Editor's Choice

Breaking Down the Apple Rumors

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

Anyone who follows the markets can tell you that Apple (NASDAQ: AAPL) has been one of the worst performing stocks of the last six months. At a time when the Dow and S&P seem to be making new highs daily, Apple shareholders are spending the days hoping that their 38% drop from the highs doesn’t get any worse. With all of the rumors flying around, which are actually likely, and more importantly, what impact will they have on the company if they actually happen?

Performance

One thing that we can definitely not assume is that Apple’s stock performance will make sense. Currently priced for zero growth, not even including cash, shares are now trading in single-digit P/E ratios. Even the lowered consensus estimates are calling for growth of 12.8% next year and 12.1% the year after that. As I’ve said before, if the market made sense, we would all be rich! On to the possibilities…

Dividend Increase

Of all of the possible scenarios, this may be the most likely to happen soon. If there is a dividend hike, I would expect Apple to raise the yield to around 3.5%. I don’t foresee a dividend raise causing the shares to rise tremendously; however, what this does do is create a price floor. As stock prices fall, yields go up, so this effectively limits the amount that Apple can fall before the yield gets high enough to attract new buyers. The "price floor" effect may boost the share price a bit, but I think the cash stockpile could be put to better use.

Likelihood (scale of 1-10): 8

Buyback

This is the way that I would prefer Apple to return capital to shareholders, and in my opinion would create much more confidence than a dividend increase. Although Apple currently has a buyback in place, it is just enough to negate the effects of stock options maturing.

If Apple were to come out and throw substantial cash into a buyback, it would be akin to them saying “We think our shares are trading at a deep discount right now, so instead of just handing back cash to shareholders, we want to take full advantage of this bargain!” I think this will do much more for the share price than a dividend hike of an equal amount.

Likelihood: 6

Other Ways Apple Can Return Cash

There are many other ways Apple can put its cash to use, and the most speculated is the takeover of a big company. I don’t think this will happen, but it’s entirely possible. Unless Apple sees a tremendous opportunity, for example, taking over Pandora Media (NYSE: P) to get a stronghold on internet radio, I think Apple’s cash could be put to better use.

Likelihood: 2, but there are some interesting possibilities

Radio

Speaking of internet radio, there has been a rumor going around for some time that Apple is going to try and enter this market. While I think they will make some sort of internet radio product, shareholders of Pandora shouldn’t be too worried. I see Apple’s internet radio offering as a nice additional feature for users of their products, not a market-dominating radio service.

The problem with trying to take over too much of Pandora’s market share is simple: Pandora got it right the first time. I simply can’t see Apple Radio’s content delivery, or the cost of their premium service (if there is one) to be any better than Pandora’s. However, an Apple radio service will be a small benefit to the company’s loyal users, but probably not much help to their bottom line, or their share price.

Likelihood: 8

iWatch

I’m not as psyched about the possibility of a watch-like device from Apple. While it could indeed be useful and trendy, my fear is that it will take business away from Apple’s other products (why buy an iPod Nano for working out if my music is on my wrist?). However, the news of Apple putting out a new, innovative product may be enough to boost the share price back to the $500 range. I just don’t see this adding a ton of revenue over the long run.

Likelihood: 7

iTv

This would be the Holy Grail for Apple shareholders, if it is done correctly. If Apple produces a big-screen LCD with a razor-sharp display and great features at a reasonable price (most important), it could be a game changer for the company. However, I think that the TV is further out than people assume, simply because Apple will be looking for a cost-effective way to make the TV. The effect of this on the share price would depend on just how cool and affordable the final product is.

Likelihood: 7+ (but not for another year)

Cheap iPhone

A cheaper iPhone would be nice, but I really don’t see it happening without a China Mobile deal. It is simply not worth developing and producing a lower-cost device for use in the emerging markets if half of the Chinese market is unreachable.

Likelihood: 3 (without China deal)

China Mobile Deal

This deal, combined with a lower-cost device, could really help Apple’s revenues. I think that a deal with China Mobile is coming this year, and the company will announce a low-cost iPhone soon after. A lower cost device and access to the entire Chinese mobile market could mean sales of 100 million + new devices in the first year. A deal and a lower cost phone could mean a significant increase in the share price in the short term, and more importantly, higher growth over the long run.

Likelihood: 7 or 8

A “real” Game-Changer

What Apple truly needs to continue its historic growth story is a game-changing product that no one has even considered yet. For example, Apple has hired most of the engineering team that designed the Segway, including their robotics expert. What could they be building? Who knows? Maybe Apple is designing an iCar?

Not that I think an iCar is likely, but my point is that no one really knows what is under development at Apple headquarters except for a select few people. If Apple’s next product turns out to be a game-changer of the same magnitude as the original iPhone, they sky is the limit.

Likelihood: 2 (within the next year)

Conclusion

So, why invest in Apple and not one of the other companies with rumors of innovative future products, like Google (NASDAQ: GOOG)? First of all, Google tends to brag more about what they are working on. Although it is still almost a year away from being available to the general public, the details of Google’s wearable computer are well known, and have already been analyzed in terms of marketability and have been priced into the stock, which has been soaring over the past year.

In fact, Google is starting to look like Apple did last year at this time. I think Apple makes the better investment by far at this point. Yes, it’s a mystery as to what their engineers are up to, but at less than half of the P/E of Google, for my money it’s worth betting that they are up to something that will produce a little more growth than you’re paying for by buying the stock.


Matthew Frankel owns shares of Apple. 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!

blog comments powered by Disqus