Many investors have written off Apple Inc. (NASDAQ:AAPL) since the stock reached dizzying heights of more than $700 per share in September 2012. Since then, Apple Inc. (NASDAQ:AAPL) stock has lost over 40% of its value, and those same investors are asking the question: “Is Apple a smart value play?” Let’s review both sides of the argument.
Apple Inc. (NASDAQ:AAPL) has a loyal fanbase and a strong brand. In fact, Forbes ranked the Apple brand the most powerful in the world. That not only impacts whether a customer sticks with Apple Inc. (NASDAQ:AAPL), but also creates pricing power Apple displays in its huge gross margins.
Apple Inc. (NASDAQ:AAPL) also has a boatload of cash. In fact, it has so much cash, people are arguing over what they should do with it. A simple Google Inc (NASDAQ:GOOG) Stock Screener search will show you that Apple Inc. (NASDAQ:AAPL) has enough cash to buy all but 25 companies in the world. (I like to imagine Tim Cook swimming in the cash, Scrooge McDuck-style.)
Think about how much you rely on devices that didn’t exist 10 years ago (smartphones, tablets, etc.). Although technology has come so far in the last decade, it still has many new things on the horizon, and Apple is prepared to be a key player in those developing markets.
Rumors suggest that Apple has been developing a smartwatch that could consolidate some activities for which we now rely on our phones and fitness devices. In addition, Near Field Communication (NFC) — which enables easy ways to pay via your mobile phone — could become mainstream with the next iPhone release and an overhaul of Apple’s Passbook app. Apple is an innovation machine — especially for things you never realized you needed.
Minus one VERY critical member (co-founder and CEO Steve Jobs), the core staff of that machine remains intact. Tim Cook is known as an operations genius. Apple’s creative guru and innovator of their coolest designs, Johnny Ive, is still there. Apple isn’t the same Apple without Steve Jobs, but it is still Apple.
Finally, does the below chart look like a dying company? Yearly revenue is almost progressing exponentially. The operating income has more than tripled in the last four years. Oh, and their margins continually rise (showing the strength of the brand loyalty and operational efficiencies) .
Why Apple is a loser
Tim Cook is no Steve Jobs. He’s been active CEO since January 2011, yet the company has released no revolutionary products during that time. Sure, Tim Cook is heralded as an operations genius, but does he have what it takes to hold Apple to the strict creative standards that made it famous?
In addition, Apple faces too much fierce competition. Although Apple’s iOS has been increasing each year since its release, iOS adoption has been dwarfed by Google Inc (NASDAQ:GOOG)‘s Android adoption rate, as reflected in the chart below. And why not? Android is free for phone makers (like Samsung), and those hardware companies can customize versions for their devices.
This is how smartphone companies die. Remember Nokia? BlackBerry users were loyal, too, but they have slowly jumped ship. There are a lot of similarities between Blackberry of ’08/’09 and Apple today.
Furthermore, the carriers are getting kind of tired of losing money on iPhones. Other phones don’t force them to lose as much money, and telecom companies (and their shareholders) generally prefer to make money.
Finally, the iPhone is by far Apple’s biggest product, representing over 50% of its revenue. If that declines significantly, so does Apple. The company has seemed unwilling to do a major overhaul of one of its popular operating systems (its OS X for desktops and laptops), even when users clamor for something better. Will that change with the next version of iOS? The gap between Android and iOS is widening, and Apple needs something revolutionary.
Final Thoughts
I think we can all agree that Apple’s secrecy does investors no favors. If we knew what was coming down the pipeline, we could make educated decisions for our portfolio. But . . . if they tell us what is coming down the pipeline and a basic timeframe, it’ll give Apple’s competitors information that could be valuable. Plus, we wouldn’t let them be one day late on that timeline without killing the stock. Which may explain why Apple is so secretive in the first place.
Personally, I believe Apple has the ability to revolutionize another industry or two. The cash on hand is the biggest reason I think the current valuation is crazy. Still, I’ve heard arguments from The Motley Fool’s own Joe Magyer that make me question my position. What are your thoughts?
The article Is the Market Crazy For Valuing Apple at Less Than $400 a Share? originally appeared on Fool.com and is written by Robbie Laney.
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