Five Mistaken Reasons to Sell Apple
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) look like they just can't stop falling, and all kind of explanations are permanently discussed among analysts and the financial media. Let's take a look at some of the most popular explanations for the fall, so perhaps we can get a clearer image about the big picture for Apple and its long term perspectives.
1 – Lower Carrier Subsidies
Carriers in different countries have been reluctant to subsidize the iPhone as much as in the US, negotiations with China Mobile (NYSE: CHL) are reportedly getting stuck due to this issue, and many analysts feel that this can be a serious problem for the company in coming years.
Carriers have been complaining about this for a long time, and it's only natural that they will be as aggressive as possible in their negotiations with Apple. However, as long as customers keep demanding the iPhone, carriers are likely to continue subsidizing the product to a considerable degree.
iPhone users generate more revenue over the life of the contract, since they purchase more expensive plans and use more services. Besides, ditching the iPhone could mean severe market share losses for carriers if other competitors continue subsidizing the product. This has been happening to China Mobile, for example, smaller competitors have been gaining market share in the high end segment of the market. Subsidizing the iPhone is expensive, but losing market share among the rising Chinese middle class can be much more expensive decision in the long term.
2 - Market Share Losses
Google (NASDAQ: GOOG) has been very successful with its Android operating system, expanding its market share in smartphone platforms over the last years. The company has increased its efforts in tablets with Nexus 7, and new low cost tablets operating with Android are expected to hit the markets in the middle term.
Amazon (NASDAQ: AMZN) prices the Kindle at fiercely competitive prices, and even Microsoft (NASDAQ: MSFT) is trying to gain some of the ground it has lost over the years in the mobile business with its Surface tablet and renewed efforts in the smartphone business. Some carriers are also feeling inclined to promoting other smartphone alternatives in order to reduce their dependency on Apple.
The mobile revolution is expanding into emerging markets, and lower cost players will probably gain market share versus Apple over the next years. But this is no real reason to sell the stock, Apple can still deliver extraordinary results while losing market share on a global scale. The company is still indisputable in the high end segment of the markets in which it operates, and this is a very profitable strategy which has delivered fantastic returns over the years.
3- Falling Profit Margins
The iPad Mini will likely have a lower profit contribution per unit than previous iPad products, and this could have a negative effect on the company's margins. A new Apple TV is under development, which creates more uncertainty about this issue. The combination of reduced carrier subsidies and increased competition doesn't bode well for profit margins either.
But even if Apple sees lower margins in the future, things should be seen in perspective. The company has operating margins in the area of 35%; this is much higher than the same ratio for companies like Google and Microsoft, which are in the area of 27%, and way above Amazon's razor thin margins.
Google and Microsoft produce mostly software and services, one of the most profitable businesses around. So even if Apple saw some material declines in margins, it would still remain a profitability leader in the tech business. Besides, the company is trading at a dirt cheap P/E ratio under 12, so we could say margin compression is already priced in to a good degree.
4- Lack of Special Dividends
Special dividends are back in fashion lately, and many investors are feeling disappointed about the fact that Apple has not announced any special distributions so far. The company has more than $120 billion in balance sheet cash, and it generates tons of free cash flows on a quarterly basis, so a special dividend from Apple would be a reasonable move.
On the other hand, some people need to get their math right on this issue, because it works the other way around. If the company pays a dividend, that would be a reason for a price decline: since that cash is no longer in the balance sheet, it shouldn't be reflected in the stock price anymore. When companies pay dividends, they transfer their cash to shareholders, so if the cash is retained, it should be considered in the stock valuation and the market price.
5- The Death Cross
Oh my god, the death cross is coming!! That's a scary name right? Well, it shouldn't be. The death cross is a technical analysis formation which happens when the 50 day price moving average crosses below the 200 day moving average. I won't even get into the discussion about the validity of technical analysis, Warren Buffet has said it very clearly:
“I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”
You don't need to take my word – or Buffet's world - on this, you can just check Apple's performance after past “death crosses.” If anything, these have been buying opportunities for long term investors over the last 10 years. The death cross can be a great title to generate attention from the public, but it doesn't provide a very insightful analysis, and it's certainly not a valid reason to sell Apple at current levels.
There are many different explanations for the current dip in Apple, some of them are reasonable while others are plain dumb. At the end of the day, Apple is still a great company with plenty of profitability and trading at a very attractive valuation, chances are this is a buying opportunity for long term investors.
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!