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The Truth Behind This Tech Giant's Mysterious Fall

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

Does Apple (NASDAQ: AAPL) have a problem? The stock has taken a plunge going from $514 per share to under $450 in less than a week after releasing its latest earnings report. The downsides of the report included a sales miss on the company’s iPad, a shortfall caused by production in its iPhones, and falling margins. 

While the company beat analysts’ expectations on earnings, coming in at $13.81 per share against the predicted $13.34 per share, this was still below the $13.87 year over year.  But this latest quarter was 13 weeks long versus 14 weeks for the same quarter last year.  So the comparison is not perfect.  In fact, if you add the extra week the EPS would have come in at $14.87 with net income of over $14.1 billion. The year over year earnings decline along with supply chain troubles should not cause the massive selloff Apple has seen the last few days.  What is really behind the selloff, and how does the future look for Apple?

Stiff competition

Apple is receiving some strong competition from Samsung (NASDAQOTH: SSNLF) and from the Android platform of Google. Samsung has seen a 76% increase year-over-year in smartphones shipped.  Google’s Android platform now controls 70% of the smartphone market.  This can be attributed in part to Apple’s desire to maintain high profit margins at the expense of market share, as Samsung’s devices are overall far cheaper.  

Nonetheless, Apple is by far the most dominant player in the tablet market and is holding its own in the smartphone market.  Apple invented the tablet market and still maintains dominance in the area that should last for at least a few more years as competitors try to catch up.  One problem Apple’s competitors are running into is that while they focus on hardware components Apple continues its dominance in the applications that run on its iPad operating system and consumers clearly value the applications over the hardware.  Apple owns an almost 80% market share in the tablet market. 

Its closest competitor is Amazon’s Kindle device which commands less than 8% of the market.  The iPad continues to show growth selling almost 23 million units in the first quarter compared to over 15 million in the first quarter last year.  It continues to fill the void left by declining PC sales.  

While Samsung has vaulted to a market share lead in the smartphone market Apple has still seen its share increase by 47% in 2012. This situation will not change much going forward in 2013. Apple continues to maintain one of the most fanatical customer bases in all of the industry. The company also continue to release new components, the most recent being the iPad Mini. As CEO Tim Cook announced in the company’s earnings call, this is one of the most innovative periods in the company’s history with products being introduced in every category the company makes.

Declining margins

Declining margins might be the most important factor in drawing a bearish look on Apple.  While margins did come in 2% higher than expected they were still down 6% year over year. The fact is that those margins are not going to increase anytime soon. Lower cost handset makers like Samsung along with increasing competition in the tablet market from Android devices and the Kindle mean these margins will likely continue to decrease.

Growth in emerging markets, which Apple will continue to see, will also put a damper on margins in the future. Consumers in these markets are not as apt to buy the high cost handsets like consumers in North America and Europe. The company has already announced that it will be launching a lower cost iPhone for emerging markets. With a product priced at $200 to $250 Apple can expect to gain market share but will see margins drop.

Overseas growth

Apple launched iPhone sales in China last month and the results were very successful.   This is an important fact investors need to consider, while Apple products might getting oversaturated in the domestic market there is still tremendous growth opportunities in emerging markets.  The iPhone sales in China doubled year-over-year.  The company has also seen growth in India and should continue to see sales increases as the market moves away from low cost phones to smartphones.  Developing markets, like the BRIC (Brazil, Russia, India, and China) are expected to supply 70% to 80% of the global growth of the smartphone market this year. 

Conclusion

Apple still represents a good value. It is the unquestioned market leader in tablet sales. As PC sales continue to decline tablet sales will increase and most of those sales will be an Apple product. The company continues to show solid growth in the smartphone market even if it has lost its leading position to Samsung.

Apple also has tremendous opportunities for growth in international markets as evidenced by its successful iPhone 5 launch in China. There is also still good value in the company.  It is trading at a multiple of just over 10. Compare this to Google’s multiple of 23 and Amazon’s 3,300 and it is apparent that there is still tremendous upside to this stock. Consider Microsoft’s multiple of over 15. If Apple traded at such a multiple, the stock price would be around $680 per share.


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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