Apple: The Most Misunderstood and Most Attractive Buy in the Market

Apple (NASDAQ: AAPL  ) shares have been on quite the ride this year, and for investors, the recent price swings have been anything but pleasant. The stock fell almost 4% on Friday to close below $510, a far cry from its $700 September levels. Sure, there have been some legitimate reasons for Apple's fall, but when you get down to it, Apple's stock looks like the victim of a dramatic overcorrection. 

What's with the selling?
Among the most frequently discussed issues plaguing Apple's stock in the past few months have been related to its Maps technology. Let's be clear on this: Apple made a mistake. Apple Maps wasn't ready for prime time, it rolled out too soon, and the company paid the price for it. Heads have rolled and apologies have been issued.

And yet the Maps fiasco continues to linger. Recent reports about Apple Maps users getting stranded in Australian deserts and news of bitter rival Google (NASDAQ: GOOGL  ) Maps' arrival on iOS have investors spooked. The fear is that Google will not only collect valuable data on Apple users, but that it will woo customers away to its own mobile products. Not to be alarmist, but that's already happening. And it doesn't matter. Smartphones running Android accounted for 72% of the market in the third quarter, compared to Apple's lowly 14%.

So what's the kicker?

Ah, of course, the kicker. The kicker is that Apple products still account for about 60%-70% of the world's smartphone operating profits. Android just can't make money like iOS. Granted, smartphones aren't the only product Apple makes, and Maps aren't the only reason for the recent sell-off.

Show me the money
Another reason Apple's shares have slumped recently has to do with the fiscal cliff. The Cupertino company, which has a cash hoard of over $120 billion, did not, like so many other companies, decide to pay any accelerated dividends in December to avoid possible dividend tax hikes in 2013. While other companies have accelerated dividends, Apple is by no means the only company to reject the procedure, and it seems a petty reason to dismiss the stock on that principle.

Of course, Apple didn't pay a dividend at all until this year, which should be a victory in and of itself. Never mind that the dividend sits at 2%, which isn't too shabby, either, especially for a company that's grown earnings per share an average of 70% over three years. Maybe there's an even better reason for the sell-off. 

Competition! That's it!
You can say a lot of things about the technology sector, but you can't say it's not competitive. Aside from Google, Apple's bloodthirsty competitors range from old-school rival Microsoft (NASDAQ: MSFT  ) to Amazon.com (NASDAQ: AMZN  ) and Samsung, as well as Research In Motion (NASDAQ: BBRY  ) and Barnes & Noble (NYSE: BKS  ) . All these companies sell tablets to compete with the iPad, making it a very crowded area indeed. Heck, on top of that, RIM is even rolling out two brand-new BlackBerrys with a new interface... at the end of next month, that is, after the holiday season is long gone. Nice move, RIM. That'll really get you back in the game. 

While much has been made about Apple's shrinking section of the tablet market, it's still projected to finish the year with over half the tablet market, at nearly 54%. How much is this ruthless influx of competition forecast to hurt Apple's tablet share by 2016? Brace yourselves: Apple will only control 49.7% by then.

So, what can fix Apple's stock?
Apple still has one of the most enviable positions in the market, an innovative culture, and a premium brand image. It may enter the TV business. Not to mention that as a global company, it has tremendous growth opportunities abroad, and nowhere is that more true than in China.

Right now, Apple has deals with two of China's three biggest carriers, but it still hasn't locked anything down with the top dog, China Mobile (NYSE: CHL  ) . Nokia (NYSE: NOK  ) , which does have a deal with China Mobile, is currently enjoying first dibs on the telecom's nearly 700 million customers. Compound that with the fact Nokia phones are running Microsoft's newest Windows 8 software, and you can bet that Apple wants to get in the game as soon as possible. So far, Apple has failed to do that. But if and when it does, the move could, by some estimates, instantly double sales of the iPhone. 

What's with the valuation?
At the end of the day, all this negative press has done nothing but yield a valuation that borders on nonsensical. For instance, investment firm UBS (NYSE: UBS  ) bumped down Apple's price target from $780 to $700 on Friday, and the stock plummeted. It may sound logical at first, but when you consider that $700 still represents more than a 35% premium to Apple's current price, you have to scratch your head.

We're talking about a rapidly growing company with great products, devoted customers, a five-star CAPS rating, tons of cash, and a 2% dividend that trades at a lower multiple (12.2) than the average stock in the S&P 500 (SNPINDEX: ^GSPC  ) (16.8). If Apple isn't a screaming buy on qualitative reasons alone, it sure is on quantitative ones. In fact, it may be the easiest pick in the whole market.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (10) | Recommend This Article (20)

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 17, 2012, at 7:26 PM, deasystems wrote:

    The author wrote, "Recent reports about Apple Maps users getting stranded in Australian deserts."

    ...And even more recent reports by Australian authorities of Google Maps--yes, Google Maps--containing "life threatening" errors. But, hey, we mustn't mention that, eh?

    The author then wrote, "Google Maps' arrival on iOS have investors spooked. The fear is...that it will woo customers away to its own mobile products."

    That's interesting! I thought it was *Google* that realized and feared that it had made a strategic error by removing yet one more excuse to not consider an iOS device...

    And your spouting of the nonsense figures regarding tablet market share provided by the numbers-for-hire outfits like Gartner and IDC is unwise. There is absolutely no corroborating evidence to support their guesses--and they *are* guesses since no tablet maker except Apple provides actual unit sales data. In fact, the independent corroborating evidence (e.g. Internet tablet traffic share, ad revenues, developer revenues, and more) all shows that Apple continues to hugely dominate the tablet market to the tune of well over 80%.

    I know the author meant well, but his repetition of the endless FUD, unfounded assertions, and false innuendo of the manipulators and astroturfers is unwarranted and only adds to the noise.

  • Report this Comment On December 17, 2012, at 9:02 PM, HiramWalker wrote:

    Apple has the best OS in the world today and there is nothing Android can do about it. In 2013 everyone is going to learn just how bad Android is, a fragmented, battery sucking mess of technology. How can they fix this? They can't. They should have built their own from scratch instead of a quick and dirty copy job.

    Although new smartphone buyers may be drawn to cheap, over-advertised phones for their first purchase, they won't make that mistake twice. Apple's customer satisfaction is the best.

  • Report this Comment On December 18, 2012, at 8:22 AM, robmxa wrote:

    Agree with last two post, OIS is ancient OS and Android OS is junk. Nokia has best OS, best smartphone in the Lumia 920.

    Nokia up 5% in Europe this morning. 11% this week (two days), up 48% this month and trading at $4.11 in Europe up from July low of $1.67.

  • Report this Comment On December 18, 2012, at 1:15 PM, Fool wrote:

    With regard to the cheap P/E multiple --

    would a stock buyback authorization be out of the question?

  • Report this Comment On December 21, 2012, at 12:18 PM, ryanalexanderson wrote:

    MegSilberman,

    Can you please elaborate? Your posting was a bit too brief.

  • Report this Comment On December 21, 2012, at 6:22 PM, Seanickson wrote:

    Apple is in a tough situation. The margins they have are so high and their profits so dependent on the iphone that they are unable to innovate for fear of destroying their cash cow. Samsung has done very well and with Apple losing their #1 status makes one wonder how long carriers will continue to provide a $400 subsidy. Apple only has 1 phone every 2 years and it is difficult to strike the balance between appeasing its current customers and trying to seek out new ones while maintaining its margins

  • Report this Comment On December 21, 2012, at 9:40 PM, mountain8 wrote:

    Whats your point,Meg?

  • Report this Comment On December 21, 2012, at 10:03 PM, ravens9111 wrote:

    Hey Meg are you long NOK?

  • Report this Comment On December 22, 2012, at 3:02 PM, MacZen wrote:

    Don't ask, 'Meg,' to elaborate on anything. He/she/it is nothing but a spammer whom I'm going to report. He/she/it has posted the exact same messages, as above, word for word, on several other articles regarding Apple only under at least one different username that I've noticed so far.

  • Report this Comment On December 26, 2012, at 9:56 PM, bfsteck wrote:

    The article refers to Apple's CAPS rating as a 5, yet right next to the article under "related tickets" it lists Apple's CAPS rating as 3. Which is it ?

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