I'm Not Sure Apple's Such a Great Deal -- Even at These Prices

Without fail, there's one task that you can regularly do that will help you improve your decision-making in investing and life: Keep a journal of your decisions. When it comes to investing, that means writing down exactly why you're buying certain stocks, and exactly what would have to happen to consider selling.

On July 16, 2010, I bought my first shares of Apple (NASDAQ: AAPL  ) . Below, I'll share my journal entry from that day, and explain why I'm so conflicted on what to do with the stock.

Reasons for buying
I like to follow the KISS rule for investing: Keep It Simple, Stupid! There's so much information out there that unless I keep my investing simple and focused, analysis paralysis is unavoidable. So here were my four reasons for buying.

1. Apple produces gadgets that are incredibly user-friendly and useful.
There's no doubt that when the iPod came out, the simple concept of "hundreds of songs right in your pocket" was easy enough -- and true -- to make the product a hit. Since then, the iPad, iPhone, and newer iterations of laptops (one of which I'm typing this on) have followed suit.

At the same time, however, rivals have gained ground. Though I don't have a smartphone (I'm truly old-school, with a flip-phone), I know that many of my friends have Samsung phones that run on Google's Android operating system. These phones are just as easy to use. So while Apple certainly hasn't taken a step back, the competition is certainly closer than it was three years ago.

2. Apple has enormous potential to expand abroad, especially with smartphones
This has really played out over the past three years. Sales in the Asia-Pacific region have exploded, growing over 300% between 2010 and 2012, and it now accounts for a much larger percentage of Apple's sales.

Source: SEC filings. 

This is a point I will be paying especially close attention to in next week's earnings, as sales in Apple's "Greater China" segment increased by 67% last quarter, but the rest of the Asia-Pacific grew at a much more tepid 10%. 

3. Apple's potential is underappreciated by the market, especially because of its large market cap.
I don't think this is as much of an issue anymore. Back when this purchase was made, Apple's growth was difficult to believe, and it traded with a market cap of about $235 billion. Since then, it's been valued at as much as $660 billion, making it -- for a short while -- the most valuable company in the world. I don't think market cap alone is what's holding Apple's stock back right now.

4. Apple's past leads me to believe they will continue to innovate game-changing products
This is where the crux of everything hinges. In my "reasons that would make me consider selling" section of my notes, I very clearly wrote two things:

  • All future products are just mild regurgitations of previous ones.
  • Steve Jobs leaves the company.

From the standpoint of an everyday Joe who is not a techy, both of these concerns give me pause. Sure, Siri is cool and the Retina display is impressive, but since the iPad came out, I haven't seen a ton of serious innovation.

There have been rumors, and Tim Cook has been promising us great products in the pipeline, but the proof is in the pudding, and I personally haven't seen anything.

As more and more time goes by, I've become convinced that the competitive advantage Apple had was Steve Jobs and, essentially, nothing more. At the same time, I know that he did everything possible to make innovation part of the DNA of the company, even creating Apple University.

Where does that leave me?
One thing is for sure, at today's price, Apple looks like quite a deal. Take a look at the metrics for the company when I decided to buy in and today.

 Metric

July 16, 2010 

Today

Price

$250

$395

Price to earnings

21

9

PEG ratio

1.1

0.5

Price to free cash flow

19

8

Sources: Yahoo! Finance and Fool.com.

By almost any metric measurable, Apple is very cheaply priced. I'm certainly not buying more shares right now, as my concerns about Jobs being the true differentiator are still very much there. However, because shares are trading for so low, and because I vowed to hold shares for three years in my retirement portfolio, I won't be selling any either.

There's 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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (8) | Recommend This Article (6)

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 April 19, 2013, at 8:44 PM, myeerah wrote:

    I am not commented on this particular article but commenting more on the negative articles I have read from this sight as well as seekinging alpa.Tim Cook is continuing to act as SJ did in the past.Silencence until game time.Much like Bill Belichik head coach for the patriots.Great companies like apple and great coaches like Belichik keep there game plan secret until its ready.I love the fact that Tim Cook is not trotting out and speaking up every time the share price falls.He is concentrating on coaching a team as he should be doing.Do great bands put out incredible records every year? Samsung has copied apple...Is that innovation? I will let the artists at apple perfect there craft and give them time and in the mean time I will keep buying shares.We live in a world that wants instant gratification but some of the greatest things we should have patience.INVESTORS! Be patient this is just the 3rd inning in Apples dominance in this sector.I am long apple and have $200,000.00 riding on that firm belief.

  • Report this Comment On April 19, 2013, at 9:10 PM, Nomadder wrote:

    My reasons for buying/holding:

    1. Apple's ecosystem is more important to customer re-purchasing than innovation. Apple's innovation may have gotten them here, but the ecosystem is where the retention (new purchases/old customers) comes from, *not* new features on old products. As I see it, Apple doesn't need any new product lines to continue its success. They can coast (a la MS) for quite some time...though if they did I might start to worry. Bottome line: Innovation is perennially and grossly overvalued when Apple is discussed, as they are still judged on their past, while the ecosystem is likewise undervalued.

    2. There is room for a duopoly in all fields in which Apple creates products. That is, they do not need to be number one to be very profitable. Second place, if it comes to that, still means a lot of money.

    3. Worst case scenario, as I see it: Apple slows down considerably, doesn't worry much about new product lines, falls to second place in all existing categories, and *still* outpaces its currently anemic P/E.

    My only questions is how long it takes for people to stop judging apple by a completely different standard, stop overvaluing innovation, and undervaluing the ecosystem. Since these are all questions that affect the short term stock price more than the long term health of the company, I'm not terribly worried.

  • Report this Comment On April 20, 2013, at 4:16 AM, DanManners wrote:

    Lets say all the metrics were the same but Apple was trading at $ 1. Now you would say everything cheap but I don't like how it is trading. At $ 1 per share you would be afraid to buy? Or would you say, hey they have $ 150 billion in cash so for $ 1 I could risk it?

    Obviously if the stock is cheap there is some price you would pay up for the stock? $ .50? Maybe $ .25 cents. The cash is $ 150 and you are getting it for say $ .10? There is some price that you would say, it should not be this low but I don't like how it is trading.

    Well that is going on right now. Auerbach Grayson analysts said it is probably going to 313 or down 20% more. At 313 will people be saying it is cheap but not really?

    The stock is down 6 of 7 days and we could get 3 more down days if the earnings are bad and be up 1 of 10 days. After we tank on Wednesday with bad earnings Tues night, we could selloff for a few moredays. Maybe a week from Monday we trade up from $ 290. Or $274. That is the worst case scenario. People are scared out of their wits about how bad the company is doing. Also are we going to get buyback and dividend increases and if so how much?

    Apple could beat by a little and offer better numbers and sales of its products and the stock could rally 40 points. A dividend announcement of 50% increae and $ 100 billion in buybacks, could move the stock up $50.

    Well place option bets now could bring big rewards next week.

    There's 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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

  • Report this Comment On April 20, 2013, at 4:25 AM, lakawak wrote:

    No...by almost any metric, Apple is a cheaper buy now than it was in July 2010. But it was OVERPRICED then.

  • Report this Comment On April 20, 2013, at 4:35 AM, lakawak wrote:

    Dan...apple could beat by a little? I don't think there is a single person, not even at Apple, who is even considering this a possibility. IT was pretty much a certainty that they wer going to miss ever since January's report. And that was BEFORE all their suppliers have delivered the bad news about a huge decrease in the demand for the components for iPads and iPhones.

    They are going to miss big, and everyone knws it. IT will likely be down all 5 days next week. Mnday and Tuesday will be insider trading as Apple execs dump their shares before the Wednesday bloodbath. Maybe a slight bump the week after as those are are still hanging on to the hope of a recovery will buy to go long. But then again, most people expected a partial recovery in February and MArch too. So maybe not. And July's earnings report doesn't look like it is going to dazzle either. So I think it is clear that the stock is not going to recover on its own. They will need to pump it up with some of their cash to see an increase.

  • Report this Comment On April 20, 2013, at 4:40 AM, lakawak wrote:

    NoMadder...Have you not been paying attention? They are NOT holding onto their customers. FAR more people have switched from iPhones to Android than vice versa.

    The reason is simply...FAR more people with iPhones, iPods and iPads sync them on a PC than a MAc. Becuase those products are mainstream products. Their success was based SOLELY on the fact that they were pretty much the only choice for a long time. It is ignorant to consider everyone with an iPod/iPhone/iPad a diehard Apple fan who will buy Apple no matter what. If that was the case, then Mac's market share wouldn't still be hovering around 5%.

    That is why most of those mainstream custoemrs for the iPod/iPhone have jumped ship as SOON as a cheaper alternative came along. Just like what happened 30 years ago with home computers.

    IT is simple...Apple has NEVER been successful in a mature market. As soon as the home computer market matured, theybecame a tiny niche company that needed a bailout from Microsoft to stay afloat. And now that the three markets they dominated in the 00s are either dead (MP3) or matured as well (smartphones and tablets) it is hte home computer thing all over again. When there are alternatives, people are not going to pay the Apple Stupidity tax.

  • Report this Comment On April 20, 2013, at 4:41 AM, lakawak wrote:

    myeerah...and what has Tim Cook does to earn the reputation of being a great leader? Oh...that's right. Nothing. He is not being secretive, moron. He isn't talking about any new groundbreaking products because Apple DOESN'T HAVE ANY.

  • Report this Comment On April 20, 2013, at 5:13 PM, krispietreats wrote:

    I don't trust anybody with a flip phone.

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