3 Reasons Apple Stock Isn't Cheap

Value investors have been diving into Apple (NASDAQ: AAPL  ) . The consumer-tech giant seems to have plenty of desirable traits. It's fetching just 12 times trailing earnings, a multiple that gets even cheaper on an enterprise value basis once you back out its unmatched balance sheet greenery. Apple's yield of 2.5% is attractive to income chasers, and it has already committed to earmarking tens of billions to return to shareholders through buybacks.

However, there are also several reasons Apple is back below $500. The stock may not be as cheap as you might think. Let's go over a few of the knocks.

1. Growth is going the wrong way
When Apple reports later this month, it will probably be the third consecutive quarter of year-over-year declines in profitability. Analysts see Apple finally bouncing back on the bottom line early next year, but it will still take some time to earn as much as it did when it peaked last year. 

Fiscal 2013 came to a close last week at Apple. Analysts see a profit of $39.33 a share for the entire years, rebounding to net income of $42.99 a share in fiscal 2014. That's a step in the right direction, but we're also falling well short of the $44.15 a share it earned in fiscal 2012. 

When Apple peaked above $700 last year, it was on the premise that Apple would continue to grow. It hasn't. Obviously, it doesn't deserve to revisit its highs as analysts have pared back expectations. 

2. The iPhone 5s and iPhone 5c may not deliver enough growth
It's all about the iPhone at Apple these days.

Macs, iPads, and iPods saw sales slide 1%, 31%, and 27%, respectively, in Apple's latest quarter. A 15% spike in iPhone revenue was enough to push overall results positive, but the tug of war only resulted rope burns and a 1% uptick in revenue. When you bake in the contracting margins that resulted in a 22% dip in net income, is this really a company worth a trailing earnings multiple that will increase to 12.3 later this month after earnings slide in Apple's latest quarter? 

All of this could be forgiven if iPhone sales come in a lot stronger than last year's showing, but that's no sure thing.

Apple initially wowed the market when it revealed that it sold 9 million iPhone 5c and iPhone 5s devices in their first weekend of availability -- a welcome uptick from the 7 million iPhones it sold in the respective countries during the iPhone 5 rollout last year -- but this figure also includes what could be millions of iPhone 5c smartphones that did not sell through to end users. Apple did not reveal how many iPhone 4S devices it sold during the first weekend that they were marked down to $100, comparable to the iPhone 5c.

There will be growth in iPhone sales this generation, but will it be enough to offset the fading popularity across Apple's other product lines?

3. Analysts may be overestimating fiscal fourth-quarter results
The bar seems to be set low when Apple reports later this month.

Analysts see revenue growing by just 2% and earnings declining 9% over the prior year's fiscal fourth quarter. This may not sound too exciting, but it would be improvement on both ends of the income statement relative to how it performed during the fiscal third quarter.

There are some reasons to believe that Apple will beat expectations. The 7 million iPhone 5 handsets it sold during their country debuts last year includes 2 million in China in its opening weekend in December. China slipped into the September quarter this time around, and that will pad performance. China Mobile (NYSE: CHL  ) did not come around as many had speculated this summer. China's leading wireless carrier could've really given Apple a boost, but it's really now a matter of when -- not if -- China Mobile begins officially offering Apple's iconic smartphone.

On the bottom line, Apple has been buying back shares. Naturally reducing the number of shares outstanding will inflate profits on a per-share basis. Apple has also managed to beat Wall Street's profit targets in each of the past three quarters.

However, it's probably not a good sign that several retailers have already shaved the contract price of the iPhone 5c in half. Apple will naturally still record the same price and margins that it originally mustered when it sold the devices, but it does suggest that supply outstrips demand. That may weigh into the potentially weak guidance that Apple serves up for the holiday quarter later this month. The shift in China's release will also negatively impact the holiday quarter and Apple's guidance.

Apple's potential upside is still huge if it's able to whip up another game-changing product or if the iPhone 5s succeeds in gaining market share that the iPhone 5 squandered. However, there are still plenty of concerns to explain why Apple may seem cheap now but may get even cheaper later this month.

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Read/Post Comments (19) | Recommend This Article (9)

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  • Report this Comment On October 06, 2013, at 2:51 PM, gsagi wrote:

    You have already got Macaloped for the February hack iWacth-fail piece; now you minimize Apple's growth by "misremembering" facts:

    http://www.apple.com/pr/library/2012/09/24iPhone-5-First-Wee...

    To quote SJ: "Start with a strong foundation!" This piece of journo blather does not cut it: it is surely not even-handed financial analysis... but link-bait.

    Cheers

  • Report this Comment On October 06, 2013, at 3:42 PM, gsagi wrote:

    Bubba;

    some numbers to point Nº3

    2012 Q4: revenue was $35.966 billion (E/S $8.67). After the intro of the iPhone 5S and 5C Apple announced (and filed with the SEC) that it expects total company revenue for the fourth fiscal quarter to be near the high end of the previously provided forecast range of $34 billion to $37 billion, and expects gross margin to be near the high end of the previously provided range of 36% to 37% (i.e. E/S should be in line with modest growth over $9.00—(derived with 922m reduced number of—diluted shares). BTW share buyback do _not_ "inflate" share prices: they return profit to investors by increasing the E/S. (Where did you go to school...? Where was the Ritalin when you needed it?)

    Next:

    For the 13-week period ended December 29, 2012, Apple (AAPL) reported revenue of $54.512 billion and earnings per share of $13.81. The outcome represents revenue growth of 17.65% over the prior-year period and a slight decline in earnings per share from $13.87 for a quarter that was THIRTEEN weeks in length versus 14 weeks in the prior-year period (2011).if it was a mysterious drop in profits THEN just by blind comparison the raw numbers should look pretty good as this will be a 14-week quarter. Again number games...

    Horace Dediu:

    "Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all."

  • Report this Comment On October 06, 2013, at 3:53 PM, ryanchandler25 wrote:

    I would much rather own Apple at 12x earnings, than Facebook at 230x trailing earnings or a forward multiple of 52x and a price to sales of almost 20x.

    Apple is a classic value play. All the growth guys have discarded it as being a worthless stock because it won't grow as fast as before. The company is still highly profitable and has a pipeline loaded with products.

  • Report this Comment On October 06, 2013, at 5:02 PM, DanManners wrote:

    When I was on Yahoo's summary page and I saw this negative headline, I said to myself "Gotta Be Rick Again"

    The quote by Horace Dediu that Apple is always in a perpetual state of free-fall is so true. I have realized that before.

    Apple's p/e will always be 8-12 and even if the earnings are at $40 and the stock sells off, you will be in the $300 level again.

    Any bad news is magnified and this is why financial engineering is a must. Buying back all the shares it can will be the only way to move the stock up. If Apple earned $ 50 eps the stock will not move above $ 500.

    Apple has to buy back half its shares over the next 3 years. The stock will not double but at best stay in the high 400's. I earnings were $ 80 per share the p/e would go to 6. But in the next 8 years, Apple could buy back 90% f its stock price, the pe would be 1. It will never go above 500 ever again. Tim Cook is the reason.

    No big phone, no new products, no watch , no tv, never ever ever. No China Mobile deal will ever happen and even if it did they would only sell a million phones at best a year and they usually are supply constrained.

    Apple has been selling off since it hit that high. Last year we fell $ 315 points from the high so this will put us at round $200 for the year. Next year the good news is that we can't fall another $ 315. I am very excited about that.

  • Report this Comment On October 06, 2013, at 6:10 PM, TMFBreakerRick wrote:

    gsagi, which facts are being misremembered? If you are referring to the 7 million vs. 5 million for the iPhone 5 debut, don't forget to add in China's 2 million to that 5 million to arrive at the correct 7 million:

    http://www.apple.com/pr/library/2012/12/16iPhone-5-First-Wee...

    Rick

  • Report this Comment On October 06, 2013, at 8:01 PM, skippywonder wrote:

    @gsagi,

    I agree with much of your comment. But you should note that the next 14 week quarter is not due for a few years. They only happen every 5 or 6 years depending on how the Saturdays fall and where the leap years are in the previous extra week cycle.

    2014 q1 will be 13 weeks, as will the next several q1's.

    But you are certainly right that the 2013 to 2012 comparison was not properly assessed by many analysts. This 13 week quarter with 50 million phones and decent margins will be very healthy indeed.

  • Report this Comment On October 06, 2013, at 8:07 PM, skippywonder wrote:

    @TMFBreakerRick,

    You are too soon on your call of sluggish demand for the iPhone 5c. What is more likely (and what we indeed have seen in previous years with the same alarms about reduced demand) is that these companies are using the appeal of the 5c to drive traffic into their stores. Walmart isn't trying to dump phones (it's much too early for that!) but rather they are trying to make sure they can get that iPhone buyer into their store. There is a huge difference there.

    Perhaps you would like to go on record with a sales level you think would prove sluggish demand so that your metric could be compared to the Q1 earnings report in January.

  • Report this Comment On October 06, 2013, at 8:09 PM, gametv wrote:

    Rick,

    If you want to quote facts and numbers, you need to get them right and put them in context. When Apple launched the iphone 5 in China it did not have the same supply constraints as the iphone 5S launch, and yes, 9 million units versus 7 million is a big increase anyway.

    Those big box retailers, Walmart, Target are using the iphone 5C as a loss leader. They use that hot price to drive traffic. That isn't a bad thing, it makes the phone an Android-killer, and perfect for the Walmart shopper. And yes, the availability of the 5C on shelves is perfect for impulse purchases and instant gratification, while the out-of-stock on 5S is due to very high demand (per recent survey data). Last year there was no 5C to satisfy impulse purchase.

    Margins have always been the concern about Apple, but you fail to mention that recent break-down of the bill of materials for iPhones show that margins are very high. Several analysts have noted this in guidance updates.

    China Mobile deal will happen in Q4, but probably not be huge. Still, it will add distribution and unit sales in next quarter. Just one more reason to believe growth will increase, not decline.

    New distribution in Japan will add millions of units in sales. Once again, carriers in Japan are battling to gain share by cutting prices, but they still pay Apple the same amount per device. What company wouldn't love to have retailers take a loss on their products to drive volumes?

    Ipad sales drop year over year was due to launch of ipad 3 in previous year. When channel inventory is eliminated, the sales decline was 3%, due to the previous year being a launch quarter for a new product. New ipad is likely to launch very soon (15th?)

    CEO Tim Cook has promised that starting in fall there would be a slew of new product releases for the coming six months. Do you want to stand in front of a potential tsunami and say that maybe it wont be big?

    Even without any new products, Apple has already indicated that revenues are at high end of range ($37 billion versus $36 billion last year). Same thing with margins. So the thesis of falling revenues or profits in next quarter disappears. The street bases prices on forward expectations, not rear-view mirror.

    The analyst community seems to believe that profits at Apple must fall because it is a commodity product. But it really isn't a commodity. The iPhone can only be marketed by Apple, while all the rest of the vendors fight it out in the Android market. As long as consumers prefer Apple (lots of market research indicates this preference is holding), there is a sustained competitive advantage for Apple.

    I encourage people who feel Apple is a poor investment to put their money where their mouth is and short the stock. An opinion without money behind it lacks conviction. My money is on Apple.

  • Report this Comment On October 06, 2013, at 8:37 PM, BenKeel wrote:

    You have to remember folks, these writers at Motley Fool LOVED LOVED US Steel at $38.00

    two years ago.

    Saying Apple "isn't cheap here" after record weekend sales is like playing handball against a curtain.

    Motley Fool's writers are smart but unfortunately most of them aren't too far removed from college which means they aren't experienced investors.

    When it comes down to choosing between Carl Icahn and Rick Moonerizz (who wrote this article and his name is fitting kuzz he's on the moon on this one) I prefer to go with the guy who just sank $2Bill. into Apple's shares.

    Also, It's pretty obvious Mr. Mooneriz and/or his family is short Apple here.

    Cash, China Telecom announcement soon (do your homework Ricky, it's not China Mobile, although they probably will announce a dela soon with Apple anyway).

    I usually print these Motley Fool articles out on soft, single grain paper and use them for my out house when I'm out of TP.

  • Report this Comment On October 06, 2013, at 9:07 PM, WineHouse wrote:

    My only Q is this: who is paying all these negativity shills to print negative stories -- regardless of facts -- about Apple? Are these the same folks who keep saying blah blah blah about political issues because they're being paid by Dixie Cups? (Hint: I do NOT own any "shares" of Dixie Cups).

  • Report this Comment On October 06, 2013, at 9:28 PM, chrischamb1 wrote:

    What a joke.....Remember a few years ago when MF actually had a few good articles and recommendations?? What has happened?? Now, just to get clicks, these clowns (including Rick Aristotle Munarriz) become just another "Apple Basher" with regard to a company that has $150 BILLION in cash, trades at a P/E of 12 and has a forward P/E of 11.5...And, PAYS A DIVIDEND! Really? They would rather prop-up a stock like Amazon which despite $61 BILLION in revenue in 2012, MAKES NO MONEY!! Or maybe Netflix and FB as other comments have suggested. Get a life..... Or better yet, learn something about the market!!

  • Report this Comment On October 06, 2013, at 9:45 PM, DanManners wrote:

    did you see Michael Blair's articles on Seeking Alpha? This guy doesn't let up on Apple. Rick is at least a little more objective. Look Apple is in bad shape. But there is hope. Read the article

    "Apple Looks To Level The Carrier Playing Field' by Ed McKernan. Absolutely great. Also subscribe to Economic TIming by Jason Schwarz. This guy has been on the money on Tesla, Apple, FB, and Yahoo. Unreal.

  • Report this Comment On October 06, 2013, at 11:44 PM, SimpleWorks wrote:

    I really don't get how people come up with no or low growth estimates especially for the holiday quarter when basically the entire product line is being updated for it. Every product line should see healthy growth and IMO Apple sells 70M iPhones this holiday quarter, expands margins, and post a 50% increase in EPS (yoy). And that's not even factoring in a China Mobile deal.

    How does everyone completely miss that the NTT deal is absolutely huge. It has been completely lost in the shuffle with disappointment in no China Mobile announcement which looks to be imminent anyway.

    THE SIGNIFICANCE OF APPLE SIGNING NTT DoCoMo - comparing it to Apple signing Verizon in Feb 2011 when smartphones as a % of subscribers in the US where at 35% with around 100M Verizon subscribers or around 35M smartphone users at the time. In 2013 Morgan Stanley's estimate for smartphones as a % of subs in Japan is 76% and NTT DoCoMo has half the market with 60M subscribers or around 45M smartphone users. NTT will grow into a ridiculous recurring revenue stream for Apple when considering Nikkei reported that NTT agreed to a quota to make the iPhone 40% of its smartphone sales to secure the deal. This shouldn't be a problem in Japan where the iPhone has been hugely successful as opposed to Samsung's Galaxy S4 which NTT dropped from it's fall lineup after only selling 700K, well short of it's target.

    Conclusion, the math just doesn't add up to anything but Apple raising guidance for the holiday quarter.

  • Report this Comment On October 07, 2013, at 1:48 PM, Mathman6577 wrote:

    Disappointing. More short-term analysis. Even three quarters is too short term. I ask again: I thought MF had more of a long-term outlook on things?

    No mention of the iPhone 5s (except that tired comparison of 1st weekend shipments -- it's getting old by the way) which is the key because of its innovation which will drive future growth (same technology that will be in iPad 5 and iPhone 6).

    The reality is Apple is no longer a growth "stock" but is in the process of becoming a "rule maker" (more like J&J and P&G) and not a "rule breaker" to quote the founders of the MF in their book. I wrote an article on this subject on the MF site a few months ago: http://beta.fool.com/mathman6577/2013/05/02/hey-analysts-app....

    I think @chrischamb1 said it pretty good. The company has tons of cash, pays a good dividend, buys back its stock. What is not to like about a company like that?

  • Report this Comment On October 07, 2013, at 5:18 PM, banmate7 wrote:

    Apple remains a classic value play. Top line revenue and earnings are positive, something obfuscated by citations about changes in still positive growth rates. Immense cash flow & balance sheets round a very complete financial picture.

    I'm averaged in at $300 and have seen nice appreciation. I remain a hold and will look to add more. I just rolled over a Roth 401k and will divide the money into AAPL, IBM, GLW, and CAT. All are at value right now.

    I'm merely waiting for the government shutdown and possible debt default issues to play themselves out. I trust American blue chips selling at value right now. Sadly, I don't trust our government.

    Regardless, Apple remains safe value play. I'd much rather put my money here than in SalesForce, Amazon, LinkedIn, Facebook, or WorkDay. All these latter companies make little to no money, offering financials that Apple would be crucified over.

    Hypocrisy? Ignorance? Manipulation? It's all of these. As I've obviously made clear, I'll stick with value and ignore market noise that casts aspersion on companies like Apple, IBM, and Microsoft. Something tells me that when the smoke clears, these companies will remain prosperous and relevant.

    Lastly, I'm reading more Motley Fool articles like this that make me question the quality of their financial journalism. It seems that there is a disproportionate bias towards short term trading and sentiment analysis here. There is too little information and examples offered on value investing in individual stocks & dollar cost averaging into mutual funds...both of which can be illustrated over the long term, juxtaposed against other styles of investing.

  • Report this Comment On October 09, 2013, at 11:13 AM, whyaduck1128 wrote:

    "The reality is Apple is no longer a growth "stock" but is in the process of becoming a "rule maker" (more like J&J and P&G)"

    That's fine with me. I'm long JNJ and PG mainly for their consistency, profitability, and reliability. You can win a ballgame by hitting lots of singles instead of going for the home run all the time.

  • Report this Comment On October 09, 2013, at 11:14 AM, whyaduck1128 wrote:

    Oops, I forgot to credit mathman6577 for that quote. I apologize.

  • Report this Comment On October 11, 2013, at 8:29 AM, Mathman6577 wrote:

    @whyaduck: I agree. Among others I hold JNJ and PG for their dividends .... you'll get 7-8% dividend growth year after year .... and PG is actually an innovator too with new products like Tide Pods and more absorbent Pampers .. to help boost revenue and EPS.

  • Report this Comment On October 15, 2013, at 8:02 AM, Jacob9009 wrote:

    Analysts expects that apple's EPS growth will be 8.4% for the next three years, which is a lot lower compared to its historical growth rate. here u go for further details http://goo.gl/AUjLYa

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