Is Apple Still A Growth Stock?

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

Given the fact one of the first posts I submitted for this blog was titled, “Why Apple (NASDAQ: AAPL) Is Worth At Least $650,” I couldn't help but question a recent article saying Apple won't hit $700 again. While it's true my original post was from January of 2012, I figured roughly a year later is as good a time as any to revisit my original conclusion. In the article called, “4 Reasons Why Apple Won't See $700 Again,” the author makes four points to show why Apple won't reach its prior levels.

Slowing Growth In Phones
“Growth in phones is slowing as competition increases.” Since the iPhone lineup makes up 56% of Apple's total revenue, a slowdown could cause the company's revenue and earnings growth to change dramatically. However, when it comes to the mobile phone market, Apple is actually gaining market share on a global basis. 

According to recent research, total mobile phone sales worldwide show Samsung in the lead with 22.7% market share, Nokia in second place with 18%, and Apple in third place with 9.2%. Nokia surrendered 5.4% of market share, and this drop was absorbed by Samsung taking 3.1%, and Apple taking almost all of the rest at 1.8%. In addition, ABI research expects 44% growth in smartphones for 2013. Though Google's (NASDAQ: GOOG) Android operating system outsells the iOS, the smartphone race is really between Samsung and Apple.

With Apple growing global market share, and the smartphone market growing quickly, this concern about competition doesn't appear based in fact. If there is a smaller player in the smartphone market that may benefit, it could be Microsoft (NASDAQ: MSFT). This same ABI research shows that Windows Phone may take third place with as much as 3% of the smartphone market by the end of this year.

Shrinking Margins
The author suggests that Apple's margins are shrinking because customers are choosing the cheaper iPhone 4 and 4S models over the iPhone 5. In addition, the iPad Mini is cannibalizing sales of the full sized iPad. One of these issues is real, the other is not. 

The iPad Mini is cannibalizing sales of the full sized iPad. This makes sense because Apple is offering the “full iPad experience,” but at a starting price of $329. So its profit margin shrinks as the average iPad selling price declines. In theory, though, Apple will gain in the end by addressing the previously untapped lower end of the tablet market. Without the Mini, these sales would go to Google's Nexus tablets, Samsung's Galaxy Tab and Note, or Amazon's Kindle lineup. Since the previously mentioned ABI study expects 125% growth in tablet sales for 2013, the additional revenue from the low end of the market should more than offset the cannibalization of the full-sized iPad.

What is not a real concern is the sale of older iPhones at cheaper prices. Older iPhone models have cheaper components, which in turn help Apple to protect its margin. Carrier subsidies do the rest. What is more of a realistic reason for lower margins is, the company has only been producing the iPhone 5 and iPad Mini for a short time. As sales increase, the company can improve production efficiency and improve margins. 

Apple Is A Blue Chip And That's A Problem How?
I won't address the article's third issue, which was the loss of Steve Jobs, because it is what it is. No one can argue Steve Jobs was a brilliant mind, but nothing said about this would be productive. Instead, let's look at the claim that Apple is becoming a blue chip stock and not a growth story. He worries that this would be a “blow to Apple and the cultists who worship the company.” 

If being a blue chip stock means generating cash flow then Apple is doing this like neither of their large competitors. In the last six months, Microsoft grew its cash and investments by 3.05%, and Google grew their cash and investments by 5.92%. In the same six month period, Apple showed a 13.08% increase in cash and investments. In fact, Apple's cash and investments now represent over 31% of the company's market cap. Considering Apple added over $15 billion in the last three months to the balance sheet, this seems almost ridiculously high.

The author seems to assume that a fast growing company can't pay a dividend or buy back shares. The truth is, Apple is being treated much worse than a blue chip stock. Some would argue that Microsoft is a blue chip, and the company's shares have a PEG ratio of 1.15. Others might argue that Google is a different type of blue chip stock, and yet their shares carry a PEG of 1.30. Apple on the other hand, has a PEG ratio of 0.56. If Apple merits being called a blue chip, the shares should carry a PEG ratio of at least 1. Many other blue chips like Coca-Cola or McDonald's carry PEG ratios of near 2 or more. At a PEG of 1, with the current expected growth rate, the author is right shares wouldn't trade for $700. Using these assumptions, the appropriate price for Apple's shares would be closer to $850.

MHenage owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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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