Apple, Buy When Others are Fearful

Erick 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) is in its own private bear territory, down more than 20% from its recent high above $700 per share. Mr. Market must think Apple is in a death spiral, seeing as it is selling for a very attractive valuation at this point in time.

Why has Apple been marked down into deep value territory? In this article I will explain what is going on, and how much, but not all, of the drop is overblown.

Apple's New Competitive Landscape

Apple over the last few years has benefited from very inept competition. Its phones, tablets and other products have been head and shoulders over competitors such as Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ). These traditional PC manufacturers have had a very ineffective mobile strategy. The future of these companies lies instead on selling servers to power cloud services, not in PCs. PC sales will continue to trend down, while tablets, mini-tablets, smart phones and cloud services continue to grow. As the horse and buggy got replaced by the automobile, so will the old PCs be replaced by mobile.

Now, companies like Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN) and Samsung really get it. These companies are providing real competition to Apple, and as such the market is reacting to Apple not being the absolute dominant player it has been for the last 5 years. Android is set to dominate the low end of the smart phone market, and Amazon wants to ride the tablet trend in order to sell content. Samsung and Apple are really the only profitable handset makers for smart phones.

What's Coming Next

Apple is poised to deliver a blow out Christmas season. The only thing holding it back are supply constraints for some key components. I have confidence in Tim Cook, and know the management of Apple is working hard to resolve these issues. Apple tends to predictably drop around this time of year, but then deliver huge upside in January when the numbers are tallied. The talk of the fiscal cliff affecting Apple is mostly noise.

I remain a buyer at these levels for the following reasons:

1. Extremely cheap valuation. The current PE is about 12 compared to a PE for the S&P 500 of about 15. Given the growth of Apple of more than 20% per year, this is incredibly cheap. Compare this valuation to that of Google and the insanity that is Amazon (according to Yahoo! Finance it is about 2700).

2. Dividend of 1.8%. Not only is Apple cheap, it pays you to hang in there. These dividends are likely to increase in the future.

3. A full new line of products for the Christmas season. I have personally have been buying Apple products this cycle and plan to stick with Apple. I think the holidays will be very good to Apple.

4. As supply constraints ease, sales will continue to rise into the spring and peak in the summer for back to school season, then slack off as rumors of new products arise. I personally plan to upgrade my iPhone 4S to the iPhone 5S or 6 next year.

5. High end products appeal to the consumer with disposable income. These people tend to buy more apps, movies, content in iTunes, thus adding to the profits and growth.

6. Beautiful balance sheet, margins and cash position.

Risks:

1. Growth will slow. Eventually the 20% clip of growth will go to 10% and lower. Most companies would kill for 10% growth per year.

2. Margins will come down. As Apple competes with Amazon Fire and Google Android products its margins will come down and it will cannibalize some of its high end sales.

3. Competition will continue to improve and innovation will slow at Apple.

Overall, Apple to me is a screaming buy. In the short term it may go down more in share price, but its valuation is very attractive at these levels. Buy when others are fearful is an excellent axiom, and one I follow for my long-term holdings!


xerohype owns shares of AAPL, GOOG and AMZN. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, Dell, 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. If you have questions about this post or the Fool’s blog network, click here for information.

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