Why I'm Buying More Apple Stock

Spoiler alert: I'm buying more Apple (NASDAQ: AAPL  ) for the real-money account I manage for The Motley Fool. Most of us are pretty darn familiar with the iPhone, iPad, and Mac maker, so let's get to the rationale.

An Apple share that was $700 just a few months ago is now in the high $400s. The market fears that Apple's growth prospects are no longer as rosy since its size has grown and its competition has gotten fiercer. In its latest quarter, its top line grew a still-impressive 18%, but its earnings per share actually fell (very slightly).

Among the factors weighing down Apple's margins were an unprecedented number of product launches (including the smaller, lower-priced tablet offering, the iPad mini) and some supply chain bottlenecks. As a result, its gross margin fell from 44.7% a year ago to 38.6% this last quarter. There are mitigations, but that's a pretty hefty drop. Bigger picture, there are many ways Apple's margins can compress, including increased competition, changes in wireless carrier subsidies, faster product cycles, and the usual tech disruption that comes out of nowhere. And on both the top and bottom lines, Apple faces a tougher road as it tries to grow an already large business.

Another criticism of Apple is its failure to return enough of its $137 billion (and growing!) cash hoard to investors. Let's tackle this one really quickly because the criticism annoys me. First of all, almost 70% of that cash is foreign and would suffer taxation if returned. Second, breaking from the Steve Jobs mentality, CEO Tim Cook already instituted regular dividends last year. Sure, there's plenty of room to grow them, but Apple yields over 2% at current prices. Not an amazing yield, but not a bad start. And finally, what's been great about Apple is that it hasn't historically blown its cash on large, ill-conceived acquisitions. For contrast, Hewlett-Packard has shown what truly horrible capital allocation looks like (see the Autonomy and Palm acquisitions). Nitpicking Apple for its conservative use of cash is missing the forest for the trees. We invest in Apple for its business prospects, not its ability to play Wall Street with its bank account.

Getting back to Apple's future profitability, there is real risk -- as there is with any company. I can't predict what the future holds, but I like the odds we're getting with Apple at current prices. At $475 a share, its trailing P/E ratio is 10.5. Factoring in that cash hoard in its entirety, it drops to 7.2. If you prefer free cash flow to net income, those multiples are even a bit lower.

Those are the multiples that a lagging, second-tier company deserves -- not a revolutionary, best-in-class company with three-year compounded sales and EPS growth rates north of 50%. Like In-N-Out Burger or the Beatles, Apple creates things that people line up for. Unlike just about every other large company on the planet, Apple's having trouble making its products fast enough to meet consumer demand. Apple's also a company that has a huge opportunity in the TV space in addition to the 18% sales growth it posted on its current lineup of smartphones, tablets, and computers.

Can you imagine? A company that has too much cash, too much demand for its products, and legitimate areas for growth trading at dirt cheap earnings multiples? I like these odds, and I'm buying more Apple.

More on Apple
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 you portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (9) | Recommend This Article (15)

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 12, 2013, at 6:49 PM, 504Capital wrote:

    The shorts on Apple simply amaze me. What sound reasoning...Apple will continue to drop because it has been dropping and there is no near-term catalyst. Hmm... I'm sorry that Apple making $13 billion last quarter is not a good enough catalyst. This stock is trading at about a 50% discount to the market on a P/E ratio taking out cash. Given all your pessimistic views can you really see much downside beyond that? Let's not forget a potential deal with China Mobile in the second half of the year as they build up their network. I know, iTV has been hyped up for a while, but it is a potential new revenue source. Apple is still growing in more countries. Let's not forget, there are potential catalysts. Regardless of little to no innovation, Apple has captured some consumers that would be hard-pressed to switch platforms.

    It is truly hard to present a case for why Apple will go below $400 other than short-term emotional investing. I hope that all the Apple pessimists are shorting Apple and when it does go up eventually, they will have to buy back the stock and subsequently raise the price even more.

  • Report this Comment On February 13, 2013, at 10:22 AM, rmshb wrote:

    @ChaimYonkel2013

    Are you serious?

    $85 for AAPL? They have over $130B in cash with $41B net profit last year.

    All the noise about AAPL is all but shouting AAPL's growth is slowing. But people fail to recognize it is still one of the fastest growing tech companies.

    I'm long AAPL

  • Report this Comment On March 01, 2013, at 11:19 AM, cluckgochicken wrote:

    The thing that is driving Apple right now is the herd. Run with the lemming bears, and you will go over the cliff. Apple may not experience the same growth it has in the past, but I believe it will continue to be an excellent investment. Right now its price is dictated by emotion, and the desire to see the big guy fall... not common sense.

  • Report this Comment On March 01, 2013, at 5:31 PM, TMFBreakerRob wrote:

    Hmmm.....

    .... most of the subscription newsletters at the Fool concentrate on buying excellent businesses and holding for the long term as long as the *company* continues to perform.

    Apple, with over $120/share in cash (and equivalents) and over $40/share in earnings is continuing to grow profitably and is priced around 11 times this year's expected earnings.

    Perhaps that's something only a Motley Fool would love, eh?

  • Report this Comment On March 01, 2013, at 6:22 PM, TheDumbMoney wrote:

    Added at $444.50. I own shares at $365, $390, $545, and $570 entry points.

  • Report this Comment On March 02, 2013, at 11:14 AM, bhughes1001 wrote:

    Adding as well, at $441 yesterday. If it stays at these levels, or drops more, I would add until it gets to 4-5% of portfolio.

  • Report this Comment On March 03, 2013, at 7:10 AM, MightyMinnow wrote:

    I started @ $4.86.50 with 5 shares and I have a bid on 6 @ $400. I figure to add again with 7 @ $347.00. then buy the same amount on the way back up.

    The chart is broke because of the initial impact of the VZ agreement. It ate up pent demand and then some. Its a good time for the company to lay low and buy back some shares.

  • Report this Comment On March 07, 2013, at 7:22 PM, MichaelHamilton wrote:

    AAPL shares $10 next week?

  • Report this Comment On March 08, 2013, at 11:12 AM, thunderboltnova wrote:

    I'm still losing my shirt on this one. CNBC promised this would go to $1,000. Jim Cramer said this was the best stock for the next 10 years. Seriously, do I sell at this point?

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