Please ensure Javascript is enabled for purposes of website accessibility

Is Apple Inc. Really a Value Trap?

By Ashraf Eassa - Feb 21, 2014 at 11:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple catches a downgrade as concerns that the company is a "value trap" continue to mount. Are these founded?

In the Feb. 20 session, Barclays' Ben Reitzes, a well-known Apple (AAPL 0.47%) 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.


 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$173.84 (0.47%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.