The Bullish Case for Apple

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

Apple’s (NASDAQ: AAPL) shares have been mired in a downfall, falling from a high of $705 to barely piercing the $400 mark again. The question many investors are asking: is Apple a buy?

Valuation

Currently valued at 10 times earnings, the stock appears cheap. It looks even better when you back out the $145 per share it has in cash, giving it a valuation for current operations of 6.5. That also doesn’t include Apple’s brand, second only behind Coca-Cola on the world’s most valuable brand list, or its property, plant, and equipment.

From a valuation standpoint, it appears very cheap.

Diminished Expectations

Have you read all the bearish scenarios for Apple? All the diminished expectations? I certainly have. I don’t believe bearish sentiment has reached an all-time high yet, but it’s on its way there. The point being, at some point expectations become so diminished that an upside surprise has the ability to propel the stock upward rapidly.

Apple’s yield of near 3% makes it a buy for many dividend investors, and as the yield increases while the stock drops, it puts a floor in place for the company.

New Products

Is no one listening to CEO, Tim Cook, who has made repeated references to the new, game-changing products Apple has in its pipeline? Is the Street really so profoundly negative on the company that it discounts such statements entirely?

I grant you that Apple is scrutinized far more than other companies. Management put an incognito ad out for a plastics engineer in the help wanted section and it got traced back to the company. The Internet rushes to evaluate any leak that might spring, making it very very difficult for Apple to keep things a secret. But, despite this, it’s not beyond the realm of possibility that Apple has a game-changer holstered and ready to be released in the, hopefully, not-so-distant future. I'm not ready to discount Tim Cook completely.

iTunes Radio

Though admittedly behind the curve, this offering does help strengthen the Apple ecosystem in its fight against streaming services like Pandora (NYSE: P) and Spotify, which continue to eat away at iTunes dominance in music.

Interestingly, Pandora has increased in value since the announcement, and while I feel Apple should open up all aspects of iTunes to Android and Windows phones, rather than keeping it within Apple’s walls, I am hopeful of the direction the company is taking in releasing the product. That's despite the fact that iTunes radio is estimated to contribute only half of a percent to revenue.

Nevertheless, most analysts don’t believe iTunes Radio to be a large threat for Pandora. 

Competition

Yes, it is absolutely true that Google’s (NASDAQ: GOOG) Android OS is dominating in market share around the world, and Android has progressively gotten better. Google and Samsung are Apple’s biggest competitors, and are in the process of eroding Apple’s margins. To be sure, Google got the best of Apple in maps as well, but Apple’s product, like Google, will get better the more it is used.

However, Apple still dominates the cell phone market in terms of profitability. Also, in terms of parallel investing, one must look at Google's 0% yield, and shares trading at a 27 P/E ratio. This indicates that Wall Street is expecting serious growth from the company, and a downside miss could send the stock spiraling downward, whereas with Apple, diminished expectations are priced in. Of course, for Pandora, overall listener hours came in at 1.25 billion for June 2013, a 17% increase from 2012, but that's off from May 2013's 1.35 billion hour total. Pandora's overall share of radio listening also decreased between May and June, dropping modestly from 7.29% to 7.04%.

Does this mean that Apple is late to the party in a crowded field? Will Apple loyalists bother to switch their listening preferences? 

Final thoughts

Apple is incredibly cheap, valuation-wise, and from that standpoint it seems like Wall Street is pricing negative growth into the share price. With cash on hand and a high yield, creating a sort of floor for the company’s shares, and diminished expectations creating an environment where an earnings beat will send shares rapidly higher, we have created an environment where there is more upside than downside.

Additionally, as I suggested, I believe the Street is completely ignoring Tim Cook’s repeated references to game-changing products in Apple’s pipeline.

For all these reasons, I consider Apple a "buy."

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Margie Nemcick-Cruz owns shares of Apple and Google. The Motley Fool recommends Apple, Google, and Pandora Media. 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!

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