Apple: A Risky Play

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

“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”

--David Tepper

Apple (NASDAQ: AAPL) is going through the kind of phase where right now the best action is to do nothing. Why? While the bulls talk about the iPhone 5's success, the desperately low PE ratio, and the debatable consumer loyalty, the bears disagree with these three points profoundly. Here is a bearish reply on the three things bulls are putting their money on:

iPhone 5 Success will show up in the next earnings report

I hear comments like this everywhere- “iPhone 5 has been selling like hotcakes,” “people have been standing outside shops.” While I don’t disagree with all the enthusiasm and successes, I would like to talk in relative terms here. According to a report by AllthingsD, “the iPhone 5 accounted for 68 percent of total iPhone sales during its first month at market — significantly less than the iPhone 4S, which accounted for 90 percent of all iPhone sales during its first month of retail availability.” While the iPhone 5 wasn’t exactly a flop based on these stats, it can be inferred that consumers are still buying the previous models, and the main reason could be that they consider the Apple 5 release to be some sort of a “reverse innovation.” Add to that the effects of such a trend continuing forward. The increased sales of the iPhone 4S/4G in the product mix is necessarily diluting the ASP’s, whose effects could be seen in the next earnings. So, I won’t be too positive about that.

Consumer Loyalty will help Apple

When someone says such a thing as a logical reasoning to pitch for a stock, I necessarily feel a trauma. Why would a customer stick to a brand if he doesn’t get value? Loyalty is fickle. I was loyal to Blackberry once because they made the best Smartphone at that time. I had also been loyal to a lot of other things at different intervals of time. Does that mean I can’t be called loyal? No, it means that I try to spend my money in the most suitable way on the best product I can afford. It was easy being loyal to Apple when they came up with the original iPhone and its subsequent releases because it was the best product in the market by a large margin. But now the scenario has changed. While there are a lot of debates going on that Android stole from Apple, one cannot deny that these two platforms are standing head to head right now when it comes to functionalities, and that provides the customer with choices. A consumer now has a choice to buy a more functional and customizable Google’s (NASDAQ: GOOG) Android phone at a lower price, compared to Apple’s expensive and user friendly platform. And that makes the customer the king again, removing Apple from its long held position on the throne.

The Low PE ratio

Apple currently trades at a low PE ratio of 9.24, and we can hear bulls arguing that they can’t estimate how the market could be so partial to Apple when it gives a PE of 14.7 to Google. The fact that I would like to emphasize here is that “we are the market.” It is we who control the market, and not the other way around. The consensus estimates Apple's EPS ending in December will be $13.32, compared to last year's EPS of $13.87 in the December quarter, a decrease of ~3%. The market, meaning we, took into account this -3% decrease in EPS year over year and that’s why paying 9.24 times forward estimates still looks too expensive for a company that has started heading in a negative direction. The market has little confidence in Apple's capability to increase its future cash flows, and hence I believe that the current low PE is justified.

Also, I believe that Google’s high PE is justified considering the diversity of Google’s portfolio and the range of businesses in which Google operates. Google is in the process of becoming an all round internet solution, as it has been expanding its functionality from Search to restaurant reviews with Zagat, travel assistance with Frommer, and possibly the social space with Google+.

The Bottom Line

Apple is not going anywhere, and the growing debate between the bulls and bears is not going to help the stock. With so much speculation around the company, its share's are going to be volatile for some time and not a safe investment haven as it has been in the past. So, the best course of action right now seems to stay away from the stock and let your money work elsewhere.

gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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