Is Apple a Buy Right Now?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Has Apple (NASDAQ: AAPL) reached the end of the line as a growth company? Is it time to cut bait, nestle Apple in as a nice blue-chip stock and move on? The company is reaching levels that weren't thought of 10 months ago (at least not this quickly anyway), the discussion will likely begin in earnest: is Apple a buy?
Is this company the same company that was the most valuable company in the world less than a year ago?
Before you answer and figure out your position on Apple, let's look at the bears and bulls on this stock:
An optimistic bear
Earnings have been down, as Apple reported $7 billion in net profit in Q3 -- representing an overall drop of 22% compared to last year’s profit of nearly $9 billion. The flagship device, the iPhone, is not an innovative market-changer anymore. And with more intense competition and cheaper phones on the horizon, it's hard to argue for the premium price of an iPhone. The legendary, lofty profit margins Apple is known for are shrinking and likely will continue to fall, but if a budget iPhone is on the horizon, Apple could substantially increase the more important number: revenue.
The light at the end of the tunnel
There's no denying, Apple has had a incredulous year. The aforementioned proves that. But is the light at the end of the tunnel starting to become visible? Apple said last week that its revenue in Greater China, which also includes Hong Kong and Taiwan, slumped 43% to $4.65 billion from the previous quarter. Not to mention, Samsung (NASDAQOTH: SSNLF) is whipping its American rival.
One of the largest competitors is Google's (NASDAQ: GOOG) Android phone. The iPhone vs. Android debate is a staple within the tech community; most users will loyally tell you why their respective devices, and theirs only, are the far superior choices. In a recent study conducted by Google, results showed that 56% of adults were using a smartphone, up from 33% in early 2012.
Not only does this show the growing marketplace for smartphones, but also the ever-increasing cost-centric consumer. Samsung's Galaxy S4 and HTC's One are considered two of the best Android phones you can buy today, however, they come at a price. The HTC One costs $599 and the Galaxy S4 costs $649 without a contract. As mentioned above, consumers are becoming more conscious about the price of goods -- giving Apple an opportunity to capitalize in the countries more focused on price rather than the latest operating system with its cheaper models.
One of the proponents of Android, Samsung, recently reported record profits and sold more than double the amount of handsets compared to Apple. The South Korean giant now has 19% share of the $80 billion smartphone market in China, a market expected to surge to $117 billion by 2017. However, most people do not realize that Samsung, with a longer history in China, has three times the number of retail stores as Apple. Tim Cook announced plans to double the number of stores in China, but that will only solve part of the problem.
The budget iPhone
Considering that China is the largest mobile phone market in the world, a growing presence in China would reap dividends for Apple, but the Chinese demographic is focused on more important feature that Apple has yet to tackle: cost.
Apple has toyed with the idea of a low cost iPhone, but no concrete plans have ever followed. Android handsets are approximately two-thirds cheaper than Apple's iPhone and the Chinese market is the fastest growing market in the world. While Apple releases only one smartphone a year, priced at the premium end of the market, Samsung brings out multiple models annually with different specifications and at different price points in China. A budget iPhone may hurt Apple's revered profit margins, but it certainly will not hurt the bottom line.
Consider the case of the iPad Mini, priced at $329 (considerably lower than the most expensive 64GB iPad, priced at $692.99). Although more expensive than the Nexus ($199) or the Kindle Fire ($249), the product made it big on the market share of mini tablets. The same scenario could be true for a budget iPhone.
Despite the surge of Android phones, the tech market is about consumers. And consumers are looking at the price of the device, especially the Chinese. If Apple can make a mid-range phone that is very similar to an iPhone and does not cut many corners (but lowers profit margin), Apple could finally have the break that it needs.
The stock is cheap, as represented by it's P/E ratio, and the company is still solid, even if the phones aren't revolutionary anymore. The quality is still good, and if the speculation of a budget iPhone in the fall of 2013 is true, Apple could become its old self again.
Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, “Apple Will Destroy Its Greatest Product.” Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.
Chris Johnson has no position in any stocks mentioned. 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!