Apple's Decline and the Opportunity it Provides

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

Apple's (NASDAQ: AAPL) share price has recently taken a tumble. But with the kind of available cash that they have, entering into a whole new market seems likely, and with it the rebirth of their stock. 

A Lot of Time on A Few Great Things

Apple's latest commercial is less about advertising a product than it is advertising the company. It's not a commercial for the latest iPhone, iPad, or Macbook Pro--it's a commercial for Apple as a whole. A company that "spends a lot of time on a few great things" (quote from commercial), and it's so true. The commercial is almost a tearjerker. With soft piano background music going, it highlights the most joyful parts of life; looking at a child's face light up, a couples' love, and grandparents looking back on the incredible life they've had. If you haven't had the chance to see it, I suggest you do:

Recently Apple's share price has steadily gone downhill, from a high of around $700 to $400 today. This is not because the company is dying, It is because Apple has done such amazing things that everyone expects it to continue to outperform in incredible ways. Profits have stopped their upward climb, and are expected to be about the same as they were last year. This is not something that should be taken lightly. It's never a good sign when a company's profit growth stalls. This is the company's lowest rate of profit growth in decades. 

Even though this is the case, I'd pay 10x earnings forever, even if they do stay flat. And if Apple hits the next big thing, which they've been known to do, I'll be sitting pretty. With downside protection and upside exposure, what's not to like? Profit margins have only slightly decreased, while still easily above 20%, compared to Microsoft's (NASDAQ: MSFT) profit margin of around 29%, up from 21% the year earlier.  So is it fair to count Apple out of the race?

Competition is the Best Motivation

The P/E of Apple is 10.08, while Microsoft's is 17.56. Microsoft provides the competition in computers, and Google (NASDAQ: GOOG) provides competition in operating systems, and if anything, this is a great thing. Apple has always been ready to take on anyone, fighting for a chance ever since Steve Jobs and Steve Wozniak founded the company. If you're wondering which of these investments to make, let's look at their market caps, P/E's, and historical share prices. Then we'll look towards the future.

Microsoft's market cap is far smaller than Apple's, at $284 billion compared to Apple's $395 billion, while Apple's P/E is also lower, as previously mentioned. Google has a P/E of 26 and a market cap of $293 billion. With better price to earnings ratios and a larger market cap than both its competitors, Apple is cheap. 

This isn't even taking into consideration the products. iOS has been hailed as perfection, while Windows 8 has received more complaints than any of the previous Windows operating systems. Apple sold 34 million iPhones in the last quarter, while Google Android accounted for 156 million phones. Apple increased its market share of phones by 1.4%, to 39.2% in the time between January and April.

The reason Google Android has such a large market share (45.9%) is because they provide operating systems to LG, Motorola, HTC, and Samsung. Apple, however, makes more money per phone. Apple has a 70% profit margin per iPhone, and sells around 48 million iPhones. At an average price of $300 per iPhone, Apple takes away $210 per iPhone. $210 times the 48 million iPhones sold is 10 billion dollars from phone sales alone. 

Android may have a large share of the market, but this isn't to say we should count Apple out for future products. The way Apple is run has always been "different," and they have a track record of coming out with products that revolutionize markets. They aim for the emotions, and their most recent commercials exemplify that. "The experience of a product, how it'll make someone feel. Will it make life better, does it deserve to exist?" (quote from commercial). I can't imagine comparing Apple products to those from Microsoft and Google after that commercial. Apple is saying that Google's Android may have a larger variety of products, but Apple makes products that "deserve to exist." That's bold. 

Anything's Possible With an Imagination (And 130 Billion Dollars)

Google has begun developing self-driving car, so will Apple jump in on the high tech automotive industry as well? With almost $130 billion in free cash, Apple has the power to launch into any market it wants to.  With such potential comes great responsibility, but we all know that, "Until everything we touch, enhances each life it touches. Only then do we sign our work" (quote from commercial). Apple has been very expensive for a long time, which means that this dip could be the time to buy. A quick look at Apple and its competitor's SEC filings shows that Apple is cheap. Get on board this train while you can. 

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Joel Wasserman has no position in any stocks mentioned. 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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