Apple Lost Some Allure, But Still Worth a Bite

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

After posting record revenue of $54.5 billion in its latest quarterly earnings report, up 18 percent from $46.3 billion for the comparable period of last year, Apple (NASDAQ: AAPL) has lost favor with investors.

Even though revenues are up for the period – the first quarter of Apple’s fiscal 2013, which ended Dec. 29, 2012, saw the company’s costs also rise resulting in net income stagnating at about $13 billion and earnings per share dipping to $13.81, from $13.87 for the 2012 fiscal first quarter. Apple explains that the 2012 first quarter comprised 14 weeks, compared to the 2013 quarter’s 13 weeks, which means that the company’s results are not so bad. Also, some of the rise in costs is on account of additional research and development expenses, which could bear fruit in the long run.

Even then, the stock was down more than 12 percent from $514 on January 23, prior to the release of its first quarter results, to $450 on January 24,  and closed at $453 on February 1.  At the current price, the stock is also down more than a third from its 52-week high of $705.

So should investors see this as an opportunity to get in on Apple, an innovator par excellence whose products are snapped up by consumers worldwide?

Based on geography, the company’s sales grew 15 percent in the Americas, comprising both North and South America, and 11 percent in the Europe region (which also includes the Middle East and Africa regions), while sales in the Asia Pacific region (including Australia and Asian countries) were also up 10 percent.

Apple’s best showing was in the Greater China market (which includes China, Hong Kong and Taiwan), with sales leaping 67 percent, and in Japan where sales were up 25 percent, even though the country has faced economic stagnation for years.

Looking at sales by product, the company reports that sales of its iPhones for the quarter, based on number of units sold, were up 29 percent, while iPad sales jumped 48 percent. On the other hand, sales of Apple’s Mac products were down 22 percent and iPod sales declined 18 percent.

It appears that while consumers have had their fill of Macs and iPods, which have been available for a long time, it is demand for the relatively new iPads and iPhones that is driving growth for the company. As Apple executives pointed out on their quarterly earnings conference call, the iPhone’s share of the smart phone market in the U.S. gained from 45 percent in the 2012 fiscal first quarter to 51 percent in the current period.

And a cannibalization effect is also in evidence, whereby iPhone sales cut into iPod sales and tablet sales cut into Mac sales.  However, the company also sees the PC cannibalization as opportunity to gain more of a presence in the Windows market, which is much larger than the Mac market.

While the company is optimistic about its new product pipeline, the credit goes to Steve Jobs for building up the Apple brand and rolling out its various product offerings in the past.

It was Jobs who conceived the company’s “digital entertainment hub” strategy, whereby a consumer could use Apple’s computers for much more than mere computing.  Jobs was behind the launch of the iPhone, the iPod, the iPad and the Apple retail store concept. His penchant for perfectionism helped drive the company’s efforts. It is telling that the Apple maps application fiasco happened as the company moved forward without Steve Jobs at the helm, with Apple users complaining that the application was unreliable. 

Another negative factor is that the company anticipates that its gross margin will decline in the future as its costs go up while its new products are priced competitively to attract buyers in an increasingly aggressive marketplace.  

And there is some concern that mobile phone service providers could provide less of a subsidy to consumers in the future as competition in the aggressive smartphone arena heats up. Typically, consumers get to buy the iPhone at a discounted rate in return for entering into a service contract with the phone service provider.  If this subsidy goes down, consumers may hesitate to pay a higher price for the iPhone.  And it appears that Apple may also have less leeway to bargain with suppliers too as competition in the digital smart devices arena heats up.

On the other hand, at its current price, based on earnings per share of $44.64 for 2012, Apple trades at a reasonable price-to- earnings of 10.19.  On a forward P/E basis of 8.75, the stock looks even better. And the stock provides a respectable dividend yield of 2.3 percent in today’s yield-strapped environment.  The company has also committed to spending as much as $10 billion, over a three-year period beginning in 2013, to buying back its stock, which will likely provide support for the stock price.

Investors who expect the company to keep up its past rate of growth may not be too happy in the future. However, it is likely that Apple will continue to provide a steady yield, and investors can still hope for growth. Certainly, there is scope for growth, particularly in developing countries as consumers become more able to afford Apple’s stylish products as their incomes grow.

 

 


Fool blogger Poonkulali Thangavelu does not own shares in Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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