Apple Inc. (NASDAQ:AAPL), the Cupertino-based company and iPhone and iPad maker, has recently tumbled below $400 per share. The company’s shares have declined 25% this year, compared with a 10% gain in the Standard & Poor’s 500 Index. The combination of increasing competition against Apple Inc. (NASDAQ:AAPL)’s core products and a loss of faith by investors and analysts led to the sharp decline.
The million dollar question is whether the giant is only taking a short nap and will come back soon, or if this is the beginning of the end for what was one of the most popular companies in America once upon a time. Going back to William Shakespeare’s famous question in the headline, the definite answer is “to be.” Let me explain why.
The reasons for the decline
Retailers and wireless carriers have twice the normal levels of iPhone inventory, indicating that Apple Inc. (NASDAQ:AAPL) is selling fewer handsets than expected. Increasing competition from Samsung Electronics Co., Ltd. (KRX:005930) and comeback attempts from Nokia Corporation (ADR) (NYSE:NOK) and Laclede Group Inc (NYSE:LG) made Apple more vulnerable.
There were also recent rumors of low morale, which started with Apple employees who are seeking jobs at competitors such as Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT). Historically, working for Apple Inc. (NASDAQ:AAPL) was one of the most prestigious jobs for an Ivy League graduate. Lately, however, Google Inc (NASDAQ:GOOG) is taking the lead as one of the most glamorous workplaces in the Silicon Valley.
Apple had no major innovations this year. The company hasn’t had a new product go on sale since last year, leaving investors and customers awaiting the release of a new iPhone and iPad. Under the leadership of Steve Jobs, Apple Inc. (NASDAQ:AAPL) had been ahead of its competitors and had repeatedly introduced new product innovations and upgrades.
The snowball effect also played a part. One thing led to another and the above-mentioned reasons caused a negative sentiment in Wall Street. Moreover, Greenlight Capital’s legendary investor David Einhorn recently filed a lawsuit against Apple Inc. (NASDAQ:AAPL), contending that Apple violated Securities and Exchange Commission rules. Furthermore, more analysts have initiated a negative coverage on Apple during the last year.
Why Apple is poised for a comeback
Apple is the richest company in the world when it comes to its cash position. As a matter of fact, the company is “sitting” on a pile of $140 billion in cash, mostly located in offshore accounts. Rising interest rates will put Apple in a better position since it will get higher interest rates for its money. Moreover, the chance of a dividend increase significantly improve as mounting pressure from shareholders will lead Apple to compensate investors for the decline in share price.
The company also has a tradition of innovation. Apple in the era of Tim Cook is not the same vibrant company as Apple under the leadership of Steve Jobs. Historically, however, the company has demonstrated its ability to be a leader and innovator in its field, with products such as new versions of iPhone the creation of iPad. I certainly believe that innovation is in Apple’s “DNA” and it is only a matter of time until Apple launches new products.
The folks at Apple are working on a new cheaper iPhone that will be released soon. This will sell relatively well in emerging markets where the income elasticity is higher. Apple is going to focus on emerging markets such as China in the next few years where its market penetration does not exceed 8%. In other words, there is still plenty of growth potential for Apple.
The fall of Apple is the rise of Google, and what about Microsoft
Currently it appears that Google Inc (NASDAQ:GOOG) is winning the battle against Apple, but one should note that the market is known to be notoriously fickle and can quickly change. Google has experienced this phenomenon and it is now Apple’s turn.
Apple’s shares began to rapidly lose altitude while Google’s shares started to gain strong momentum. As Google’s share price hits $900 for the first time, Apple’s free-fall continues. It is hard to ignore the coordinated movement in opposite directions occurring almost simultaneously. Money is being pulled out of Apple and poured into Google. I strongly believe that large hedge funds are responsible for this correlation, but it is difficult to provide a definitive proof for this assumption.
While most of the market’s attention has been given to Google and Apple, one of its most important competitors is coming back under the radar. Shares of Microsoft Corporation (NASDAQ:MSFT) have been up more than 30% this year.
Microsoft has maintained a superior business over three decades. When the two giants have gone head-to-head, however, Microsoft has come off worse. In tablets, music players and smartphones, Microsoft lags behind. On the other hand, Google’s Android is clearly crushing both Apple and Microsoft in the mobile device market. It’s putting the squeeze on Microsoft Corporation (NASDAQ:MSFT) as well as on Apple, which sparked the smartphone and tablet revolutions in the first place.
The similarities between Apple and Microsoft also lie in management and leadership. Steve Jobs was the ultimate visionary leader, and without him Apple looked more like a sheep without a shepherd. Microsoft experienced a similar phenomenon; when founder Bill Gates stepped down, the company was looking for a new direction with Steve Ballmer. It took a while, but it seems that Microsoft is finally back. I certainly believe that soon enough Apple will hit paydirt again as well.
The foolish bottom line
I strongly believe that the sharp decline in Apple’s share price is temporary. From a long-term perspective, the company is financially solid and has repeatedly proven its strong reputation for creativity. In addition, the above combined with a high dividend yield makes Apple a strong buy. Therefore, the big Apple is poised for a comeback.
Yaniv Hirsch has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Yaniv is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Apple – To Be or Not To Be? originally appeared on Fool.com is written by Yaniv Hirsch.
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