How Do You Like Them Apple(s)?

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In recent weeks I have come across a plethora of articles that try to defend Apple's (NASDAQ: AAPL) recent tumble in the stock market and reassure readers that the company is still worth having in your portfolio. What has changed for Apple? Will Apple continue to rise in 2013? Let’s analyze these issues.

Apple and NASDAQ

First, let's examine the recent development of Apple compared to the market. The NASDAQ has under-performed Apple during the year despite the recent fall in shares of Apple. During 2012 Apple rose by 26.5% while the NASDAQ increased by 13.7%. The chart below shows the developments of these indexes during the year (prices of normalized to January 3rd, 2012).   

<img src="/media/images/user_12845/apple-nasdaq-2012-dec_large.jpg" />

How has the company performed during the year? To examine this issue, let's check the company's profitability and growth in revenues.

Profitability

The company's profitability isn't much higher than that of other leading high tech companies. In this regard, it will be difficult to compare Apple's performance to other leading phone companies because most of them (excluding Samsung) aren't doing well. Therefore, I choose to compare Apple's profit margins to other high tech companies that have a very strong hold in their respective market (some might even say these companies have a monopoly in their industry).

In particular, I have chosen Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG). As seen in the chart below, all these companies' profit margins in recent years was between 25% and 40%. Apple's operating profitability has increased this year (up to September) and may exceed the operating profitability of Google and Microsoft. Nonetheless, all three companies have had a consistently high profit margin in recent years. Therefore, the main factor that puts Apple over these companies, besides its higher market cap, is its recent growth in revenues.

<img src="/media/images/user_12845/apple-and-google-profitability_large.jpg" />

Growth

Despite the many positive attributes of Apple, the bottom line is that this company has a very high volatility and the main reason for holding such a risky asset (assuming rational expectations with all the problems related to this assumption) is a high return. Since Apple seldom pays dividends (its recent dividend payment didn't result in a high yield) it comes down to the appreciation of its stock. One of the main factors that could pull up the company’s stock price is growth in Apple's revenues.

As seen in the chart below, the company's revenues spiked in 2011, and the growth in revenues slowed down in 2012 compared to previous years.  

<img src="/media/images/user_12845/apple-and-google-revenues-growth_large.jpg" />

So will Apple continue to grow as it did in recent years? There is no clear cut answer. The company seems to exhaust its growth in sales from the current products it sells. The rise in competition in the smartphone and tablet markets contributed to the slowdown in Apple's growth in sales.

If Apple won’t come out with a new product, its growth will only come from relaunching its current brands including the iPhone 6, the iPad 4 and more.

If the company will be able to come up with a new product such as iTv, iPrinter, iGoggles or any other product, then the company’s sales will reach new highs; otherwise, the company’s growth will level out as was the case for former growth companies such as Google and Microsoft.

Apple’s success could have partly been a matter of luck; if so, there will be a regression to the mean as was the case for numerous companies in the past (e.g. Microsoft). The bottom line is that Apple is likely to further grow but unless it will come up with a new product that will open a new market, then its growth rate will dwindle and so will its stock.

For further Reading: Is Exxon Due for a Rally?

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.


liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend 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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