Is It Game Over for Apple?

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

A few months ago, we saw Apple's (NASDAQ: AAPL) stock hit record highs amidst expectations that its newest iPhone 5 would be yet another smash hit. Bullish predictions came from right and left with one analyst predicting that the stock price would touch an extraordinary target of $1000 by 2013. But now the company’s stock has fallen more than 35% to $450 levels from an all time high of $705. Is wall street overeating? Lets find out...

So why is the darling of investors suddenly being punished heavily by Wall Street?

Apart from the well known reason of Samsung and Google Android’s dominance, the problem also originates from emerging markets such as China and India, where extremely low cost smartphone producers have thrived over making devices that pack in many of the iPhone's features.

According to research firm IDC, Apple's ranking in China fell to sixth place during the third quarter of 2012, from the number four position in the prior year period. To counter slackening demand, the Cupertino based company even introduced installment schemes in China for its iPhone and MacBook laptops. But I doubt if that by itself would make any significant difference.

So will emerging markets really dictate how Apple will grow in future?

Yes they will. And here's why:

The domestic market for Apple's products has come to a point of saturation. While Apple has certainly captured a good chunk of tech savvy consumers in the U.S, outside this market, there is an entirely different story to tell.

In emerging market economies, such as India and China, many people cannot afford Apple's products. Besides that, consumers in these parts are known to be very price sensitive.

As a consequence, Apple is missing out on the explosive growth present in the mid to low-end smartphone segment. In China, Lenovo, Huawei and ZTE command a large share of the market. In India, re-branded Chinese smartphones are selling like hotcakes. One of India's popular smartphone vendors, Micromax recently announced its plan to release the "Canvas HD" Android Jelly Bean powered smartphone in March this year. The phone would sport a 5 inch HD IPS LCD touchscreen with a 1280x720 resolution, and would be powered by a 1.2Ghz quad core processor. All of this is available at a price under $300 without a wireless service contract.

So as you'd imagine, Apple would have to really think hard about how it is going to win the hearts of consumers and investors alike.

Currently Apple faces quite a dilemma here. If it sticks to selling premium products, then it would have to think of newer ways to make more money. On the other hand, if it enters the mid to low-end smartphone space, it would have to heavily sacrifice on profit margin besides experiencing a possible erosion in brand value.

Does Apple stand a chance at all?

Well, over the past decade we have seen Apple reinvent the way we communicate, listen to music and work or play through mobile and tablet computing. All of this has generated a large pile of cash, to be precise, an eye-popping stockpile over $120 billion. Now all those greenbacks can be put to good use - to fund further research and developmental efforts or even acquire other companies with innovative ideas.

Nokia (NYSE: NOK) wasn't lucky enough to have that kind of cash in its coffers, even though it did enjoy unparalleled brand recognition and a ton of profits in the pre-iPhone years. After a long struggle, the company did finally manage to get back into the black with a small €202 million (approximately $270 million) profit in the fourth quarter of 2012. But even with this great news, it would take a while for Nokia to effect a turnaround. 

Apple isn't like long lost Research in Motion (now known as BlackBerry) either, which after a painfully long time unveiled two new Blackberry 10 based smartphones that miserably failed to impress the market. 

Apple could easily come out with larger Phablet style smartphones similar to Samsung's Galaxy Note or could even come out with an Apple TV among other things. The opportunities are abundant for Apple to exploit and I suspect that CEO Tim Cook is being cautious about revealing Apple’s next big thing, since any premature announcement would certainly tip off the competition.

An attractive valuation

I find it rather funny how Wall Street first used to consider Apple as an unbeatable force, and now thinks that the company is beyond all hope. For a company with great potential and a huge pile of cash on its books, I feel that Apple is currently trading at a great valuation.

To put this into perspective, Microsoft (NASDAQ: MSFT), which still depends mostly on the dying personal computing space, trades at a P/E multiple of about 15 at a price of $27.84. In contrast, Apple which trades at about $450 per share, does so at a rock bottom P/E multiple of about 10. This is a great valuation for a company with lots of potential and truckloads of money.

So should you start thinking about the true value Apple stands to deliver in the future, or follow Wall Street's herd mentality? The choice is yours.

kekidf has no position in any stocks mentioned. 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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