Apple Bears: Does Their Case Hold Up?

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

Yesterday Apple (NASDAQ: AAPL) shares fell a whopping 6.4% in a huge one day plunge. What caused it?

Rumors would have us believe that a part of this was due to Apple not announcing a special dividend. I discount this almost completely, because if investors are truly selling off shares of a company which only recently began paying out to shareholders, merely because they didn’t distribute a large taxable dividend, albeit at a lower rate than next year, then investors are absolutely delusional and it represents a giant buying opportunity.

More likely, this is a lame excuse given out by hedge funds unloading their shares for other reasons.

So now I read more Wall Street hot air by analyst Paul Schatz yelling out bearish scenarios of a 50-70% decline in the stock. Funny how people rarely are chanting these bearish scenarios when the stock is spiraling upwards, but when it’s in free-fall then everyone feels free to chime in.

Our Game Plan

Our game plan is to keep our emotions out of this, and rationally examine the company’s prospects, and determine if the bearish scenarios have any validity. 

Bears’ thoughts

1)      Margins will shrink and the company’s profits will decline with them

2)      Has had recent supply chain problems

3)      Recent questions about Apple Maps and treatment of workers not only in China, but in the Apple retail stores as well.

4)      The company’s growth prospectus is in question.

I have also read explanations of the stock's decline being related to capital gains sales, the “death-cross” (a technical indicator based on the stock’s chart), raised margin requirements, etc. I won't be addressing these because they have nothing to do with the long term viability of the company.

  • Margins

Okay, I myself have been saying for a long time that Apple’s unfathomable margins in hardware are directly related to the WOW factor of their products and being first to market with their innovations. Without new products that knock our socks off, the snob appeal of owning Apple will diminish, and with them, margins.

This is especially true because offerings from Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Nokia, and Samsung have really and truly caught up in terms of quality. Apple has even played catch-up with their necessary move to release the iPad Mini to counter the Google Nexus and Amazon Kindle.

  • Supply Chain Issues-

Yes, it is a problem, but a problem based largely on the massive, massive demand for the iPhone 5. This is something for management to deal with, but of problems and challenges you’d like to have as a business, this is rather welcome.

  • Worker treatment.

No doubt that at some point in the near future Apple will have to be paying their workers in China more, even if it was just a PR move, which it won’t be, because market forces in China are creating an upward rise in labor prices. As for the Apple Stores, the company has fired its retail head. Problem solved? Maybe, something to watch out for though, because one of the things that makes Apple great and customers loyal is the generally wonderful experience in its retail stores.

  • Growth in question?

Hey, there is no doubt in my mind that margins will contract unless a new WOW product is released. However, is growth really in question?

People point out that Nokia just today inked a deal with in the China Mobile to sell its Lumia line that Apple is losing in China all of a sudden.

Obviously China Mobile has a huge number of subscribers but the Nokia phone deal will not be subsidized, meaning that it will cost over $700 to the consumer. According to this video on Bloomberg, Apple will still be carried and the cost subsidized by a smaller carrier. Other analysts predict that China Mobile will also be carrying the iPhone by the end of 2013.

Valuation

Apple has $111 cash per share on its balance sheet and is trading at levels that imply little expected growth; a current PE of just 12, with what is likely to be banner Christmas sales season, plus the rock solid balance sheet make the stock especially juicy.

Smart phone penetration world-wide is less than 50%, meaning there is plenty of room for sales by all, and Apple still owns the world’s most valuable brand, at some point, and we are rapidly approaching it, even with declining margins, Apple becomes a pure value play.

I therefore recommend trying to bottom feed, and adding some Apple shares to your portfolio. Ignore the hype and focus on value.


margiecfl owns Apple, Amazon, and Nokia. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, 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!

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