Is This the Right Time to Buy Apple?

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

A few days ago, I wrote a somewhat bearish article on Apple (NASDAQ: AAPL) listing all that is wrong with the giant company. In this article, I want to see if I can make out a relatively bullish case for Apple.

Apple May Be Undervalued

Apple’s stock price crashed 6.5% on Dec. 6, resulting in $35 billion attenuation in the market capitalization. The stock price is currently trading at $457 per share. This stock crash is the biggest loss that Apple has incurred in nearly four years. Many analysts have attributed the loss to several reports that coincided on that day having a snowball effect on Apple’s stock price. Research firm IDC indicated that the decline is to be blamed on the dipping tablet market share. According to IDC, Apple's tablet market share has slipped to 44% in 2012 from 52% last year.

Apple is now facing fierce competition in the tablet market from the likes of Google’s Nexus 7, Amazon’s Kindle Fire, and Samsung’s Galaxy Tab. In addition, no announcement of a special dividend from Apple in 2012 has further contributed to the dip. Finally, the recent China Mobile deal with Nokia (NYSE: NOK) has enabled the Finnish multinational to secure China Mobile’s partnership for the flagship Lumia 920, which has enabled it to position the mobile phone as an alternative to Google’s Android. This deal channeled more panic among investors, resulting in heavy selling.

Even though the above listed factors have played an instrumental role in pulling down Apple’s share price, Trefis (Equity Research Firm) still estimates an upside of 43% on the stock price. Apple's tablet market share is expected to dip further in the coming years; nonetheless, the overall market size is expected to grow more than 100% by 2016.

Samsung Doubles Tablet Market Share

According to IDC, Samsung’s market share grew from 7.3% last year to 15% in 2012. Newer innovative products and low prices are driving the overall tablet market. Apple’s iPad still leads the way with 44%, and the launch of iPad mini is further expected to provide some support to the declining numbers, therefore loss of 4% to 8% market share should not have any noticeable impact on Apple’s share price given the tablet market is expected to grow exponentially.

Unlike the smartphones, Apple’s iPad only contributes 13% to the stock value; hence the decline in the tablet market share should not send a lasting shock wave among investors. Apple smartphone sales witnessed robust growth last year, and going forward Apple is expected to sell 44 million units in the fourth quarter of 2012, which is in line with Apple’s original forecast.

Nokia's China Mobile Deal

China Mobile is the largest wireless network in the world with over 700 million subscribers. Apple’s iPhone is not accessible to many Chinese mobile users, as China Mobile has still not reached an agreement with Apple. Apple’s iPhone is so far only available to the Chinese users through China Telecom Corp and China Unicom. The two mobile carriers are significantly smaller in comparison to China Mobile, and the 3G user base of both companies combined is still not large enough for Apple to penetrate the Chinese market effectively. Several analysts and trade pundits expected Apple to launch the sales of iPhone 5 with China Mobile; however, with Nokia scoring the deal and Apple still struggling to reach an agreement, this has led to an increased disappointment among investors.

However, the outlook of investors on Apple seems a little short-sighted, as it is expected to reach an agreement with China Mobile in the near future. Therefore, Nokia’s deal with China Mobile should not carry any notable affect on Apple’s stock price in the long run.

No Special Dividend Announcement from Apple

Several Wall Street analysts did not expect Apple to pay out any dividends in the 4th quarter of 2012, as most of its cash is held outside the US. Many US-based large multinational firms planned to pay out special dividends before the hike in the federal tax rates on dividends, but Apple’s participation seemed unlikely as more than $120 billion in cash on its balance sheet is held overseas. Nonetheless, according to Wall Street analysts such as Chris Whitmore of Deutsche Bank AG; Apple being an established player possesses one of the strongest financials, thus it does not operate on small transactional benefits instead focuses on long-term growth.

Apple’s stock price has dipped by 35% since posting an all time high of $702.10. It now seems that investors may be are more concerned with their long-term growth prospects, rather than if the company will pay out dividends the 4th quarter. Wall Street analyst Christ Whitemore expects Apple to increase its pay out by 10% instead of declaring any special dividend. Thus, the disappointment of investors with no dividend declaration by Apple will only reflect in the short-term on the stock price, but going forward it’s going to be the long-term growth prospects in this intense competitive environment that will eventually determine the stock price.

Apple's shares may be undervalued, and have a potential upside of 20% to 25% going forward. The key revenue streams are in line with the original forecast and the recent decline in share price should turn around soon.


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