Huge Potential Upside In Apple Despite Widespread Bearish Outlook

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

In the final stretch of January, Apple (NASDAQ: AAPL) has arguably managed to become the synonym for bear. Not only has its stock suffered notably, but the iPhone maker has also weighed down the Nasdaq.  Reports show that Exxon replaced Apple as the world’s most valuable company.  Interestingly, this snapshot merely represents what you could call ‘the tip of the iceberg.’ The negativity shadowing Apple’s stock is overwhelming, at the least.

The gloomy picture painted by Apple’s bearish slant has prevented many investors from seeing the huge potential upside in Apple. Before looking at this upside, it would be prudent to establish Apple’s current position, particularly in regard to the widespread negative outlook.

Changing competitor landscape weighing in on the big wig

One of the key contributory factors behind Apple’s lackluster performance in the past quarter is the changing competitor landscape. A time existed when there was some real daylight between Apple and its competitors. But Google (NASDAQ: GOOG), Apple’s closest and arguably the most aggressive competitor, has since bridged the competitive gap. Through its iconic Android operating system, Google has managed to trounce Apple, mostly through Samsung.

Recent reports suggest that a Google smartphone, dubbed the Google X Phone, could very well be on its way. Although the Google X Phone is still not certain, I am inclined to believe that its emergence could dent Apple’s outlook in a terrible fashion. The phone, which may hit the market in June, is deemed to be a Samsung killer. If this is so, Apple will not stand a chance. Why? Samsung currently assumes the role of the iPhone killer, and if something better than Samsung comes, Apple will definitely be left holding the short end of the stick.

The neck-to neck competition in the smartphone industry also seems to have spilled over to the tablet sector. Although Apple’s iPad currently enjoys a huge lead in this market, recent reports from the IDC suggest that Apple could also lose its footing in this market.

The IDC’s preliminary estimates for tablet shipments in the fourth quarter of 2012 show that Apple’s share slipped to 43.6 percent, compared to 51.7 percent share a year earlier. The drop could have actually been bigger were it not for the 48.1 percent growth in shipments during the quarter. While these figures seemingly pass by as acceptable, they are nothing but worrying when viewed on a comparative scale.

Unlike Apple, Samsung managed to increase its market share, securing 15.1 percent of the tablet market compared with 7.3 percent a year earlier. What’s more interesting is that Samsung’s shipments during the quarter grew an unimaginable 263.0 percent.

The graph below offers deeper insight on the same

 

As seen above, Apple’s market share in the tablet market fell for a better part of fiscal 2012. The iPhone maker will need to reverse this trend in order to avert competition from Android-driven Samsung tablets.

Lastly, recent consumer reports show that the iPhone 5, despite being popular in the market, ranks worst in top iPhones produced by Apple. As I had earlier mentioned in my recent bullish write-up on BlackBerry (NASDAQ: BBRY), feature phones are falling by the wayside. This has been clearly demonstrated by the poor performance of the iPhone 5 relative to its predecessors.

Now that I have mentioned Research in Motion (or should I say BlackBerry), I am of the opinion that its Blackberry 10 will have a notable impact on the iPhone. Not only will it send ripples throughout the market, but it will also compel Apple to look for an outside-the-box solution, given the many new entrants into the smartphone market.

Apple’s outlook seemingly appears to be at its worst. Despite this negativity, I am inclined to believe that Apple has some solid growth prospects.

Sell side reluctant to give in

Sell side analysts are still advancing bullish cases on Apple. After the disappointing earnings call that saw Apple miss many estimates, including the iPhone sales estimate of 50 million units, Barclays’s analyst, Ben Reitz, advanced a bullish argument on Apple, arguing that the tech big wig deserved a second look from investors.

Reitz contended that investors were overlooking Apple’s strengths, citing the potent Chinese market. Indeed, a closer look at operations in China shows that iPhone 5 sales more than doubled during the last three months of 2012. This is commendable considering that the iPhone 5 was introduced in the middle of the quarter. Reitz also exclaimed Apple’s strong cash flow.

Another factor that Barclays pointed out was the demand for the Apple TV. I believe that the Apple TV presents good prospects for Apple. In the last quarter of 2012 Apple increased its TV sales by 60 percent year-over-year, selling an excess of more than two million units. In the same breadth, pro-Apple Topeka analyst Brian White, in a report published in mid-January, made mention of the Apple TV. White noted that demand for the Apple TV was convincing, remarking that there was still room for an Apple disruption in the market. In addition, White sees a $100-$400 billion market opportunity in the TV segment. In what has since become a signature move, White pegged a price target of $1111, building on a similar move in mid-2012.

While I am not of the opinion that Apple’s share price will attain such highs, I do believe that it will rise notably this fiscal year.

My two cents

In October 2012, it was reported that Apple’s Braeburn was, at the time, the world’s biggest hedge fund, managing an excess of $117 billion as of June 2012. Subsequent reports show that Braeburn adds close to $15 billion each year.

In my opinion, the sizable funds at Apple’s disposal, coupled with its rosy bottom line and strong cash flow, gives the tech heavyweight a huge edge. Apple’s financial muscle will certainly allow it to regain footing. Not only does the large amount of money allow it to speed up its operations, it also allows it to play the game it plays best: patents.

The money at Apple has been one of the key plays behind the unquestionable team of lawyers and the growing patent portfolio that has put Apple on the map over the past several years.

Right now would be a good time to buy. Apple's share price is relatively low and growth prospects are high considering the current low growth rates.

 

The chart shows that year-over-year growth rates have reached notable lows. In addition, share price as of this writing was $455. Given the growth prospects, this price will rise. Current conditions present a good entry point for Apple. The tech behemoth is a strong buy.


Yieke 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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