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3 Reasons Apple Stock Isn't Cheap

By Rick Munarriz – Oct 6, 2013 at 2:30PM

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The consumer-tech giant isn't a screaming bargain.

Value investors have been diving into Apple (AAPL -1.79%). 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 (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.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and owns shares of Apple and China Mobile. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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