This is a Good Time to Bite Apple

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

Apple (NASDAQ: AAPL), which used to be a darling of a stock market, has been beaten down heavily for the last 4 months, as shares have lost more than 36% of their value. Recently, the first quarter 2013 earnings results have dragged Apple down much further to only $463.50 per share, a loss of nearly 10% within one trading day. Is Apple a good investment opportunity at the current price? Or should investors avoid it for good?

A Quarter That Beats Expectation

In the first quarter Apple recorded $54.5 billion in revenue and $13.1 billion in quarterly net profit.  The EPS came in at $13.81, much higher than its own guidance of $11.75 and analyst estimates of $13.48. The operating cash flow generated in the first quarter was $23 billion. In the quarter, around 47.8 million iPhones were sold, a 29% year-over-year growth on 37 million sold iPhones last year. However, the number of Macs sold has reduced from 5.2 million last year to 4.1 million this year.  In total, Apple reported to have more than 75 million iOS devices sold in the recent quarter. The company declared a cash dividend of $2.65 per share, payable on Feb. 14 to shareholders of record on Feb. 11. At the current price of $463.50 per share, the forward dividend yield is 2.28%.

David Einhorn is Getting Bullish

Hedge fund manager David Einhorn has been quite bullish about Apple. As of September 2012, Apple was the biggest position in his portfolio. He owned more than 1 million shares of the company, accounting for around 12.2% of his total portfolio. In the fourth quarter, Apple’s share price dropped significantly, from $667 to more than $532, giving back all its third quarter gains. Einhorn said that he took advantage of the lower prices to buy more shares, which he had sold in the third quarter. He believes that Apple could hit $1 trillion in total market capitalization. For him, Apple was not a hardware company, but a software company. In order to use Apple’s operating system and software such as iOS, App store, and iTunes, users have to buy an Apple product. As we have witnessed, consumers with one Apple product want to have more Apple products. David Einhorn wrote in his second quarter letter to shareholders, “Rather than view AAPL as a hardware company, we see it as a software company that monetizes its value through the repeated sales of high margin hardware.”

But Increasing Competition

However, Apple has begun to face increasing competition from other players in the market. Research in Motion (NASDAQ: BBRY) is beginning to recognize the importance of the software segment. Its CEO, Thorsten Heins, said that RIMM was reviewing several options including selling its handset business or licensing its software to other companies. With the good feedback from more than 100 network operators, Heins believed that it could be the alternative to iOS and Android. Microsoft’s (NASDAQ: MSFT) Windows 8 has been following the licensing strategy, licensing the operating system to HTC, Nokia and Samsung. As of January, it reported that around 60 million Window 8 licenses have been sold to OEMs.  In terms of smartphone operating system, IDC reported that with 18.8% market share iOS ranked second, after Android with 68.3% of the market. Windows Phone’s market share was only 2.6%, but was expected to grow rapidly to 11.4% in 2016.

My Foolish Take

Even with the increasing competition, I think Apple could be bought due to value reasons. It is currently valued at only 10.5x trailing P/E. In addition, the ecosystem that Apple has built over time with loyal users would benefit Apple in the long-term.

hoangquocanh has positions in Research in Motion and Apple. The Motley Fool recommends 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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