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Confessions of a (Former) Apple Bear

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

The Apple (NASDAQ: AAPL) bears are finally enjoying their day in the sun. After years of earnings beats, blockbuster product launches, and rapidly ascending stock prices, Apple has finally taken a breather. And it didn’t take long for the buzzards to circle overhead, salivating at the coming doom.

I can empathize with these bears. Until 2011, I was one of them.

I went from believing I’d never want to own a piece of Apple -- that the stock was a bubble waiting to burst -- to making it the keystone of my portfolio. And despite all the doom and gloom I’ve been reading about Apple over the past several weeks, I remain a firm believer.

Still, it’s important to look at the bear case for the company, because an investor’s opinion should always be open to change based on what you read and see. Let’s take a look at some of the arguments we’ve been seeing for Apple since it started its descent from $705.

The growth story is over. Apple is no longer a juggernaut.
There’s no question about whether Apple can continue to put up 70% year-over-year earnings growth figures for many years to come.  It can’t. The smartphone market will near saturation. So will the tablet market.

As investors, we should acknowledge this. But we should also avoid mistakenly believing that makes Apple a sell. I’ve bought into that before, and paid dearly.

Why? Because Apple is not priced for juggernaut growth. It’s barely priced for growth. Apple is selling at a forward price-to-earnings multiple of less than 9. Compare that to Google’s (NASDAQ: GOOG) forward PE of nearly 16, despite Apple’s wider margins, and Apple looks cheap even if growth slows significantly.

Considering the growth of those two companies over the past several years, you would think Apple would be the stock fetching the loftier multiple.

Take a quick look:

<img src="http://media.ycharts.com/charts/15e9d592fd9a055943087c61e4fdda6f.png" />

AAPL EPS Diluted TTM data by YCharts

But competitors are gaining market share in developing countries. Apple will have to make cheaper products to compete. That means margin contraction.
Again, there is validity in this argument. Apple is at a disadvantage in developing countries, where many people cannot afford the cost of an iPhone and instead opt for cheaper Google Android-based smartphones.

As the smartphone market in those countries grows, Apple’s share could shrink without a lower-end handset. This is surely what fueled rumors of a cheap iPhone, which Apple has since quelched, sort of.

A question for investors to consider is this: Should Apple chase market share in these countries? History tells investors it won’t, and that’s not a bad thing. Apple’s products remain coveted overseas, and are a status symbol in some developing countries.

It could lose market share but continue to grow. And it could do so while maintaining its brand and higher margins.

But Apple’s products are already too expensive.
I once believed this. I now think it’s malarky based largely on Apple's success and not-so-largely on anecdotal evidence around me.

A friend of mine was in the market for a new home computer and said she was thinking about buying a Mac. My response: “You can get a comparable Dell for half the price.” Despite what I thought was a very sensible argument, she chose the Mac and the higher price tag, and she’s never regretted it.

What’s more: She did so during tough economic times, when her employer and industry were laying people off.

As long as there are Americans with disposable income, there will be a reliable market for higher-end products. Not only that, but the companies that sell those higher-end products enjoy wider margins than their competitors. This has been a key area of Apple’s success.

Apple’s products are losing their chic. That will eventually start to hurt demand.
Jim Cramer made this argument on Monday’s Mad Money.

Where’s his proof? His daughter, previously an Apple devotee, has been complaining about how much she dislikes Apple these days.

We’ve heard and read similar stories for years. But if they are true, why did Apple make huge market-share gains in US smartphone sales last quarter?

You want to see a tech giant whose products are no longer chic? Try Microsoft (NASDAQ: MSFT). Despite the company's huge push into the mobile market, heavy with advertising and celebrity endorsements, the Apple iPad reportedly outsold the new Surface tablet 20 to 1 in the December quarter.

Yet even Microsoft manages to sell at a premium to Apple today, fetching a multiple of just under 15.

Here’s a theory: When the price of a stock is dropping and bearish arguments abound, anecdotal evidence that supports those theories make sense. When things are going well, we dismiss them as hogwash. In reality, they’re probably about equally as valid in good times and bad, and probably shouldn’t be too key a factor in our investment decisions.

Steve Jobs is gone. The innovation is over.
This is one argument bulls can’t look to the past to counter.

Jobs was a genius. A true visionary. But even he did not unveil new blockbuster products every year.

The iPod debuted in January 2004. The iPhone came in January 2007, and the iPad arrived in January 2010. These were all revolutionary, game-changing products, all coming three years apart. And here we are three years since the iPad debut, wondering if Apple has lost its ability to produce blockbusters.

With Jobs gone, there are indeed questions about the company’s ability to innovate at such a high level. Investors can reference Microsoft post-Bill Gates as a cautionary tale on how a company can stray without a visionary founder.

But answers to those questions won’t come this month, and they may not come this year. Lack of a new product rollout in 2013 may further skepticism, but it should not validate it.

Hold your breath
It’s been all gloom and doom for Apple investors lately. But losses have come mostly on speculation.  The next earnings report comes Jan. 23. We may start to see some answers to these questions developing. They won’t all be answered this month, but a good report could go a long way to hush my former brethren, the Apple bears.

jekoslosky owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, 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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