This is the Drop You Were Waiting For
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Back Down to Earth
Apple (NASDAQ: AAPL) has been Wall Street's favorite stock for a while, especially as it continued on its tear this year, up 50% YTD, with an all-time high of 705.07. But, after disappointing iPhone 5 sales and a poor Q4 earnings report, Apple is all the way back down to $604. Is this the time everyone was waiting for? Before Apple came back down, the big argument against Apple was that it had appreciated too much and would pull back soon. Jim Cramer always says that if a stock rallies to an all-time high then pulls back 5% (Apple has pulled back 14%) that it is a good time to buy. Let's see if he is right.
Valuation Game
Apple has a P/E (TTM) of 13.7, Microsoft (NASDAQ: MSFT) has a P/E of 15.25, International Business Machines (NYSE: IBM) trades at a P/E of 13.9, and Google (NASDAQ: GOOG) has a P/E of 21.25. When stacked up against these big tech companies Apple wins on being the cheapest P/E-wise. As far as PEG growth ratios go, Apple also wins. Apple trades at a PEG of 0.60, with Google, IBM, and MSFT trading at a PEG 1.57, 1.41, and 1.77, respectively. When you compare Apple to other big companies, it is the cheaper investment on a valuation basis. What this means is that Apple could trade at a higher P/E, just like its competitors, and that on a PEG basis Apple is very undervalued. But there is much more to a stock than a few statistics.
Historical Earnings and the Big Catalyst
Where Apple could bounce back up is with its Q1 earnings report. This is Apple's most profitable quarter. The past two Q1's were both big blowouts for Apple, which is good news for investors who buy this dip. In Q1 2011, Apple made $6.43 a share, almost a dollar more than the $5.55 estimate. In Q1 2012, Apple made $13.87 a share, over $3 more than the $10.48 estimate. If history repeats itself, this dip could net you a double digit gain. Also, in both Q4 2011 and 2012, Apple missed expectations and the stock fell, only to quickly recover. History is also in Apple's favor.
No cheer for the iPhone 5 or the iPad Mini
Recently Apple released the iPhone 5, which sold 5 million in its first 3 days of sales, and the iPad Mini. The 5 million in sales were less than the very optimistic 6-10 million expected, but still a 25% gain over the first 3 days of iPhone 4S sales (which came in at 4 million). Some attribute the miss to Apple trying to force its consumers to use its maps system or that it didn't offer enough new things in order to get consumers to go out and buy their phone. I think it is more of a supply issue, and that even though sales may have been less than expected in the last quarter due to lack of supply, you will see a nice beat in the upcoming quarter.
The iPad Mini also received little excitement from Wall Street. I think that the iPad Mini will help Apple defend its huge dominance in the tablet space. One reason why Apple missed earnings expectations is because iPad sales came in less than expected due to increased levels of competition from the likes of Google (which has its popular Nexus 7 tablet). Strategy Analytics released a new study that showed Apple's tablet share dropping from 64.5% (in Q3 2011) to 56.7% today. Apple tablet shipments are up 29.2% since Q3 2011, while Android shipments are up 41.3%. Android is able to take up more market share because it has a much lower price point. But most of that advantage is taken away with the release of the iPad Mini. Microsoft saw its market share fall from 2.3% to 1.6% in that same time period.
I think Wall Street is underestimating the importance of the iPad Mini, and that this is a bullish sign for Apple, not a bearish one. The tablet market remains a high growth area, with tablet shipments up 43% year over year, (Q3 2011 versus Q3 2012); so if Apple can maintain its lead it will continue to grow its bottom line as it has in the past.
Final Thoughts
We were all waiting for this; but now that the pullback is here, why is no one hopping on the train of easy returns? History shows us that every time Apple missed earnings and had a pullback in its stock price, it quickly rebounded within a matter of months. History also shows us that Apple's next earnings report could beat expectations once again, but that remains to be seen. Apple, just like any other company, has its problems, like increasing amounts of competition and falling margins. But on a valuation level, a historical level, and on a future catalyst level, Apple remains the leader in the tech industry and is still worth your money today. Buy the dip; reap easy returns in the future.
Dig Deeper
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callumturcan owns shares of Microsoft. The Motley Fool owns shares of Apple, Google, International Business Machines, and Microsoft. Motley Fool newsletter services recommend Apple, Google, International Business Machines, 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.If you have questions about this post or the Fool’s blog network, click here for information.
