5 Reasons Why You Should Not Buy Apple Right Now

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

Editor's Note: The original post referenced Apple's bottom line and gross margin being flat year over year. The author meant over last year's quarter. This version has been corrected.

Apple (NASDAQ: AAPL) analysts and shareholders alike are constantly laying out stories of Apple's undervaluation and portraying excessively bullish opinions. The erratic Mr. Market is often very wrong and in some cases, for prolonged time periods. However, I am convinced Mr. Market is not far-off by a huge mark when it comes to pricing Apple.

While Apple might have some upside, it’s always a good idea to separate one's emotions (in particular, with big name brands) from investing decisions. Let’s take a look at what might be causing the discrepancy between the company's value and its stock price, if any. 

Dwindling margins

Apple's revenue saw healthy growth, but the bottom line is flat versus last year's quarter. Sales have grown as more people buy iPhones and iPads for the first time. However, over time the addressable market share for selling new iPhones at premium prices is narrowing as it achieves higher global penetration. In particular, its gross margin in Q4 was down over last year's Q1 by more than 600 basis points.

And the company also provided lower guidance for the company's gross margin going forward. Valuation models employed by analysts and investors are very sensitive to margins, and likely, caused a number of analysts to issue bearish views on Apple stock.  

Cash hoard and buybacks

Overly bullish investors are constantly boasting of Apple's cash balance $137.1 billion. However, often ignored is that, a majority of that cash balance, i.e. $94.2 billion, is trapped overseas. Repatriation of this income will eat away a sizable chunk of that cash balance, in the form of a huge tax bill. However, Apple is not alone, Google (NASDAQ: GOOG) has $31.4 billion of its 48.1 billion tucked away offshore. 

In addition, historically, the management teams of many companies have been very good at burning large cash balances by making bad and pricey acquisitions or investing in products that didn't create much value. Too much cash can be a negative as well as they are earning low single digit returns from fixed income instruments.

Also, the company's share buybacks are a way of offsetting dilution from stock compensation, so this is not a catalyst for driving the stock price higher. However, sizable share buybacks at current price levels might be a good idea for Apple. Share buybacks have been a great catalyst for sending the stock price upwards for Yahoo

Size discount

Emotionally driven or just publicity driven analysts can make outlandish calls such as $1111 a share effectively giving Apple a total market cap in excess of $1 trillion. However, it seems markedly different from reality, and falls into the category of wishful thinking. While Apple just might be a trillion dollar company in the long run, the probability of that happening is extremely low. 

When a company becomes so large as Apple, the ability to grow sustainably is often questioned. As a result, investors attach a size discount to their valuation of the company, which results in low price multiples for long time periods. 

Management hiccups

The late visionary Steve Jobs is gone, and with him went Apple's innovation. One might say, but the stock has hit $700 a share, under the new CEO. That is correct, and the only reason that has happened is because the company is still riding on the product life cycle of the iPad and iPhone.

And the Apple's Map debacle didn't assist in enhancing the company's reputation either, even though the impact on revenue was immaterial. Also Scott Forstall, who was a key member during the Steve Jobs era and the creator of iOS was sent packing in late 2012. The impact of Management engaged in a power struggle drastically reduces investor confidence. And rightly so as they are the ones who make the key decisions in creating shareholder value. 

Crown jewel dependence

Over reliance on Apple's crown jewel is the kicker. Taking the iPhone numbers out of the equation clearly shows a completely different company. However, in recent quarters, sales from the iPad line have partially offset the excessive dependence on iPhone revenue. The threat of substitute products and existing competition are very high in the smartphone and tablet market.

Google’s Android powered devices have been performing very well all over the world. The most notable being Samsung and along with the newly rejuvenated BlackBerry, both pose strong external threats for the company. Samsung's growth in net profits over the holiday season was at an astonishing 76% from a year ago.  

As market penetration in developed markets increases, Apple is increasingly reliant on foreign countries for its revenues. And it will be a big hurdle for the company, due to its premium pricing, and the unwillingness of many carriers to subsidize hand-sets in emerging countries.

In growing regions of the world, lower priced devices from Samsung, Nokia (NYSE: NOK) and BlackBerry appeal a lot more to consumers, with relatively lower purchasing power. Nokia, Samsung and BlackBerry all have strong positions in the emerging markets. According to IDC, Apple is the third biggest phone seller in the world with 9.9% market share and trails Samsung and Nokia, who hold 23% and 17.9%, respectively. 

The takeaway

Often, a lot of investors tend to forget that Apple's stock price was above $600 for a few months only, primarily driven by momentum investors. Being emotionally attached to a particular company or stock can have detrimental consequences. Falling in love with a company can be very dangerous, and investors should consider the bearish side without brand bias. 

ishfaque has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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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