Analysts Debate: Is It Time to Sell Apple?

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The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we're reviewing our outperform call on Apple (AAPL +1.00%), which has recently released the iPhone 5 but made some missteps along the way.

Apple by the numbers
Here's a quick snapshot of the company's most important numbers:

Sources: Yahoo! Finance.

So it Apple's stock still a buy, or are the stock's best days behind it?

Travis' take
I'll admit that I was very underwhelmed by the iPhone 5 and am downright disappointed by iOS 6, especially the new maps app. This has made me rethink my own investment in Apple, and I wanted to take another look after these underwhelming releases and see if the stock is worth selling.

What we need to keep in mind as a backdrop is that Apple's two key markets -- smartphones and tablets -- are still growing rapidly, and while Apple may not have far and away the best product in each market, the company will still hold its own and has a strong legion of followers. Even if Apple loses market share, it could easily maintain revenue and potentially still provide a nice return for investors, so the big-picture view is good.

What has to be concerning is the level of competition in the smartphone and tablet markets. Samsung has arguably passed Apple in smartphones (and makes hilarious commercials poking fun at the iPhone 5), and Microsoft (MSFT 0.71%) is introducing another operating system that could potentially rival iOS. Apple once stood well above the smartphone market with iOS, but Android and Windows Phone 8 are closing the gap.

In tablets, Apple still has a clear advantage at the top end of the market, but the Kindle Fire HD from Amazon and the Nexus 7 from Google are going to eat into market share. These devices are in many ways inferior to the iPad for now, but in a couple of years we may be seeing them pass the iPad the way I think Samsung did this year with the Galaxy SIII.

But these strategic challenges don't make Apple a sell, because the stock is trading at a reasonable multiple and the company is still generating a ton of cash. Over the past year, Apple has generated $52.1 billion in operating cash flow and spent just $6.5 billion on capital expenditures. This is possible because Apple outsources its manufacturing and puts the onus on its manufacturing partners to spend on capital. This is key for Apple right now, because it still has a cash flow machine even if results don't grow the way they have in recent years.

There's also Apple's ecosystem to consider. Apple essentially locks device users into its ecosystem, which provides future revenue. This generates returns, but it also makes it more difficult for customers to leave the ecosystem once they're in it. Consider me one of these people. If I were a total free agent, a Galaxy SIII may be the phone I buy, but I'll soon upgrade to an iPhone 5 because I have a Mac, iPad, and Apple TV, which makes switching less attractive.

What I see in Apple is the same thing we saw in Microsoft a decade ago. The company may not grow or dominate new markets, but it will continue to be profitable and generate enough cash to satisfy shareholders. As a result, Microsoft's stock went almost nowhere for a decade, but the key difference with Apple is that the stock trades at only 15 times trailing earnings, which is much cheaper than Microsoft did a decade ago, giving investors room for error.

At this point, the market has priced in zero growth for Apple, and I don't think the company's growth days are over. A new Apple TV and a mini-iPad could boost results again, and with millions of customers still making lots of noise over every product launch, the stock is still worth owning. I'm not as excited about Apple as I was under $600 per share, but it's still worth holding on to for now.

Alex's take
The problem with being bearish on Apple is that Apple's been very good at proving the bears wrong. That's because, for the longest time, even the Apple bulls tended to underestimate the company's potential. We've never really seen a company maintain margins this high while selling so many millions of high-priced devices before. It defied almost everything we used to expect from the computer hardware industry, and that defiance continued for so long, many analysts simply recalibrated their expectations.

Now that we're well into the mature stage of Apple's product cycle, signs are emerging that the consensus finally swung toward hyper-optimism. With an army of little Gene Munsters anticipating a gazillion iPhone 5 sales on opening weekend, the only way Apple could have lived up to the hype was by exceeding it. It didn't. The pendulum swings back to bearishness quickly.

Here's the condensed version of post-release disappointment:

"Just 5 million iPhones sold in a weekend? That's pretty lame. I thought Apple would sell 10 million! And what the heck is up with Apple's maps app? It's so buggy that it almost drove me off a bridge! It might have been my fault, though. I was polishing my iPhone furiously at the time, to buff out all the scratches that it had right out of the box. The ticket I got afterwards cost so much that I won't have any money to buy adapters so my other iStuff works with the iPhone 5's new charging cable. ... Man, I miss Steve Jobs."

I've been one of the most bearish Fools toward Apple since Steve Jobs died, but I still can't bring myself to predict underperformance. I've pointed out that Apple's losing its cool cachet among the trendsetting young people whom it needs as brand ambassadors. I argued that its patent warfare with Samsung was a petty admission that the company doesn't have any new ideas, so it's just going to try building a wall of lawyers around its old ones. And just before the iPhone 5's release, I offered the same argument I'm making now -- Apple's becoming a victim of its own hype.

But I still can't call it an underperformer. Most of us can't, despite being so broadly disappointed with the latest release. The holiday season is still likely to be huge for Apple as the people who waited out release weekend look to upgrade. An iPad Mini, while perhaps not Jobs-approved, fits in with the post-Jobs strategy of actually taking the fight to Google and Amazon's alternative sizes instead of trying to float smugly over the tablet battlefield. Its brand power alone will guarantee big sales this year. By the time the results are in, all the nattering nabobs of Apple negativity should have had enough time to stew in their reduced expectations to give Apple enough room to beat the Street again. It's also important to remember that industry insiders do not represent the average consumer.

There's enough new-release momentum to make this another huge fourth quarter for Apple. The future is hazy any further out. By this time next year, Google's groundbreaking Project Glass might be reaching the earliest of its early adopters. If (and, I believe, when) that technology starts catching on, Apple won't have an answer -- just as Research In Motion (RIMM +2.32%) and Nokia (NOK +2.79%) had no real answers to the iPhone. It's one thing to develop for a portable screen in your hand. It's entirely different to do so for one hanging in front of you, and Google has a multiyear advantage on that front.

In the short term, for the next few months, Apple will have the fundamentals on its side. After that, there's just no indication that it really knows what the next big thing will be. I'd like to revisit this call after Apple's fourth-quarter results are in next year, but I have no problem maintaining it through the holidays.

Sean's take
Apple sold through its initial stock of 5 million phones over the first weekend. The last time I checked, a company that's selling through its product is a good thing.

Under the tutelage of Steve Jobs, Apple went from a has-been to an innovator, and it continues to do so under new CEO Tim Cook. Whether Apple is able to reinvent the wheel is another story altogether, but what I'm trying to say is that Apple's products are so good, and its following so cult-like, that it doesn't have to.

Forgive the Matrix-like references, but there's little to suggest that Apple's growth figures are broken or that its peers are getting anywhere near the company with regard to growth. If Apple wanted to, it could simply put its hand up and say "No" to stop the bullets heading in its direction. That's precisely what it just did to Samsung in court, where it won a $1 billion verdict that vindicated Apple's stance that Samsung infringed on its technology. An appeal of the verdict is pending.

As for Apple's peers, many are scrambling for answers. Nokia would be wise to split its business into three separate components, as I've discussed before, because it's going to take years to carve out its niche in the smartphone market with the Lumia. Similarly, Research In Motion can't find its way out of a paper bag, with even the company's lingering enterprise customers growing weary of its stale designs. Unless the BlackBerry OS 10 is a game-changer, RIM is probably done for.

As Travis mentioned, Apple has the most amazing cash flow of on the planet as far as I'm concerned. That has to do with the fact that Apple products sell themselves. There's a reason we see so few Apple ads and such a ridiculous number of Samsung and Nokia ads; they have no choice.

The only thing that truly stands in the way of Apple and greatness is its supply chain. I've cautioned that demand far exceeding Apple's estimation could cause it to lose sales to rivals, but this scenario is still highly unlikely.

As a faithful Apple iPhone user (and someone currently waiting for his preordered iPhone 5 to arrive), I'm suggesting we stay long Apple.

The final call
We're clearly not as bullish on Apple's stock as we were a few months ago, but we're still confident enough to keep our outperform call.