Buy Apple at Reasonable Valuations Today

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

Editor's Note: The 8.1 trillion figure reported by Samsung was in South Korean Won, not USD. This article has been corrected to clarify the currency.

The war between mobile device makers is in full swing. No, this not merely a Hamlet-type question of, "to buy Apple (NASDAQ: AAPL) or not to buy Apple." Instead, there are lots of players, lots of mobile gadgets, lots of angles to make a profit, and lots of investment questions. There is more to this market than just Apple.

Smartphones: Samsung Outpaces Apple 

Believe it or not, the 800-pound gorilla in the smartphone room is not Apple. It's SamsungSamsung  the global leader for TVs and mobile phone manufacturing, reported its third quarter earnings over and above analyst estimates. For the third quarter the company's operating profit was reported as 8.1 trillion won, a 91% year-over-year increase. Operating profit from the telecommunications doubled, as Samsung's Galaxy devices sales have outpaced the sales growth of Apple's iPhone.

Increased competition is anticipated due to slower global economic growth. Samsung hopes to increase the sales of tablet computers from high-end pen-equipped models to the launch of cheaper devices. According to Strategy Analytics, Apple's share of the global tablets market fell to 57%, compared to 65% last year, due to higher sales of devices operating on Google (NASDAQ: GOOG) Android software. Samsung captured 35% market share, while Apple had only 17% share of the smart phones market. The company is offering Galaxy Note II with a pen and a screen larger than its S III model, which had record sales of over 20 million units within 100 days of its launch.

In the $219 billion global smartphone market, the newest kid on the block is Apple's iPhone 5. But the sale of the new phone has remained below the analyst estimates. It also faces tough competition from LG Electronics and other competitors, as they are launching high performance devices at lower price points.

Nokia Disappoints Again

Nokia (NYSE: NOK) suffered a $1.27 billion loss in the third-quarter on reduced smartphone sales. Its sales have declined from four million units in the second quarter to only 2.9 million in the third quarter. Optimists hope that these declining sales are the result of customers waiting for the debut of the new Lumina smartphone line.

Many analysts are not so hopeful for Nokia's ability to overturn its losses with the introduction of its new windows-based Lumia smartphone. Nokia CEO Stephen Elop said, "A number of operators around the world are increasingly frustrated with the two strong ecosystems in their shops today. As they see a full portfolio of products with Lumia from Nokia, this will represent for them a credible third alternative." Nokia plans to diversify its customer base with a wide array of Lumia smartphone models covering different price points.

The company also plans to reduce costs by laying-off one third of its workers when it transitions away from its Symbian operating system. Even with this restructuring, Nokia may not be cost competitive against rivals who outsource the assembly of their smartphones from China.

Predictable Price Competition

Vigorous smartphone competition should not come as a surprise. These device makers are all trying to ensnare consumers to their platforms. Once on a platform, that consumer will purchase media multiple times. For an Apple tablet the content could be different software app downloads. These device makers are willing to cut profits or even take a loss on their devices to populate their platforms with consumers.

This is not a new strategy: the same pricing strategy dominates ink and printer pricing. Companies sell printers at a loss or at lower margins in order to gain customers who buy high-margin compatible ink cartridges over and over again.

With this strategy in mind, Microsoft's (NASDAQ: MSFT) enthusiasm for its hardware partners to launch Windows-based smartphones makes less sense because it does not have the library of content or apps that are already written and developed on other, established platforms. Microsoft may be coming late to the mobile device party.

Crunching The Numbers

Lets see if any of the firms vying for smartphone market share have stocks that trade at attractive valuations.

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> </tr> <tr> <td> <p>AAPL</p> </td> <td> <p>Apple</p> </td> <td> <p>Personal Computers</p> </td> <td> <p>13.24</p> </td> <td> <p>3.51</p> </td> <td> <p>4.65</p> </td> </tr> <tr> <td> <p>GOOG</p> </td> <td> <p>Google</p> </td> <td> <p>Internet Information Providers</p> </td> <td> <p>21.4</p> </td> <td> <p>4.72</p> </td> <td> <p>3.3</p> </td> </tr> <tr> <td> <p>HPQ</p> </td> <td> <p>Hewlett-Packard</p> </td> <td> <p>Diversified Computer Systems</p> </td> <td> <p>NA</p> </td> <td> <p>0.22</p> </td> <td> <p>0.87</p> </td> </tr> <tr> <td> <p>MSFT</p> </td> <td> <p>Microsoft</p> </td> <td> <p>Application Software</p> </td> <td> <p>16.02</p> </td> <td> <p>3.45</p> </td> <td> <p>3.63</p> </td> </tr> <tr> <td> <p>NOK</p> </td> <td> <p>Nokia</p> </td> <td> <p>Communication Equipment</p> </td> <td> <p>NA</p> </td> <td> <p>0.26</p> </td> <td> <p>1.02</p> </td> </tr> </tbody> </table>

Apple's head-start among the other companies on this list complements its reasonable valuations. It is a clear pick over Microsoft, which is trading at similar price multiples but is only a smartphone upstart. Hewlett-Packard and Nokia are also clearly cheap based on very low price-to-sales and price-to-book ratios. However, the bottom line is literally negative for these loss-generating companies.

In contrast, Google is overpriced as a smartphone play. It trades at uniformly high price-to-sales, price-to-book, and price-to-earnings ratios. Overall, Apple is the clear winner among these stocks. It may lose market share, but its sales and earnings growth over the next few years come at very reasonable valuations today.


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 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.If you have questions about this post or the Fool’s blog network, click here for information.

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