Will Apple Ever Really Be "Overpriced"?
Maxwell 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) recently won a jury verdict over South Korea's Samsung Electronics (SSNLF) in a patent infringement matter that had long been watched by industry observers. The Apple win occurred in a federal courtroom just a few miles from Apple headquarters. The significance of the “homecourt” advantage is apparent when one considers that one day earlier, judges considering the same exact issues in a Seoul courtroom came to the conclusion that Samsung's designs did not infringe on Apple's patents. I don't have a dog in this fight, and love my 4G LG device. I have the utmost respect for both Apple and Samsung's management, and wanted to take a look at where they are headed.
Apple has the highest valuation of any stock in domestic history, now well over $600 billion. Of course, adjusted for inflation since 1999, Microsoft's (NASDAQ: MSFT) peak price in the “dot.com” bubble years would surpass Apple's, but in strict dollar terms, Apple is now where no company has been. Its market value has raised some $300 billion, or 70%, in the past twelve months under the leadership of Tim Cook, and the question is whether, and for how long, it can sustain its remarkable momentum.
Under legendary former CEO Steve Jobs, Apple was known as a product driven company. Yet, it is also an unparalleled global marketer, leading to Apple products being as well known and popular in Asia as they are in the United States. Between its iPhone, Tablet, musical catalogs and devices, and computers, it has created a devoted customer base, and a splendid history of publishing earnings forecasts that under promise and over deliver.
Of course, the company is also known for cutting edge technology, enhanced by consistently bringing to market new editions of existing products. That also is about the only current weakness of the company, as many prospective buyers right now of the company's iPhone 4S are putting off that purchase to await the release of the new iPhone 5. This phenomena reared its head in the third fiscal quarter of 2012, when Apple posted revenues up 23% from a year earlier to $35.02 billion, and profits up 20% to $8.82 billion, or $9.32. Despite the tremendous comparisons, the numbers failed to meet analysts’ expectations for the quarter of $37.2 billion in revenue and $10.36 per share.
Apple's near term growth will be provided, as always, by new and updated product launches. Apple does not like giving specifics on long term product launch dates, but there is a cottage industry of sorts of rumor mongering about the subject. Current notions are that the new iPhone 5 will be launched in September, a new 7 inch iPad in October, and the long anticipated Apple Television, who knows? But the anticipation itself is such a part of the Apple culture, that the reality of the debut date is really not terribly important. What is important is that if the iPhone 5 is not introduced until either very late in this quarter as suggested, it is going to reduce revenue in the quarter as people await the new and improved version.
The most remarkable thing to me about Apple is despite the stock price's tremendous run; it still does not appear overpriced. It has a current price to earnings ratio of 15.6, which combined with its forecast 5 year growth rate of 22% give a PEG of 0.68. I am not about to argue with such a winning formula by saying it is too late to invest in Apple. Rather, I would look for any sign of price weakness before jumping in with this undervalued growth giant.
Samsung's market capitalization fell over $12 billion in the wake of the California judgment, not so much because of the money judgment, but rather out of fear that the company may have to stop selling its top tier phone and tablet offerings in the United States. “May” does not mean Samsung “will” have to stop domestic Galaxy sales, but even the fear of that is substantial.
Otherwise, Samsung has become the world's largest personal electronics company, with leading positions not just in cell phones, but also in personal computers, televisions and many other categories. But at this time, the burgeoning smart phone offerings accounted for about 70% of the company's $4.5 billion in profits in the second quarter of this year. The company is also well known for its flexibility, and no company is better suited to get around specific infractions in future construction of product than Samsung. Citigroup (C) analysts have issued a “buy” for Samsung on this dip, and I absolutely agree. If you want to buy a South Korean company, I would look no further than this peer leading company on this price weakness.
The “smartphone” industry has evolved into a classical duopoly featuring Apple and Android phones. A key consideration going forward is whether there is an actual need or desire for a third operating system. If there is, it will have to offer benefits that neither Apple iOS nor Android offer, and I cannot imagine such would be the case.
A few months ago, I might also have been writing about companies like Motorola Mobility, Nokia (NYSE: NOK) and Research In Motion (NASDAQ: BBRY). Motorola was acquired by Google (NASDAQ: GOOG) in the second quarter of this year. Nokia is stammering with heavy losses while it tries to compete with the likes of Samsung, while only recently utilizing operating systems other than its antiquated Symbian system. In the 12 months concluding with the second quarter of 2012, it had lost over $4 billion, calling into question the continued viability of the company. Microsoft has partnered with Nokia on its Lumia line of phones, the most recent of which has gotten mostly positive reviews. But Apple's phones and the whole panoply of phones featuring Google's “Droid” operating systems have such a head start, I question public demand for a third operating system. I have no interest in taking a risk on Nokia at this time.
Research in Motion is even worse off, as much of the market has abandoned its Blackberry line of product. The company is hoping that its new version 10 operating system will attract new buyers; it would have been far easier to retain existing customers than to attract new ones. I don't see many Droid phone or Apple customers moving back to Blackberry. No matter how much better the new operating system is, the question is obvious. Is it too little too late? I believe yes, and see no future in Research in Motion.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Nokia. 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.If you have questions about this post or the Fool’s blog network, click here for information.