Three Simple Reasons to Buy Apple
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Now that Apple (NASDAQ: AAPL) has lost more than 20% from its September highs, the bears are louder than ever with their negative arguments about the company. Apple receives tons of coverage, from all kind of angles and with varied levels of quality, so it's easy to lose sight of the big picture and get confused by so much information.
When this happens, the best thing to do is to focus on the big and important aspects regarding an investment. Due to its fundamental quality, growth prospects and bargain valuation, I believe Apple is a buying opportunity at current levels.
1. A High Quality Business
Competition in the smartphone business is increasing, Samsung and Google (NASDAQ: GOOG) have launched high quality devices which can be considered challenging in terms of functionality and price versus the iPhone. On the lower end of the price spectrum, Android provides the possibility for manufacturers all over the world to deliver low cost products supported by a fantastic ecosystem and a wide array of applications.
Pricing is a big issue in emerging markets, and carriers may not be willing to subsidize the iPhone as much as in the US, so Apple could lose some market share versus cheaper producers as smartphones expand into emerging countries.
Google is also increasing its efforts in tablets with Nexus 7, and Amazon (NASDAQ: AMZN) sells its Kindle Fire products for aggressively low prices and razor thin – perhaps even nonexistent – profit margins. The iPad is still way ahead of the competition when it comes to quality, so these lower priced products won't inflict much damage to the iPad at this stage, but the quality gap may become smaller in the future.
That´s usually the rule in the tech business, innovators like Apple start with a big technological advantage, and the imitators usually reduce that gap over time by using similar processes and technologies. Apple will probably always be a quality leader, but technological advantages tend to get smaller over time. At least until another big innovation is produced.
But make no mistake; the business is not just about price and technological features, Apple has a rock solid competitive advantage in the power of its brand and image differentiation, an asset which is much harder to replicate than touch screen technologies or anything like that.
Apple doesn't need to win in every segment of every market to be a successful company, it sells premium products for premium prices, and it achieves higher profitability than any of its competitors because of that strategy. Technological advantages change with the time, but brand differentiation can last forever.
2. Plenty of Growth Ahead
Apple is the biggest company in the world as measured by market cap, and its growth rate over the last ten years has been so spectacular that it’s almost impossible to replicate. But the company still has many exciting growth opportunities over the following years, and the good times are far from over at Cupertino.
Opportunities for expansion are huge in countries like China. Apple has been negotiating with China Mobile (NYSE: CHL) to include the iPhone 5 into the carrier's network, which could provide access to a gigantic customer base of more than 700 million users. We can't expect the same level of penetration for Apple products in China than in the US or Europe, but over the long term a rising middle class should provide plenty of fuel for the company's sales.
Pricing will of course be an important issue in China, and negotiations are probably stuck because of that, but both Apple and China Mobile have a lot to gain from an agreement, so it makes sense to assume than one will be reached sooner rather than later.
The iPad is the market leader in a whole new product category, and it can continue growing at an amazing speed for a long time. As Apple keeps expanding in devices, it consolidates its position in the digital media and apps business, which could be another exciting source of growth in the middle term. Tim Cook has also admitted that Apple is working on a new Apple TV, and there is certainly a lot of room for new and innovative products in that industry.
3. The Price is a Bargain
Apple is currently trading at a P/E of 12.4 which is cheaper than any other big player in the tech industry, even cheaper than Microsoft (NASDAQ: MSFT) which trades at a P/E of 14.5. This just doesn't make any sense to me.
To a good degree, Apple's success has been Microsoft's loss over the last years. The Cupertino giant is leader of the mobile revolution, eating market share away from PCs and presenting a big challenge for Microsoft. Adding insult to injury, Mac has been gaining market share versus Windows operated PCs on a consistent basis over the last quarters.
Microsoft has done too little too late on the mobile front: sales of the new Surface tablet have been disappointing so far, and its efforts in the smartphone business have never delivered much to write home about. It’s still early to tell, but even sales of the much anticipated Windows 8 are a reason for concern regarding Microsoft.
We could hardly argue that Microsoft has better growth prospects than Apple, yet the market is putting a higher price tag on Microsoft versus Apple. Needless to say, Apple is also cheaper than other successful tech companies like Google which trades at a P/E of 21.6 or Facebook which carries a P/E ratio above 140.
The financial media and bearish analysts can provide all kind of reasons for a negative view on Apple. But many times it’s much more useful to focus your attention on what really makes a difference when it comes to long term investing. Due to the fundamental strength of the business, its growth opportunities and attractive valuation, there are simple but important reasons to take a bullish position on Apple.
acardenal owns shares of Apple, Google and Amazon. The Motley Fool owns shares of Apple, Amazon.com, China Mobile, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!