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The Apple Sell-Off Has Gone Too Far

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The Apple (NASDAQ: AAPL  ) bears have won the recent battle for Apple's stock, but with shares now bumping just over $450, I think the sell-off has gone too far. Investors are giving way too much credit to the competition and not realizing the stickiness Apple has built into its model. I think there are a lot of reasons to like Apple, whether investors listen to David Einhorn or not.

Is Android really the problem?
Over the past few months I've become concerned that Google (NASDAQ: GOOGL  ) Android's spread from smartphones into tablets would continue to eat away at Apple's market share. But fellow Fool Evan Niu had an interesting look at Android in his article, "Google Has Lost Control of Android." Evan outlines how smartphone and tablet makers like Amazon and BlackBerry are piggybacking Google's work without giving Google the benefit integrating into the Android Compatibility Program. It even takes some major work to get Google's standard apps loaded onto a Kindle device.

So, if Google is losing control of Android, it loses incentive to develop new versions and support it. Google also loses control over functionality and quality, something that Apple guards with its life. Maybe Android's share will continue to rise, but maybe the plethora of Android versions will eventually become too much for consumers to handle. Every interface could be different, every app ecosystem incompatible with the next. At least with Apple you know your apps, music, and movies are compatible across all devices, not something Android can say.

Long-term, is Android a problem? In a way, it is, but I think the Android experience will eventually become diluted as more versions come out and more manufacturers fork (i.e., modify) their own versions. This doesn't help create a self-reinforcing ecosystem of Android devices the way Apple does, and may explain why Apple's market share was up 2.0 percentage points in the fourth quarter to 36.3%, according to comScore. The Android isn't the problem a lot of people make it out to be.

Building an ecosystem one user at a time
It's easy to see that if you're an iPhone user you're more likely to buy and iPad and a Mac. The three devices sync seamlessly through iCloud and there are hundreds of thousands of apps that can be used on multiple devices and transferred to new devices when you upgrade.

This creates a stickiness to Apple's devices for millions of users. Even if Apple doesn't gain a single new user for the next decade, it has a hold on users (like me) who have multiple devices and have an incentive to stay within the ecosystem.

If Apple introduces an Apple TV that's compelling, I know I'll take a long look at it because everything else I own is Apple. Once you're in the ecosystem, it's hard to get out.

Everyone is down and out?
What's interesting when you look at the whole market is, there's pessimism everywhere. Microsoft (NASDAQ: MSFT  ) trades at similar multiples to Apple with a similar cash hoard (proportionally) and people say it's because Microsoft missed the smartphone and tablet boat, largely because of Apple. If Microsoft is losing and Apple is losing, who is winning? Google? BlackBerry?

The smartphone and tablet markets are huge -- and they're growing -- and I think Apple, Microsoft, and Google will be big players in these businesses for years to come. With everybody trading like they're going out of business, someone will be a big winner and Apple has a better chance than most of being that company.

Don't forget Apple is growing
Let's recall that Apple is still a fast-growing company. Revenue was up double-digits even in the latest "disappointing" quarter, something that's rare for a stock with an 11 P/E ratio.

AAPL Revenue Quarterly YoY Growth Chart

AAPL Revenue Quarterly YoY Growth data by YCharts.

We're treating Apple like it's a company without a competitive advantage in a market where competitors are coming out of the woodwork with better products. I don't think that's even close to the case right now. iPads and iPhones will continue to grow and even a little margin pressure will be OK given the sheer size of the market. And let's not forget that once people buy Apple's devices, they're more likely to buy more and they get sucked into Apple's ecosystem.

The sell-off in Apple is ridiculous, especially when you consider the company's cash position. Still, the debate will rage on as to whether Apple remains a buy. For another perspective, 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 (6) | Recommend This Article (5)

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 February 09, 2013, at 9:13 AM, IonyxSephira wrote:

    Finally some one is making sense out of all this nonsense. Apple is still the front runner in this smart phone tablet game. Those that think other wise obviously don't know how to read numbers correctly. There doing just fine despite all the negative hype that has surfaced since before the 5 launched. They don't need a cheaper phone or a phablet there doing it already with a 4" screen.

  • Report this Comment On February 09, 2013, at 9:29 AM, rossideas wrote:

    Thank you! Thank you! Finally reality comments about Apple. There is no real competition for Apple, just low quality, rush-to-market copy products... not well thought out and not controlled. These products meet a specific price mark. Yes, it took a little Apple business, but Apple is not in any trouble. Just hype to short the stock... and the market fell for it. Apple has totally loyal customers. Apple is totally growing. This is and will be for years to come, Apples & Oranges.

  • Report this Comment On February 09, 2013, at 11:01 AM, sammycooool wrote:

    It isn't pretty when we have to read these silly articles about a dying company and are lead to believe the shares are cheap. They are hitting 52 week lows for a reason, the company has nothing to offer consumers for all of 2013. Its that simple yet we still read articles pumping a dead horse. It took a lawsuit to get the stock up on low volume this week, yeah, that will last. Is there not someone on this site with an education in finance who can write a decent article and stop giving people false hope?

  • Report this Comment On February 09, 2013, at 4:51 PM, JKramarz321 wrote:

    Poor Sammy!

    All those phones sold by Sansung and Android makers and only making half the profits of that dead horse with nothing to sell to consumers.

    The worse you paint Apple, the worse Android makers look.

    You're glorifying market share, with little to no profit.

    That's like glorifying working 60 hour weeks for less than minimum wage! We call that grunt work, and you're welcome to it.

  • Report this Comment On February 09, 2013, at 11:32 PM, ConstableOdo wrote:

    These so-called investors on Wall Street don't know or care anything about OSes. All they know is that Android is creaming Apple in global market share. Those lousy hedge fund investors don't even take the iPhone's ecosystem stickiness or profits into consideration. Hedge funds are just leeches and will move from one company to another based on how much free-flowing blood is available.

    Apple sold off on earnings despite having one of the best quarters of any tech company ever. Those hedge funds tossed Apple aside so they could put all their money into those companies with easy pickings that can be pumped up with with only a fraction of the cash that Apple would take to boost. Companies like Netflix, Amazon and Priceline are low-hanging fruit to get rich quick.

    Don't read too much into the iPhone being declared dead by the hedge funds. They care very little about the smartphone industry and hedge funds managers are lousy prognosticators of the future they have no control over.

  • Report this Comment On February 10, 2013, at 6:31 AM, impulse101 wrote:

    You mention stickiness for Apple. Android has been doing it well before Apple, your apps are associated with your gmail address forever. Not only will all my apps live with me from device to device for life but my apps work on both my Android phone and my families 7 Android tablets. Everyone i know is switching to Android and they all say they never could go back to the stagnate, boring, dying IOS which is just a screen littered with icons, hasn't changed in 5 years even though they try to copy Androids success with smaller tablets and larger phones but it just comes off as desperate. IOS has now been relegated to the technological illiterate and the ignorant. Good luck with your stock, Android is outselling Apple for a reason, no matter how far you stick your head in the sand.

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