Can Apple's Investors Ignore its Competitive Risks
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s no doubt that Apple (NASDAQ: AAPL) is the hottest stock in the market right now! It seems that the smart phone sector is where all the money has been minted in the last few years; it’s mainly because investors and consumers have seen a lot of innovation in this sector which has been fueled by giants. So why does Apple stand out in this market? The company’s perfectionist approach to incorporate both slick style and innovative technology has enabled Apple to stand out in any crowd.
With last week’s surge in Apple’s stock, a lot of people are becoming very skeptical about the future of this stock and are comparing it with Research In Motion (NASDAQ: BBRY). A lot of market gurus feel that a few mistakes are all that is needed for this stock to lose value. Such skepticism comes to existence because the growth of this stock resembles the dot-com bubble from the early 2000s. I personally feel that this opinion is wrong. Here’s why!
The price to earnings ratio of Research in Motion shows that they never really had consistent value; it purely depended on the stock price. This means the PE ratio doesn’t really reflect the growth of the company; it is more of a representation of the high price of the stock.
Apple on the other hand, has a price-to-earnings ratio which is not dependent on the stock price; as a matter of fact Apple’s stock price increased only recently. Over a period of 1 year the stock price went up by a staggering 77.8%. The PE ratio for Apple is very strong; it has been more or less consistent in its values and this represents a steady and solid growing company. The present PE ratio for Apple is close to 16% against the 6.35% of RIM.
Such strong figures force me to say that despite its all-time high, Apple is still an inexpensive stock. For a company with a cash position of $120 billion (apparently this figure is 20% of Apple’s market capitalization) Apple’s stock is definitely cheap and I seriously don’t see any reason why this strong stock should fail anytime soon.
But does this mean that Apple investors have the luxury to ignore all the competitive risks? Not one bit my friend!
Competitive risks associated with Apple
So what are the risks involved here? The points listed below are applicable to every smart phone, tablet and PC business.
- A reduction in gross margin which is caused directly by aggressive price cuts.
- With rapid advancement of technology from the part of industrial players, the common consumer is bombarded with a lot of options; this definitely will result in an unpredictable sell of a product.
- The customer becoming price sensitive is another issue.
But the slightest advantage that Apple has is that it product appeal comes from pure non-technical factors. Somehow every product from this firm has attained a sort of cult status wherein consumers regard this product to be superior in comparison to every other product in the given price range even if Apples products aren’t superior in terms of specifications.
A question that will linger on is how long will this “cult” effect last for Apple? Of course, this is quite unpredictable.
On a more technical side of things Apples advantage lies in the fact that their operating system ecosystem is great when compared with Google’s Android and Microsoft’s Windows phone. This is no surprise as Apple’s OS is very hardware specific while Google and Microsoft aim to make their OS cater a host of smart phone companies. This can be summarized quiet simply by saying that Apple aims at quality while Microsoft and Google aim at quantity. Of course, this doesn’t mean that both sets of companies don’t look into quantity and quality respectively.
The problem with the smart phone sect is that the market will eventually commoditize it. I call this a problem because it will get hit by the “good enough” syndrome where consumers will be satisfied with the bare minimum specifications at a moderate price; quiet similar to what happened in the PC sector.
In the tablet sector, we have an interesting scenario! The sector has been dubbed as the “PC killer”; though this seems highly unlikely as the form factor and battery life goes against tablets. This sector might result in the annihilation of the netbook sector for casual users. And this one sector where Apple is pretty strong especially with the release of the new iPad which offers the highest resolution screen in the whole tablet PC category.
In the laptop sector, Apple will face a slowdown because it’s pretty overpriced. Here’s an example:
UX31A Ultrabook created by ASUSTek is dubbed as the world’s best ultrabook. It features a full HD (1080p) screen and a 1.7 GHz processor. This product is priced at $1400; MacBook Air on the other hand offers a 1400x900 screen resolution and a 1.6 Ghz processor and is priced at $1500. This just proves that there are quite a few players who actually make product better than Apple and still keep the price lower than Apple.
All of the above points force me to think that though Apple as a stock is very strong, it would be foolish for investors to think there are no risks involved in the stock.
ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend 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.