What Has Happened to Apple?

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

On Friday, Sept. 21, Apple (NASDAQ: AAPL) hit an intra-day all time high of $705.07. About 4 months later, the company has relinquished its position as the most valuable company in the world to ExxonMobil, and is trading at $439.88, representing a 37.61% drop from September. The company has shed nearly $250 billion of market capitalization in less than half of a year, which nearly equals the total value of Google. What has happened to Apple?

<img src="http://stockcharts.com/c-sc/sc?s=AAPL&p=D&yr=1&mn=0&dy=0&i=t63435340086&r=1359317762085" />

In the months leading up to the company’s earnings report, worries arose about the company losing its innovative touch after the loss of the company’s founder Steve Jobs. Problems surfaced when the company’s replacement of Google Maps was riddled with technical issues, leading to an apology by the company. On top of that, shipping delays were caused by supplier issues, which in turn led to month-long delays for the new iPhone 5.

Most recently, Apple reported first quarter 2013 earnings. For the third quarter in a row, Apple reported revenue and profit figures that fell short of analyst expectations. Year over year, revenues increased 18%, to a record $54.5 billion. However, margin compression lead to profits only meagerly eking out a year over year increase from $13.06 billion to $13.08 billion. A record 47.8 million iPhones were sold, up from 37 million iPhones in the same quarter last year. Year over year iPad sales increased 48.70%, to 22.9 million iPads compared to 15.4 million in the same quarter last year. While these two segments experienced substantial growth, year over year Mac and iPod sales deteriorated 21.15% and 17.53%, respectively. This earnings report sent the stock tumbling 10% the next day. A great deal of the decline in the stock price over the past months could also be credited to a simple pullback from technically inflated levels.

Nevertheless, the company is now trading at a level not seen since the beginning of 2012. After this crazy rollercoaster ride in 2012, what are investors to do with this once-golden boy of their portfolios?

The Case to Sell

From a bearish standpoint, a lot of things are going the wrong way for the company. A year ago, Apple reported a gross margin of 44.7%, which fell to 38.6% in the company’s most recent earnings report. Projected to further compress to 37.5%-38.5% in the 2nd quarter, this trend is a troubling sign for the company. While the company’s incredible margins were destined to fall from their elevated levels, a 600 basis point decline is rather steep, and led to the company’s profit growth nearly going negative.

Additionally, the company is facing increased competition from Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), Amazon.com (NASDAQ: AMZN), and Samsung. Google’s Android platform is fiercely competing with Apple for market share and appears to be gaining slight ground on the formerly most valuable company in the world. Their cheaper alternatives are much more accommodating in emerging markets, and will always pose a major threat to Apple. Microsoft and other manufactures of tablets and laptops are matching the innovative iPad, and are offering tablets and laptops at a cheaper price than Apple. Additionally, Microsoft’s recent launch of Windows 8 could threaten Apple’s iOS platform. Amazon’s cheaper and smaller tablet offering of the Kindle forced Apple to roll out the iPad Mini, which offers smaller margins for Apple compared to the traditional iPad. Finally, Samsung’s Galaxy phones have rivaled the iPhone for years, and further campaigns against Apple are probable. In all segments of their business, Apple is facing fierce competition, which is likely to continue and lead to further margin compression.

On top of that, Apple is caught in the middle of a vicious cycle which is not likely to help investors in the company. Apple is the largest holding of several of the most influential and prominent funds in the world. In many instances, Apple single-handedly made up 15%-20% of total holdings. While few investors were complaining about this lack of diversity when Apple was racing to all-time highs, the downfall of the stock has led to an outcry for diversification, which could lead to millions of shares being dumped, and a panic reflex from the market.

The Case to Buy

At current prices, Apple trades with a price to earnings ratio of 9.98. It is an understatement to say Apple is trading with a rock bottom valuation. A company that just reported year over year revenue growth of 18% is rarely trading with a price to earnings ratio less than half of that of Procter & Gamble and Coca-Cola. This valuation should provide incredible opportunity to investors, and attract value investors.

In addition, the company’s filled with potential opportunities that will probably lead to growth. One of these sectors is the television, which is of “great interest” to the company, according to its CEO. The iTV has long been rumored to be the next game-changing product in the company’s pipeline. Additionally, Tim Cook talked with China Mobile to discuss the future of the companies. China Mobile is the largest telecommunications company in China, and could prove to be a gold mine for Apple in the future.

Finally, Apple currently holds a cash position of $137.1 billion. That is the equivalent of $144 per share, which at current prices makes up nearly a third of the total business. This position has grown exponentially since the fourth quarter of 2011, with $81.6 billion of cash. Not only does having a third of the business backed by cash provide incredible security to investors, it also provides significant opportunity to investors with potential for dividends and stock buyback programs.

The Foolish Bottom Line

Apple has experienced a drastic rise and fall in 2012. Overall, the company is still relatively solid. The massive pile of the cash the company has is incredible, and the revenue growth is still solid. However, margins are the true issue. They have fallen hard and are projected to continue to plummet in the foreseeable future. This will place great strain on the company’s profits. Further margin compression could stem from incessant competition. All in all, Apple is a greatly damaged business, and at current prices is a solid hold.   

makinmoney2424 owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, 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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