Is Apple Inc. Really a Value Trap?

In the Feb. 20 session, Barclays' Ben Reitzes, a well-known Apple (NASDAQ: AAPL  ) bull, went ahead and downgraded shares of Apple to "Equalweight." This, in Wall Street parlance, is equivalent to "hold," which really means "sell." Reitzes' price target of $570 remains intact, representing roughly 7% upside, but it's clear that this is a neutral/bearish stance. The question now comes down to the following: Is Apple really the "value trap" that is implied by this report?

It depends
The two things that fuel a bearish argument against Apple are the following:

  1. Competition continues to intensify, as the rest of the industry aims to take some of Apple's out-sized share of mobile industry profits, hurting Apple's margins.
  2. The high-end smartphone and tablet markets are showing signs of saturation, proving to be a secular headwind to outperformance.

While these two trends are undeniable -- and Samsung is proving to be particularly formidable -- the bullish counter-argument goes something like this:

  1. People will pay a premium for differentiated iOS over the various Android phones.
  2. Apple can maintain or grow share in the high-margin, high-end of the smartphone/tablet space, particularly if Apple rolls out a larger iPhone soon.
  3. Apple can drive incremental growth beyond tablets and phones with a "next big thing," e.g., smart watch.

The truth likely lies somewhere in the middle of the extreme bull and bear cases, but it's to what extent those results are skewed that will really tell the tale. At this point, nobody knows the outcome; one can only make educated guesses based on past trends and an understanding of the companies involved. But there will be plenty of money to be made long-term for those who turn out to be right.

Stuck in a range?
Another interesting point made by the Barclays analyst is that Apple is basically going to be stuck in a trading range over the next year. This may very well turn out to be the case, and frankly, if Apple waits until the September time frame to launch its next-generation phones to counter the strengthening Android threat, then the stock may well be stuck in what looks to be a $500-$550 range, buoyed by the aggressive buyback program at the low end of the range.

However, Apple really does deserve the benefit of the doubt -- at least for now. The company has executed superbly for many, many years and has only gotten stronger over time. It's tough to imagine that Apple's skyrocketing research and development budget, which has shot from $2 billion at the start of 2011 to a whopping $4.8 billion exiting 2013, isn't going to produce something pretty spectacular, especially given how efficient Apple's R&D tends to be.

Foolish bottom line
Apple is a megacap company -- the largest on the market, in fact. It takes a lot to move the needle, so to speak, and even more to keep growth-hungry investors who were spoiled by Apple's growth story from 2004 to 2011 from becoming frustrated. While Apple does face competition and a generally tough environment, it would be unwise to underestimate the company, even without Steve Jobs at the helm. It's not yet time to declare Apple a "value trap," which is stock investing code-word for "done for." Not even close.

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  • Report this Comment On February 21, 2014, at 1:17 PM, dhuddle wrote:

    All Apple has to do is to use 2 advantages they have that most companies don't --

    1. Their huge cash pile. Use it to buy or create opportunities.

    2. Take advantage of their loyal customer base. It is reported that they are entering payment processing (that is a natural) and they could easily enter search with their own engine or a JV with Baidu or Bing.

    As for buybacks, every share bought back increases EPS by a multiple of 1.11, so a 10% buyback increases EPS by 11% - that is better than making bad investments.

  • Report this Comment On February 21, 2014, at 3:36 PM, metoo5 wrote:

    >> Apple is done for. ... The market is saturated and the products Apple sells are too expensive.

    I'll bet you ChaimYonkel2013 has never understood why anyone has ever purchased an Apple product. I affectionately call this argument the "people are stupid argument". Only conspiracy theories offered for why people ever bought Apple products.

    >> Apple is coming out with new phones in Oct as usual. Big deal a bigger phone. Like they are inventing it. Everyone who wants a big phone has one.

    Apple didn't invent the smartphone either did it? Then how do you explain why so many people bought Apple's smartphone? Did they think Apple invented smartphones? Nooooo.

    ChaimYonkel2013 if you don't know why people buy Apple products then why do you think you can tell us anything about whether they will continue to do so.

    The author of the article laid out the bear and bull arguments for AAPL. Whichever one turns out to be true, it seems you have nothing interesting to tell us but that repeating 30 year old arguments that refute themselves seems clever to you. They're not.

  • Report this Comment On February 21, 2014, at 3:42 PM, metoo5 wrote:

    Probably a bad joke, but ChaimYonkel2013 I should say I was spoofing your spoof. I think you're tongue was in your cheek and so was mine just to be clear. What you said it so commonly said.

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