8 Reasons Apple May Get Cheaper

My ears are numb from all of the ringing of the dinner bells.

There seems to be a lot of cheerleading among Apple (Nasdaq: AAPL  ) bulls these days. The stock has fallen sharply since poking its head above $700 to hit an all-time high two months ago. Nor is there a shortage of encouragement among my fellow Fools. However, before approaching Apple as a bargain, it's important to assess the reasons it may not be the mother of all buying opportunities. Let's review.

1. All that cash isn't a cushion
It's true that Apple closed out its latest quarter with a little more than $121 billion in cash, short-term investments, and long-term marketable securities on its balance sheet. Divide that into Apple's 948.2 million fully diluted shares outstanding, and you get a compelling $127.87 in cash for every share of Apple.

However, it's not exactly fair to simply subtract all of that from Apple's valuation and assume that Apple is trading at an even cheaper multiple. It is, yes, but the difference isn't that extreme. The lion's share of Apple's cash is held up overseas. Repatriating profits would mean that a decent-sized chunk of that money would go to pay taxes.

Apple has a ton of money on its balance sheet, but some of it is spoken for.

2. Apple has been mortal on the bottom line lately
Remember when Apple used to make analysts look ridiculous? It would offer up conservative guidance, the pros would perch themselves just above that figure, and Apple would still blow Wall Street projections out of the water.

Well, beats have been rare since Steve Jobs passed away. In fact, Apple has come up short on the bottom line in three of the past five quarters. That's a pretty shocking statistic, especially for a company that had barreled to fresh all-time highs just two months ago.

3. The road downward is paved by those calling "bottom" prematurely
When Apple was trading 10% below September's all-time high, many argued that the step back was giving investors a new chance to hop on. When Apple's stock was trading 20% below its all-time high, many investors took the milestone to mean they would be rewarded to buy in as contrarians now that Apple's stock was entering bear territory.

What can we say about those mile markers now that the stock is better than 22% off its earlier high?

Calling a bottom is dangerous, especially since Apple -- despite missing Wall Street's profit estimates in back-to-back quarter -- is still trading 36% higher year to date.

4. Life after Steve Jobs won't be easy
Avondale Partners initiated coverage of Apple on Friday with a ho-hum Market Perform rating and an equally uninspiring $600 price target. Remember when some brave analysts were pointing at four figures?

Analyst John Bright sees reasonable growth for Apple's iPad and iPhone businesses in the coming years, but he's not entirely sold on the company's next act.

"We believe the probability of increased competition outweighs the probability of innovation without Jobs," he writes.

5. Apple's losing its tablet edge
Until about a year ago, whenever someone asked for a tablet, it was really a request for an iPad. Apple owned the tablet market, and rightfully so. It legitimized the then-fringe niche.

Now the market's changing. Amazon.com (Nasdaq: AMZN  ) has sold millions of its Kindle Fire since hitting the market last November. Google's (Nasdaq: GOOG  ) own Nexus 7 -- made by Asus -- raised the bar again this summer on what tablets costing half as much as the iPad can do.

Industry watcher IDC claims that Apple's share of the tablet market shrank to 50.4% this past quarter. However, the real story is that Samsung, Amazon, Asus, and Lenovo -- the four largest players after Apple, and all making tablets based on Google's Android operating system --- have seen their collective share soar from 11.4% to 37.4% over the past year.

6. iPad Mini? $329? Really?
There was never going to be a winning price on the iPad Mini. If Apple charges too little, sales would merely cannibalize the more lucrative full-priced iPad. If it charges too much, consumers will stick to the $199 offerings out of Amazon and Google that have better resolution than Apple's iPad Mini.

The $329 price point that Apple decided on may be the worst of both worlds. It's not enough woo entry-level tablet shoppers, yet it may lead some to question why they should pay at least $500 for a slightly larger tablet.

7. Apple Maps is a sign of arrogance run amok
Heads rolled at Apple after the Apple Maps fiasco and the lampooned nature of Siri, but the real problem is that Apple let these very incomplete products hit the market and even shell out big marketing dough to promote Siri.

Does Apple merely think its consumers will put up with anything after forgiving the company for Antennagate? Maybe Apple doesn't respect its customers enough to care.

In singing Apple's praises, fellow Fool Evan Niu boasts of how the company is able to do more with less by pointing out how Apple spent just $2.4 billion in R&D last year. Microsoft (Nasdaq: MSFT  ) and Samsung shelled out $9 billion apiece. Even Google spent more than double in R&D than Apple. Yes, even Amazon spent more on R&D last year.

It's great that Apple can generate so much revenue by putting in so little, but what will it do when simply putting out the same iOS device in different-sized configurations stops passing for innovation?  

8. Optimism is in retreat
One of the reasons Apple has been one of the best investments over the past decade is that it was a joy to see analysts scrambling to catch up. Apple would blow estimates out of the water, leaving analysts with little choice but to jack up their projections.

We've been going the wrong way in recent months. Just three months ago, Wall Street figured that Apple would earn $52.50 a share this new fiscal year and $60.53 a share come fiscal 2014. Now those same pros are forecasting net income of $50.14 a share in fiscal 2013 and $58.70 come next year.

Could it be that Apple's share price is merely catching up to a market that didn't see the shift to reverse coming?

Apple is a great company, but maybe it will only be a good -- and not great -- investment in the coming months.

Apple jacks
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Read/Post Comments (14) | Recommend This Article (18)

Comments from our Foolish Readers

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  • Report this Comment On November 11, 2012, at 11:41 AM, merechino wrote:

    "Cheaper" means it is worth more. Did you commit a logical paradox?

  • Report this Comment On November 11, 2012, at 11:46 AM, inn8 wrote:

    @R A Munarriz

    Re: "Does Apple merely think its consumers will put up with anything after forgiving the company for Antennagate? Maybe Apple doesn't respect its customers enough to care."

    It wasn't Apple who needed to be forgiven for "Antennagate" , but the hit thirsty bloggers eagerly seeking their 15 nanoseconds of fame.

    Quite possibly it is the bloggers and technology ambulance chasers who don't respect their readers enough to care.

  • Report this Comment On November 11, 2012, at 11:56 AM, applefan1 wrote:

    Let me go into this article a little deeper.

    1. Apple spends their money where they get a decent return on investment and they typically buy key companies that are small, but have compelling technology. Apple typically doesn't waste BILLIONS of dollars like Microsoft did with Skype or HP did with Autonomy.

    2. Last quarter was low because of the impending Windows 8 announcement, iPad mini, iMac, Mac Mini, Presidential election coming up. People were holding back purchases last month because of the announcements pending and the Presidential election.

    3. IPad mini too expensive? Well, selling 3 Million units in the first weekend, when the celluar versions haven't shipped yet are still impressive numbers. If they had the cellular versions shipping, then the numbers would have been closer to 5 Million in the first weekend is my guess. How many Surface RT tablets sold? Microsoft won't say the actual numbers, because they probably aren't big enough to brag about.

    4. Yes, Steve was a visionary and his loss has its impact, but the company despite their mistakes has already been working on future products and they just need to make fewer mistakes, fix the ones they have and to continue coming out with compelling products. Yeah, it's hard to continually come up with out of the park home runs. But they still seem to have a product line that is selling with little dogs. I consider the iPad mini as their first entry and they next one will be a significant upgrade so they will eventually have two distinct classes of mini tablet similar to how they sell the larger iPad.

    5. Well, if you buy purely on specs and price and don't even consider the entire eco-system of a platform, then you might be making a bad decision. Apple has a far better eco-system. I STILL have NOT seen anyone dragging that many Nexus, Windows or Samsung tablets. I've seen a couple of Kindles, but they were older women that seem to be avid book readers and not avid computer users.

    6. Well, Apple's IPad mini has a larger screen, more memory than a $200 Nexus which is basically a useless product. Apple STILL sold 3 Million non-cellular units, if Apple had the cellular units available, the sales would have been more like 5 Million units. Apple is STILL on track to sell more like 100 Million tablets, which is more than they sold last 12 months. So if their sales are STILL increasing, then their sales are STILL increasing.

    7. Maps problems will get fixed, just as Siri will. It's just a matter of time. I've used both Siri and Google voice search. Siri does do things that Google Voice search doesn't and Google's voice search does things that Siri doesn't. I will use both when i need to. But that technology is NOT the most used aspect of these devices since people haven't FULLY committed to using voice as means of interacting with their tablets. It's still work in progress. BTW, I have NOT had any problems using Apple Maps. I prefer it over Google Maps, FYI.

    8. For a LONG term investment, I think it's still a good investment. I've been hearing more and more comments from people saying that WIndows users aren't all digging Windows 8 and there is a movement of Windows users to Apple because Apple's not stupid enough to drastically change their GUI in the way Microsoft did. Windows 8 is a love it or hate it GUI for Windows users and their only viable alternative is OS X. Sorry, but that's REALITY>

    9. I honestly think that the media kind of overhypes the future price of Apple stock much like they did with Facebook. The stock goes up drastically and then drops based on all of the FUD and hype. But reality is that their tablets, smartphones, laptops and desktops are still increasing in sales on a year to year basis and we're going through a major refresh. Stay tuned for more products from Apple going after other markets.

  • Report this Comment On November 11, 2012, at 2:13 PM, Shiroto wrote:

    I feel that the Motley Fool has no real standards at all when it comes to accepting contributor articles. This article adds absolutely nothing new to the bear rehash which has been rehashed endlessly over the past two months, and is based primarily upon empty speculation and hyperbole. We can all expect more and more of this endlessly, endlessly.

  • Report this Comment On November 11, 2012, at 5:01 PM, chinaman8 wrote:

    This article is mostly incorrect.

    1. All that cash isn't a cushion

    Apple's tax rate this past year was just 9%, so the cash tax liability is not high. Anyway Apple is adding over $40B cash/year so the tax you mention is not meaningful. Most of Apple's manufacturing and parts purchasing are overseas, so there is no reason to repatriate the cash. Therefore Apple stock is even more undervalued because of its large cash hoard with 0 long term debt.

    2. Apple has been mortal on the bottom line lately

    Apple has beaten all its announced earnings and revenue targets. If it does not beat inflated Wall Street analyst targets, that is the analyst's fault.

    3. The road downward is paved by those calling "bottom" prematurely

    It's a great time to buy Apple stock. No one knows where the top or bottom will be, but based on its current and future earnings, the stock is way undervalued at today's price and will adjust upwards over time. If people are selling in the short term for tax reasons, that has nothing to do with Apple's value.

    4. Life after Steve Jobs won't be easy

    Top management consultancy Booz and Co. just announced Apple is the most innovative company in the world for the third year running.

    http://www.booz.com/global/home/what_we_think/global-innovat...

    5. Apple's losing its tablet edge

    Apple is still by far the largest tablet vendor and its iPad products are the standard. If anyone is buying the other tablets/e-readers, it's because of price, not because they are better or more desired. The release of the iPad mini will take share away/regain share from the Amazon/Google 7" tablets as Apple did not have a product in that size category previously. Also the iPad4 released was a surprised and is spurring more Apple tablet sales.

    6. iPad Mini? $329? Really?

    The iPad mini is still selling like crazy at $329-$659 each with 2 week order backlog of all models and no known manufacturing issues. Since supply is less than demand, it could be priced higher than $329 and still sell out.

    7. Apple Maps is a sign of arrogance run amok

    Apple Maps was version 1.0 and the map data is over 99% accurate and inaccuracies are being reported and corrected. Google Maps has been around for years with a big head start. This will be a non-issue soon as Apple Maps improves and Google has already submitted an iOS6 maps upgrade to the App Store, and there are other good third party iOS6 map apps available now.

    8. Optimism is in retreat

    Wall Street can forecast whatever they want and they can be right or wrong and that is not Apple's fault. Apple has consistently beaten their own official earnings and revenue guidance.

    Apple has the best phone, tablet, small tablet, music/media player, notebook computers (both regular and lightweight), and all-in-1/small desktop computers on the market. And all of them have been refreshed this year. So their sales this holiday and into next year will be spectacular.

  • Report this Comment On November 11, 2012, at 9:35 PM, Nomadder wrote:

    If Apple keeps missing expectations, but the P/E keeps dropping, then which is the more important consideration?

  • Report this Comment On November 12, 2012, at 10:43 AM, lucasmonger wrote:

    Trying to figure out whether Apple will hit $1000 or drop below $500 is futile. The market is going to do what it does (some analysts will overhype, others will downgrade). And big climbs and drops don't always follow how the company is doing.

    All of this is just noise compared to the meteoric climb from $6 per share about 10 years ago. Quick recap on Apple:

    - 1997 stock was around $10, CEO ousted, Next acquired

    - 1998 iMac introduced, Steve Jobs becomes iCEO, stock climbs to well over $30

    - 2000 Dot Com era in full force, stock climbs to $120

    - 2002 Dot Bomb hits, stock plummets to $13

    - 2003-5 iPods, Mac OS X, iTune really helping Apple's bottom line, stock climbs and climbs

    - somewhere in this mix, there was a stock split

    - Dec 2007 Apple stock hits $200

    - 2008-2009 Financial crisis hits, stock plummets again to about $87

    - 2009 until now, stock keeps climbing and climbing, and climbing

    It's easy to spot the buying times, before dot-com when they were about to go bankrupt, during the dot bomb era, and during the financial crisis. So next time we have a major drop in the economy might be the time to pile in, not now.

    So the real trick in finding the next 10-100 bagger is to figure out what company out there might be the next Wall Street darling. It's not Apple, Chipotle, Netflix, or Amazon... those ships have already sailed.

  • Report this Comment On November 12, 2012, at 6:03 PM, Edeskimo wrote:

    It is amusing watching all the isheep fanboi apologists rationalize the recent drop in market capitalization, drop in tablet sale dominance, drop in smartphone sale dominance, drop in public opinion of the company and drop in perceived quality of its devices and software.

    You can rationalize them missing analyst expectations but that is largely the basis on which stocks trade - how profitable the company is expected to be.

    This stock actually trades on a very high P/S for a hardware manufacturer although I do realize they do other things. The wellspring of commoditization of these mobile devices will drop their margins markedly and this will result in a sharp retraction in profitability in the future.

  • Report this Comment On November 13, 2012, at 2:58 PM, PrivInvest wrote:

    Wow! Very intense, probably no one will read this as I am reading it quite late after it's publication, but just to help me analyze it. You are all correct, or all wrong, it really doesn't matter because I cannot conclude anything. I just want to make some money out of the situation. So, Apple is entering it's traditional best qrtr with new products that, has been speculated and I give some measure of credibility, have been expected. So, yes, i believe they will make a lot of money but, will Wall street or Mr. market like this? If they are as divided as you are I give it a 50% chance.

    Some people want the opportunity to get in at zero risk prices, that is something wall street loves, and also like to make money tearing the stock down when it is high, and Apple is high, and they like it even more when it is unexpected, because it falls harder and lower and they make a lot of money out of it. Yet again, non arguable blow out numbers are an imminent threat to such efforts so the discussions are heated on both sides of the line. I don't like the odds and there is only one play I would feel comfortable if at all.

    In the short term Apple is squeezing the juices of it's past successes but they will have to come up with a new product soon because competition is catching up to them and they will overtake them in the long run, they will not loose the advantage of their brand but will loose the number one seat as it has happened in the past. What lies in the future? I only devise the glass project as the next big thing unless they have something hidden in a treasure chest or begin acting as the visionaries their late leader was, these last of course spoken with the limited vision of a plain investor. Analyze my analysis as I can still see juices that can be extracted form it.

  • Report this Comment On November 14, 2012, at 11:40 AM, only1ferret wrote:

    All lightweight arguments against buying appl now. But, the bottom line is the cash hoard, the earnings and the revenue will continue to grow and $540 will look cheap in retrospect.

    The biggest fear I would have is carriers stop or reduce the subsidizing of iphone.

  • Report this Comment On November 14, 2012, at 1:03 PM, hiddenflem wrote:

    Rick good points but you are wrong about the price point on the mini. Even at $329 I suspect it will exceed all expectations. Bigger is not necessarily better when it comes to tablets.

  • Report this Comment On November 15, 2012, at 8:13 AM, jargonific wrote:

    Good time to trade safely with stops and do research into options trades, while watching Europe. Fiscal cliff in America means now open political warfare in the House. Thus we see old rivals in the news. They love this kind of thing.

    It's obscene to have to watch them debating the wealth of the 1% versus the health, food, and housing, of the poor and middle class. Even as they cry about taxes for the rich, people are at risk that the bullies with blackmail on their minds will put US security at risk. No all in all, I'd say volatility is VERY high on ALL securities, even Apple.

  • Report this Comment On November 15, 2012, at 5:49 PM, iborg wrote:

    I like bear articles, because when I'm researching a company, I want to be challenged to dispel or validate any possible red flags.

    In our investment club where we collectively hold a handful of stocks, members give a Stock Monitoring Report [on our holdings] each month. The guideline for these Reports is to report any "bad news".

    Good article, Rick.

  • Report this Comment On November 16, 2012, at 3:32 PM, WineHouse wrote:

    It's not all capital gains. AAPL has recently initiated a dividend. With share price volatility, talking about current yield is a moving target, but the dollar value of the dividend is a nice $10.60 per share, and that's the initial payout. If you paid 700 per share, your yield on original investment is 1.5%, which is not something to sneeze at. If you paid 300 a share (some folks who bought within the past couple of years may even have paid less), your yield on original investment is 3.5%, which is in the same league as "high-yield dividend stocks." AND if we're going to see continuing earnings growth, even if it slows down to only a quarter of its present rate of growth, you can expect the dividend payout to roughly increase in parallel with earnings, which gives you a dividend growth rate of 10-15%. Not bad. Who cares what the herd mentality says a share is worth on any given day?

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