Apple Falls: Buying Opportunity

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Apple (NASDAQ: AAPL) have been performing much worse than the general indexes lately, falling to below $640 after having reached fresh all-time highs above $705 a couple of weeks ago. At the same time, many high profile commentators have recently proclaimed the end of the good times for the company. But I believe the recent fall is a great opportunity to buy an extraordinary company at a convenient valuation.

One of the main arguments for Apple bears is that the company is not the same kind of innovative powerhouse it was years ago, and the iPhone 5 is seen as proof of that. The company did make a mistake by ditching Google (NASDAQ: GOOG) maps from its from its new operating system, leaving IPhone 5 users and those who update to IOS 6 with a clearly inferior mapping application. Apple has recognized the error and should make sure to rectify it as soon and smoothly as possible.

But some analysts are taking the wrong conclusions from the maps fiasco; the typical argument is something along the lines of “this wouldn't have happened if Steve Jobs were still around.” This kind of reasoning seems to forget what happened with the iPhone 4S and its famous “antennagate.”

The previous iPhone model was designed, created and launched under Steve Jobs' omnipresent leadership, and it had a serious reception problem, which is arguably a much bigger deal than the current maps problem. Steve Jobs pushed for perfection in both functionality and design, but that doesn't mean he was able to get ideal results on every aspect of every product.

Antennagate was about a permanent flaw which couldn't be solved by making Google maps available for iPhone 5, which Apple will – hopefully – do as soon as possible. But that didn't stop the product from being a big success and a huge profit driver for the company. Sales of Apple products are not only driven by the technological quality of the devices; brand power, design and image differentiation are just as important.

Another bearish argument against Apple is that the competitive landscape is getting more crowded by the day, and other players are delivering competitive products with aggressively low price tags.  Google's Android has provided an excellent platform on which many low cost producers are building attractive smartphones integrated into a very strong ecosystem, and the online search giant has also delivered an efficient product with its Nexus 7 tablet.

Amazon (NASDAQ: AMZN) has been aggressively marketing its Kindle products at a notoriously low price point, without much regard for profitability. Competing against a company like Amazon, which has an amazing track record of disrupting different industries and is not afraid at all to reduce prices and profit margins to gain market share, is certainly a demanding challenge.

Microsoft (NASDAQ: MSFT) is trying to enter the mobile arena too, and it has invested heavily in its partnership with Nokia (NYSE: NOK) to jumpstart Windows Phone. This sounds like an important risk for Nokia, as Windows Phone is still immature, lacking depth in the apps, content, and user base of IOS or Android, but it still means more competition for Apple. Also, Microsoft will soon be launching Windows 8, which could reinvigorate sales of Windows-based PCs and recover some of the ground they lost against Macs over the last years.

Competitors will be launching more and better products to compete against Apple in the coming years and, as the technological gap gets narrower, this could mean increasing pressure on the Cupertino giant. But this is already reflected in the company's valuation. Apple is not priced for extraordinary growth rates -- on the contrary, it has a fairly moderate valuation reflecting very achievable growth rates.

Apple trades at a P/E ratio of 15x earnings for the last year, and 12x earnings on a forward basis. The company also has more than $100 billion in cash and liquid investments on its balance sheet, which should provide ample room for increasing dividends and share buybacks over the following years.

Apple is not valued as a high-growth powerhouse, but as a mature and stable tech giant. A slowdown in growth rates is a possibility, but there's no reason to sell Apple at current levels; this is still a high-quality business with a very reasonable valuation.

And the company still has many opportunities to surprise the market in a positive way. A smaller iPad is expected to reach the markets in a few weeks, and Apple has revealed that it's working on a TV product with the aim of disrupting TV and movies like it did with the music industry when it launched the iPod. Digital products and applications are another area of business offering extraordinary potential over the middle term.

All the success Apple has achieved over the last few years is self-sustaining to a certain extent. As users get familiar with the ecosystem, they are more prone to keep choosing Apple products for their next purchases. The brand is as strong as ever, and there is no sign of slowing demand for the company's products in spite of the much criticized maps problem.  

Analysts and commentators have been trying to call the top in Apple for a long time, and they have been mistaken through the years. Once again, the bearish case for Apple seems more based on subjective opinion than on the cold hard evidence. As far as I can see, the dip in Apple is a buying opportunity.

Foolish Bottom Line

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acardenal owns shares of Apple, Google and Amazon. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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