Apple: A Change of Fate

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

One of the most loved stocks of 2012 has become one of the most hated in 2013. Analysts have always critiqued it, but now, some people are downright nasty when looking at Apple (NASDAQ: AAPL). The company has cash, still has an unbelievable "fan base", and is arguably one of the cheapest stocks available. People love to hate, but my question is "Why?" 

Times have changed

Nothing is more obvious than how this investment has changed the way we view it. Just last fall, some analysts were expecting it to reach $1,000/share. Now, the stock is in the low-to-mid $400 range, and has fallen 36% since October of last year. The company has become cheaper because of the falling stock price, but should investors really put their money into a stock that is "struggling" so much?

Yes, but they need to understand that the times have changed, and Apple may have changed its appearance as an investment. It's not bad--its just different. 

I believe the company will become (and already is) a cash cow. Yes, the company already has roughly $150 billion in available cash, and by releasing $100 billion of that to shareholders by 2015, the company may become the new dividend king.

Over the past five years, Apple's shareholders have seen a larger increase in its stock than shareholders of both Google (NASDAQ: GOOG) and Samsung (NASDAQOTH: SSNLF). Both Google and Samsung have increased slightly over 89%, while Apple is up nearly 162%. Even with Apple's currently falling stock price, it is hard to deny its long-term growth. Now, in my eyes, the company will become more of a dividend stock.

Apple's sales and revenue continue to set records, and its $150 billion cash pile continues to grow. They already have a dividend yield of 2.6%, which will likely increase with the $100 billion being released to shareholders by 2015. 

Keep in mind that if Apple can release the highly rumored iWatch or iTV, the stock could experience some impressive growth once again. After all, this would be the first new line of products since Steve Jobs' passing. It would prove to consumers and investors a like that Jobs' wasn't the sole reason for the companies success/innovation.

Times have changed, but there are also a few things remaining the same.

What's stayed the same? 

Apple users are still Apple fanatics. They will still buy the newest device upon release, and the company will more than likely retain that business. The iPhone is still the company's biggest revenue generator, and its 91% retention rate shows how happy its users really are. After all, Android's retention rate is just 76%. Not only is Apple retaining its iPhone users, but its sales continue to rise as Q1 shipments rose 6.6%.

Competition certainly hasn't died off in the past several years, which becomes obvious with Google and Samsung's recent announcements. Samsung and Google are currently fighting over the Android world, and Samsung is winning. Yes, they have worked together to acquire the market they have, but Samsung is hoping Motorola's (owned by Google) new smartphone, "Moto X", will be another flop. Motorola only holds 1% of the market share, but Google just gave them $500 million to develop the device. The graph below shows that, despite Samsung and Google's efforts, Apple is still expected to grow its marketshare.

<img alt="" src="http://g.fool.com/editorial/images/39339/platform-share-yankee-group_large.png" />

Source: Yankee Group survey

As the graph above shows, Apple's market share is expected to grow to 42% by 2017, in comparison with Android's plateau of 34%. Clearly, competition is not changing, but Apple still looks to perform well.

What to expect?

Apple may become a dividend investor's best friend. Google, on the other hand, doesn't currently offer dividends, while Samsung shows a dividend yield of 0.6%. By 2015, Apple's dividend yield could drastically surpass its current level of 2.6%, due to the $100 billion being released to shareholders. This could make Apple's stock very appealing for the right investor. 

Apple's mobile mindset will not change. The iPhone and iPad accounted for nearly 74% of Apple's 2012 revenues. Not only has it embraced the mobile idea, but global tablet sales are expected to surpass desktop, laptop sales by 2015. In fact, the iOS platform, as a whole, has a 90% retention rate--not surprising considering their loyal customers. 

Valuation

<table> <tbody> <tr> <td> </td> <td>    P/E    </td> <td>     FCF yield     </td> <td>Earnings yield    </td> </tr> <tr> <td>Apple</td> <td>   10.2</td> <td>         11%</td> <td>            9.8% </td> </tr> <tr> <td>Google</td> <td>   26.7</td> <td>         4.1%</td> <td>            3.7%</td> </tr> <tr> <td>Samsung </td> <td>     8.6</td> <td>         5.4%</td> <td>            8.6%</td> </tr> </tbody> </table>

Apple is clearly the cheapest of these three competitors, with Google undoubtedly being the most expensive. However, let's take a look at what potential investors would receive for the premium they pay.

<table> <tbody> <tr> <td><strong> Company</strong></td> <td> <p><strong>    Revenue     </strong></p> </td> <td><strong>   Earnings Per Share</strong></td> <td><strong>   Gross Margins</strong></td> </tr> <tr> <td>Apple</td> <td>  $169.1 bil</td> <td>              $41.89</td> <td>           37%</td> </tr> <tr> <td>Google</td> <td>    $53.5 bil</td> <td>              $34.50</td> <td>           57.4%</td> </tr> <tr> <td>Samsung</td> <td>     $179 bil</td> <td>             $137.02</td> <td>           37%</td> </tr> </tbody> </table>

Google may have higher gross margins, but it generates approximately 77% of its revenue from ads. Mobile ad revenue is expected to increase by 5.1% in 2013, which means their mobile ads would make up 17.6% of their overall revenue. Meanwhile, Google Phone and Motorola revenues are expected to decrease by 1% which will account for only 10.8% of the company's revenue. 

The bottom line

Some people like change, and others don't. I think that is the essence of what's going on with Apple. It might not be the growth stock that it once was, but it's transformation into a new animal has certainly begun. Investors should receive stout dividends from Apple, but may not receive the growth shareholders have become accustomed to. Google and Samsung are clearly solid companies, with lots of potential. Google is not cheap by any stretch of the imagination, but Samsung offers a reasonable premium for the right investor. 


Tyler Wofford 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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