Apple Becomes the Conservative Choice

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

If you're wondering why Apple (NASDAQ: AAPL) is stuck in neutral, look no further than its earnings estimates.

Analysts have been steadily taking their estimates down on the company all year, and are now predicting what could only be called a rout for the second quarter. This is often Apple's weakest quarter, as it usually announces new products in the third quarter and delivers them in the fourth.

Long story short, the 49 analysts covering the stock now have an average earnings estimate of $7.33/share and the average revenue estimate is down to $35.17 billion . Compare that to the $9.32/share earned in last year's second quarter on almost the same revenue and you have your answer.

In the last 90 days estimates for the year have fallen from $49/share down to $43.59. That would be down slightly from last year's earnings of $44.15/share.

Situation on the Ground Steady

Currently the online Apple store is showing no delays in shipping any of the most popular iPhone and iPad models, with phones starting at $199 with 24-month contracts and iPads starting at $499 without contracts. The most popular Samsung phone, the S4, is currently showing similar pricing and shipment options at online phone company stores.

An earnings report in-line with analyst expectations now would still give Apple a forward Price/Earnings (P/E) multiple of under 10, with a dividend yielding 2.92% on top of it. That's a huge bargain in a market with an average PE of about 14.5, which may be why the stock bounced off its recent lows of under $400/share. Given that the company has put $60 billion into its stock buyback program for the year, and that total shares are now down to about 940 million, with the market cap now at $392 billion, it seems Apple may be a safer place to park your money right now than a government bond.

Despite this it's apparent that alarm bells are ringing at Apple headquarters, with Tim Cook's pay being tied more closely to performance and the company hiring away Yvs St. Laurent CEO Paul Deneve, apparently to work on the company's “cool.” Recent ads have been panned as prosaic and inward looking, with designs shown at the WorldWide Developers Conference seeming stale in contrast to what came before.

Apple is still trying to re-invent itself in the wake of co-founder Steve Jobs' death, and it's obvious that the “cool” he brought to the company is fading, with nothing on hand to replace it. That would transform Apple into a commodity player in a market where the hot operating system is Google Android, the same box it got into with Microsoft Windows 20 years ago.

That's the conventional wisdom. But the only things that could upset it, and move the stock appreciably, appear to be upside surprises, not downside ones. An earnings disaster – a decline of over 20% in year-over-year earnings and flat revenue compared with the same quarter last year – is already baked into the stock. Short interest in the stock peaked at the end of April but remains elevated, at levels twice as high as a year ago.

The next move is likely up, tied to earnings, and the hype cycle will probably begin anew in August.

More Risk Preferred

Investors usually look to tech stocks for capital gains, which is why Apple's doldrums have so many fleeing the stock despite fundamentals.

You can contrast the situation with that of Adobe Systems (NASDAQ: ADBE), which is up nearly 41% over the last year to almost $46/share.

Adobe focuses on design software of all kinds, the kinds of software used by graphic artists and web designers. Fundamentally, its biggest problem has been Apple, which has been pushing Adobe Flash away for a few years now, and has essentially made it redundant.

The company has sought to replace its growth in Flash with the Creative Cloud, a $50/year subscription to its leading design software titles, sold as a service. The result of Flash's loss and Creative Cloud's gains have been a wash, with revenue flat at about $1 billion/quarter, trending slightly downward, and profits only starting to recover from a lower base, to $76.55 million in the last quarter.

Despite the fact that Apple's numbers actually look more attractive, Adobe sports a high P/E of nearly 41 even without a dividend.

Another alternative is Microsoft (NASDAQ: MSFT), Apple's long-time rival, which is up only 9.6% over the last year but is up 26% so far in 2013. The company's 23 cent/share dividend yields 2.73%, almost as much as Apple, and the financials have taken a jump up, with quarterly sales now in the $20.5-21 billion/quarter range, and margins of nearly 30% delivering over $6 billion to the bottom line in the last quarter.

The Microsoft-for-Apple trade has been working well this year, having been very one-sided toward Apple over the previous three years. Nevertheless, investors are now willing to pay a PE of 17.6 to be in Microsoft, against about 10 for Apple.

A Foolish Take

The price investors pay for tech stocks is based on momentum, and assumptions about the future that are often false.

By any conventional measure Adobe and Microsoft are woefully overpriced in comparison to Apple, but those who've believed that have been hit hard throughout 2013.

It may be time for investors to see tech stocks as investments, rather than speculations. Putting money into Apple today means having a steady dividend, and a nice floor under the price driven by an active stock buyback program. It's a conservative investment in a field where conservatism is out of fashion.

This may not make your rich, but it will keep you safe. 

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Dana Blankenhorn owns shares of Apple. The Motley Fool recommends Adobe Systems and Apple. The Motley Fool owns shares of Apple 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!

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