When Will Apple Be a Buy?

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

Apple (NASDAQ: AAPL) has had a bad case of mean reversion. After nearly a decade of beating the market, Apple has lagged the indices for almost a year. When will Apple be a buy?

The competition

While long known for having technological prowess, Samsung  (NASDAQOTH: SSNLF) has proven to be an equal of Apple in the marketing category by willing to spend whatever it takes to build a great mobile brand.  While the Samsung galaxy S4 has not been a smashing success, it has taken significant market share from Apple iPhone.  Samsung is also showing that it is making inroads with Galaxy Tablets and looks poised to compete in the TV arena as well. Last quarter, Samsung also beat Apple by taking most of the profit for making mobile phones.

Google (NASDAQ: GOOG) has a dominant market share of internet search, the web's operating system. It is has nearly an equally dominant share of the mobile operating system with Android. With YouTube, Google has a potential to monetize as the $60 billion dollar a year TV industry as shows slowly migrate online.

Google has also shown that it can develop new products. Google is also launching the very first wearable tech product, Google Glass next year. While it remains to be seen whether Google Glass will be a hit, Glass defintely has the potential to drive Google's bottom line. Google also has several other promising projects include Google Fiber, an uber-fast 100-GB internet service, and self driving cars. Last but not least, after purchasing Motorola, Google will be stepping up competition against Apple in smart phones, TV's, and wearable watches.

While not cause for present concern, Apple will also have to contend with the strengthening of Chinese phone manufacturers Xiaomi, Huawei, and ZTE.  As the three Chinese phone manufacturers learn the marketing ropes and work their way up the ladder, Apple will see its Chinese revenue growth slow. The Chinese government has also shown through various state TV shows that it will support its domestic cell phone companies at Apple's expense. Since China is Apple's second largest market, and the primary driver of Apple's top and bottom-line growth, Apple will most likely see its Chinese growth curtail in the future.

Strengths

On the plus side, Apple has significant software lock-in, a world class brand, and very talented employees. Its wide moat should allow it to produce steady profits for the foreseeable future. Apple management has shown that it does care for its investors by promising to double its stock buybacks from $45 billion to $100 billion while raising the annual dividend to 3%. Perhaps the greatest reason to be optimistic about Apple is that the dearth of new products will soon be over. 

iWatch

Apple is scheduled to launch a wearable watch in either late this year or 2014. Citigroup analyst Oliver Chen predicts that Apple will capture 10% of the $60 billion a year global watch industry. With a likely price range of between $200 and $500, Apple iWatch is set to compete against the affordable luxury brands of the market such as Tommy Hilfigur and Calvin Klein. With a great brand and loyal fans, Apple should have no problem hitting the 10% mark.  If Apple could transform the industry like it did smart phones and music players, the top line and bottom-line implications could be far higher. 

iTV

According to market-research firm IHS Electronics & Media, the TV market is a $119 billion a year opportunity. While the details are not out, Topeka Capital Markets analyst Brian White believes that iTV will be 60 inches and priced for the high end of the market with a price of between $1500-$2500. While Samsung with 29% market share and LG with 15% market share are the current market leaders, Google with its Motorola division and Apple could take a significant chunk of that market.

No analysts have given potential market share estimates for iTV, but I believe Apple will get 15% of that $119 billion dollar market. Apple has shown that it can take market share away from entrenched competition before with the iPhone for the mobile phone category. Apple has a strong track record of melding technology with fashion and using its brand name to successfully take the high end of nascent tech markets. If Apple captured 15% of the TV market and maintained a 30% profit margin, Apple should see an extra $18 billion in revenue and $5 billion in profits. More importantly, iTV would add to the Apple moat and give new customers more incentive to purchase higher margin Apple iPhones, iMacs, and iPods.

Conclusion

Although Apple's stock has gone through some troubles over the past year, the future for Apple is still bright. With the inevitable launch of Apple iWatch and iTV, I believe Apple shareholders will be rewarded for their patience. 



Jason Bond has no position in any stocks mentioned. 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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