-time record quarter in the eye right now. That's a fact.

The December quarter's lowball guidance is targeting $52 billion in sales, topping last December's record $46.3 billion. On top of that, this year's product lineup heading into the all-important holiday shopping season is much stronger than it was last year. The iPhone 5 is a bigger upgrade than the iPhone 4S was, the new iPad Mini is going to fill many stockings (it fits perfectly!), and the iPad 4 also got spec bumped.

The iMac has just gotten a dramatic redesign, and MacBook Pros now sport Retina displays. That includes the 13-inch version, which is Apple's top-selling notebook model.

Combined, these products that were just introduced will drive 80% of sales this quarter. This is going to be a monster quarter. Mark my words: get in while you still can.

Apple has enormous opportunities still waiting to be tapped. The iPhone and iPad have garnered nearly unstoppable momentum, which is precisely why we've recently added two bonus reports to our premium Apple research service on those two products. During Apple's current weakness, investors may want some reassurance on Apple's prospects, so get started by clicking here.


Read/Post Comments (28) | Recommend This Article (101)

Comments from our Foolish Readers

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  • Report this Comment On November 08, 2012, at 7:18 PM, bbrriilliiaanntt wrote:

    Greetings Evan! Great Article, all points spot on! My favorite line was the heading 'Why Ask Why?'. That is so true. Who cares, time to dollar cost average as low as the Apple sellers are willing to sell to, these are the opportunities to argue against S&P 500 Index Funds. <;) Cheers!

  • Report this Comment On November 09, 2012, at 12:51 AM, dschleicher wrote:

    The one key issue playing against AAPL that I don't hear anyone saying is that if anyone needs to harvest gains in AAPL in the short-term from its big bull run, they are incentivized to do it soon (before the next earnings announcement) because of the planned expiration in the Bush tax cuts.

  • Report this Comment On November 09, 2012, at 2:09 PM, TheRealRacc wrote:

    The article contains 95% backward-looking statements and 5% forward-looking, which is just estimating what Apple's revenue might be.

    Unfortunately for investors, there is a lot more to the game than what has happened, and what future revenue numbers might be.

    It has become obvious that Apple is being abused by the market for short-term gains. This will come at the expense of anyone who purchased the stock over $500 (or whatever arbitrary number you feel comfortable using).

    JPMorgan said that Apple could be responsible for propping up U.S. GDP moving forward, and keeping us afloat during our unfortunate economic solution.

    When fundamentals have left the building, you are left holding quite a mysterious package. AAPL is starting to look more and more like BAC.

  • Report this Comment On November 09, 2012, at 2:11 PM, TheRealRacc wrote:

    If people still believe in Apple the way they did when the original iPod and iPhone came out, then the game is easy: AAPL is boom-and-bust stock. always has been and always will. Why worry about one quarter, or even one year, of performance, when you believe that the company will continually outproduce and outsell its competition?

    Apple supporters need to constantly buoy their confidence, or they begin to think that nobody cares.

    My suggestion to anyone is to buy Apple and never look at it. Or don't own it.

  • Report this Comment On November 09, 2012, at 5:47 PM, EquityBull wrote:

    You should include forward PE in your chart. Shows really how cheap apple is. Also EPS that PE is based on is understated as apple reserves 35% for us taxes on all offshore earnings. Since they will never get taxed as apple won't bring it home until the repatriation tax is repealed the actual GPS is higher

  • Report this Comment On November 09, 2012, at 5:53 PM, cduance wrote:

    It will be very hard to hit a 52 billion dollar christmas quarter if they dont have the stock to get out the door the small retina displays are hard enough to manufacture, sharp which supplies a large number is having issues and I have been hearing the same things about the larger 13 inch displays. If you cant supply the demand then record revenue numbers will be very hard to come by

  • Report this Comment On November 09, 2012, at 6:00 PM, GreggInSF wrote:

    As an apple owner, I'm actually a little nervous, but it's not because of any of the short term things, it's because I can't quite make sense of the executive shakeups, and whether power struggles and infighting following the Jobs death are driving out some of the creative leaders that made Apple great. I'm not saying that IS the case, but it has be wondering...

  • Report this Comment On November 09, 2012, at 6:48 PM, vyu wrote:

    Unfortunately, these are not the main reasons why Apple got hammered. Increasing competition, lack of innovation, market share (Android market share is increasing, and counting..), among others, are some of the reasons.

  • Report this Comment On November 09, 2012, at 6:49 PM, vyu wrote:

    Remember Dell? It was the King in the PC era. Today, it's a commodity.

  • Report this Comment On November 09, 2012, at 7:01 PM, gilsh wrote:

    the market responds to two very simple news items:

    1) Microsoft has entered the modern computing market. and everybody knows that most of the industry has a mainly Microsoft-based Information technology base. Which means that If windows 8 mobile is no plop (and everybody covering it agree that it is far from being such), it is going to become a major player. Meaning: Apple's share is going to decline.

    2) Google and Samsung's recent tablets are far more exciting that Apple's ipad. Meaning: Apple has lost its dominance in the tablet arena just as it has lost its dominance in the smartphone arena one year ago.

    1+2 has a very simple meaning: just like on 1985, Apple was first, had the coolest products for a while, but in Cost/Benefit aspects and shortly afterwards, in performance-related aspects, it got beaten by competitors.

    Apple will probably remain quite proftiable for 3-4 quarters, but these are going to be its last days of super-profitability. And Mr. Market, just as it always does when he wakes up wearing his rationale hat on, is valuating the stock, as it will be performing on the fall of 2014.

    don't believe me ? write it down, and talk to me in two years time. Till then, it is going to be roller-coaster ride owning Apple. Because we all know Mr. Market is not remaining rationale at all times...

  • Report this Comment On November 09, 2012, at 7:07 PM, ANuvver wrote:

    Greetings from the UK.

    An issue I don't see addressed here is pricing policy.

    Is it possible that AAPL's quality premium focus has painted the company into a corner? If they maintain their margins they risk losing market share and if they drop prices they risk upsetting the upgrade faithful. Meanwhile the competition is coming up hard behind.

    I wonder whether the supply constraints might not be, um, shall we say, convenient.

    Apple stuff seems to me to be a sort of luxury marque in consumer electronics. As recent falls in the luxury sector, particularly in the strongly aspirational Asian markets, might indicate, this may not be the best time to be buying into the proposition.

    Okay, so these devices have got so many pixels you can travel into the past and they're just so sexy and cuddly you want to take one to bed with you. Apparently. But given that most consumers are effectively using a Ferrari to transport potatoes, I find myself asking how long the brand loyalty can stand.

  • Report this Comment On November 09, 2012, at 7:41 PM, sharpx2 wrote:

    "Remember Dell? It was the King in the PC era. Today, it's a commodity."

    That is because it produces commodity products. I don't see that happening with Apple.

    "Is it possible that AAPL's quality premium focus has painted the company into a corner? If they maintain their margins they risk losing market share and if they drop prices they risk upsetting the upgrade faithful. Meanwhile the competition is coming up hard behind."

    I think that Apple has already proven that trying to get down in the dirt and compete with commodity-type products is a losing tactic. That's why so many PC giants are hurting. Even Microsoft has realized that they need to move into higher-margin products to make a meaningful dent (thus the Surface.)

    What really matters, I think, is whether they can keep up the stream of innovation. Their products function in a far smoother, polished way than their competitors, who mainly are making cheap stuff that appeals only on price and not function. There are some exceptions, but nobody is even close to Apple. Not yet. And they may never get there, because they continue to make Apple's last-year model and design as their brand-new thing!

  • Report this Comment On November 09, 2012, at 8:32 PM, eldetorre wrote:

    "That is because it (dell) produces commodity products. I don't see that happening with Apple."

    You are drinking the Apple Koolaid. All of Apple's devices are commodity devices dressed up in designer packages. The public is very fickle when it comes to buying into design paradigms. All of their recent innovations have been lacking. Siri and Maps are jokes. Apple has no moat. The only thing they have going for them is a trove of patents, many of which should never have been granted. If real patent reform happens Apple will be hurt by it.

  • Report this Comment On November 10, 2012, at 12:33 AM, dwilh51183 wrote:

    By the way, did you people forget AAPL still has to buy back 5 BILLION of their own stock yet this year, and another 5 BILLION next year. Add a huge "short squeeze " when that happens ,along with investors piling in to get that great dividend... and you have triple buying pressure on AAPL pretty soon.I still believe AAPL will be an $825.00 stock by Christmas.Congress will agree on debt issues, so a rally will follow. After Christmas, AAPL will have 175 BILLION in "CASH" on hand. If by chance there is another great idea or product, or new young company with exploding sales or cool products, AAPL can just buy them.

  • Report this Comment On November 10, 2012, at 12:44 AM, dwilh51183 wrote:

    APPLE got hammered because OBAMA got back into office the illegal way....with under-aged not-registered voters in certain precincts in OHIO. There were a lot of crooked things that went on and he got away with it. I really believe AAPL, GOOG, SAMSUCK (copy cats), INTC, MSFT...EVEN NOKIA AND RIMM will all be winning stocks because the whole world still needs new phones and computers.We are only in the 2nd inning of this tech revolution.APPLE only lost 1 long time employee in Scott Forestall. The other dude was only w AAPL for 3 months

  • Report this Comment On November 10, 2012, at 10:22 AM, RetiredExCPA wrote:

    I ordered the iPhone 5 (64/white) online (AT&T) on November 8th. The site said 3 to 5 days to ship. The phone shipped November 9th. I think the supply issue may be under control. Just thought you'd like to know.

  • Report this Comment On November 10, 2012, at 4:47 PM, ingr72 wrote:

    I believe a lot of the selling has to do with the so called " Fiscal Cliff " ...Apple is still the choice in this country of the teenage to 50 crowd... Just go to any phone carrier like VZ or AT&T and ask any sales person there which phone is the most popular. Then go to any Apple store and check out how busy they are and look at the other stores nearby to see if they have traffic. Never owned an Apple product but everywhere I go that I see people texting etc. I see the Apple Logo... As someone has said in an article I read here, now is the time to start to buy the stock with dollar cost averaging ... and I believe you'll be rewarded handsomely.

  • Report this Comment On November 10, 2012, at 5:58 PM, erniemink wrote:

    Microsoft Windows 8 is much better than Apple. Of course ALL version of Windows are better and more universal than Apple. Their cell phones and tablets incoluding the Microsoft Surface beat the pants off Apple.

  • Report this Comment On November 12, 2012, at 1:37 AM, aaplebee wrote:

    Apple is long due for a split, then it can back to $700 :)

  • Report this Comment On November 12, 2012, at 1:38 AM, cmarkn wrote:

    I wonder if Apple's loss of value reflects a loss of confidence in their management by the market. The miss on last quarter's earnings, Siri and Maps may be seen as symptoms of a loss of the drive to perfection that is what makes Apple gadgets so coo. By the way, cool adds a lot of value to anything that has it - about 20% it looks like.

    Another thing I've noticed is that MSFT doesn't get tablets. All their commercials show people popping keyboards on and off their tablets and popping stands out so they sit nicely on a table. Clearly they think of tablets as nothing more than smaller and more expensive laptops, and their included Office apps reflects this. Meanwhile, iPad ads show they understand tablets: their tablets are held in one hand and using the onscreen keyboard - completely portable and self contained and cool.

  • Report this Comment On November 12, 2012, at 8:18 PM, vyu wrote:

    I am not an Apple hater. On the contrary, I am an owner of several Apple products - iphone 3GS, iPad 3 and MacBook Pro 15 with Retina. But I am also a sensible consumer and prudent investor. As a consumer, I want the best products for my bucks. Take a look at this table http://mashable.com/2012/10/29/tablets-compared-nexus-10-ipa...

    Now tell me which product would you buy?

    As an investor, I want to know if Apple can sustain it growth by continuously innovating and beating the competition. I am not seeing it, at least not now. Apple stock is priced for perfection.

  • Report this Comment On November 16, 2012, at 12:00 PM, sept2749 wrote:

    Wow! Here I own a company worth close to 1/2 trillion dolllars, has ~121 billion in cash, no debt, a killer brand name along with killer products - one after the other - all innovative and well constructed, a huge demand and loyalty for their product line and now we have a dividend and I need to worry due to a price dip. I have watched AAPL dip for years and it's a buying opportunuty not a disaster. Why should I worry? Wait till the next qtr. It'll be a killer qtr. They have more and better toys this year then last.

  • Report this Comment On November 16, 2012, at 12:03 PM, grumman77 wrote:

    I bought some apple stock a few years ago at $20. It split soon after making it effectively $10 a share. A while later I bought some more at 75 100. Unfortunately at about 250 I decided it might be as high as it would go and sold some. A part of me wishes I had sold some more when it hit 700. However, since I didn't sell at that point I'm hanging in for the ride. I think it will go back up and sellig now would just be to take the loss and lock out any chance of getting the gain I think will come.

  • Report this Comment On November 16, 2012, at 2:43 PM, WineHouse wrote:

    Of course Schleicher is right. Some people who bought AAPL about a year ago have wiggly tushies that don't let them sit on all that paper capital gain. They feel compelled to "cash in" and "lock in those gains." In fact, I'd suggest that some "growth-oriented" managed stock funds are behaving the same way.

    On the other hand -- the meteoric rise from 400 to 700 was propelled to a certain extent by the emergence of a dividend. A decent dividend. While the yield ($10.60/share/yr) is only 1.5% on a stock price of 700, consider that the yield is 2.65% on a stock purchase price of 300. That's a handsome yield for a growth company!! Plus, all of a sudden lots of "dividend yield-oriented" stock funds felt the need to add AAPL to its portfolio (the hope of course is that the dividend will rise year over year). All that institutional buying/accumulation certainly helped propel the stock price transiently; then, when the intended quantities were accumulated, the buying pressure was released and poof the stock went down again.

    Market forces are not necessarily a proxy for the economy, nor are they necessarily proxies for the intrinsic value of a company. They are what they are -- herd mentality.

  • Report this Comment On November 16, 2012, at 2:44 PM, WineHouse wrote:

    whoops -- typo -- yield is 2.65% on a stock price of 400, four hundred, not 300. sorry about that.

  • Report this Comment On November 20, 2012, at 3:11 PM, superbinvesting wrote:

    I don't think Apple has bottomed out yet. It will likely correct another 5-9% and then trend sideways for the next few months.

    ingeniousinvesting (dot) com

  • Report this Comment On November 20, 2012, at 7:34 PM, hbofbyu wrote:

    Their brand is their moat and just like CocaCola they have to stay cool. Apple has to decide what's cool or they will die.

    Never let engineers who list off statistics and specs tell you what value is. They don't know what drives consumer purchasing; just look at the clothes they wear. Form before function (for engineers it is the reverse).

    Apple has to innovate but they have to continue to do it from a marketing perspective.

  • Report this Comment On January 24, 2013, at 2:35 AM, Orcarr wrote:

    Are you sure it was really time to buy Apple? Or maybe it was time to buy apples...

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