Let us take a look at its current value, and where Apple needs to go to maintain itself in the tech sector. After the huge drop, Apple’s market cap is at $381.4 billion, and it doesn’t seem like that will be the bottom as its share price could continue to tumble. The company now trades at a very low P/E ratio of only 9.2, but in my opinion it helps to look more in depth than just rely on that number.
The truth is that the company is having trouble with competition despite beating Q2 2013 expectations on earnings per share and on revenue. I would say that you would have to look at the growth of the company, but the growth continues to slow. As mentioned on Apple Inc. (NASDAQ:AAPL)’s earnings call, new products aren’t expected until the fall, or early 2014. This means that while you are waiting for growth that may or may not come, margins will remain under pressure.
Outlook is not hot
On April 23, Apple reported second-quarter earnings at $10.09 per share on revenue of $43.6 billion. This beat the analyst estimates of $10 per share on revenue of $42.3 billion.
So as we can see, Apple beat analysts’ estimates, but there is a big reason why. Apple did something different than it normally does by adding its own guidance. Before, Apple Inc. (NASDAQ:AAPL) used to allow analysts to create the earning estimates for each quarter. Now, Wall Street refers to Apple’s outlook, which has always been lower guidance, thus is why I think that the earnings beat was not a surprise at all.
So earnings beat, but why did the stock break-even the next day, you might ask. It really comes down to the company’s margins. Apple’s margins fell from 47% last year to 37% this year. The decline in margin is due to the company selling more of the older products, and with no new products in sight for a while I expect the margins to continue to decline.
Also, it didn’t help that Apple guided lower for its fiscal third quarter. Apple is forecasting revenue of between $33.5 billion and $35.5 billion. This is far lower than analysts’ estimates for approximately $38.3 billion in revenue. So it seems investors may want to be cautious holding onto earnings next quarter.
Value play mode
I think that the growth for Apple Inc. (NASDAQ:AAPL) is decent, but it is not what it used to be. The company is expected to still grow by 10% this year, but with all the new evidence offered by management it seems the company is turning into a value play. For starters, on this earnings announcement, the company revealed it would increase its dividend by 15%, bringing its dividend to $3.05 per share.
In my opinion, a dividend is there because the growth is slowing, and I feel the company is turning into more of a value play than a growth story. Another hint that growth is slowing is that company is increasing its share buyback program to $60 billion. Now unless Apple shocks me later in the year or early next year, I maintain that it will still be considered a value play.
Personally I would like Apple to use its money to make acquisitions, and incorporate those acquisitions into its ecosystem. One company that I think it would do well to acquire is Netflix, Inc. (NASDAQ:NFLX). The reason I believe that this acquisition would add value is the ability to control online streaming. Think about it – Apple’s iPad, and iPhone are built on a strong online ecosystem.
In obtaining Netflix, Apple Inc. (NASDAQ:AAPL) could update the stream-service software to suit its phone style more, and also use all that cash it has to create new original content. This would also introduce a new form of revenue that it could use to expand into other territories. So while it is expanding its portable products in other countries, it is also advertising its stream service at the same time. In my opinion that’s something that I would like to see.
For the first quarter Netflix, Inc. (NASDAQ:NFLX) added 2 million new subscribers, which was far above the company’s own internal estimates. In my opinion, I think this huge subscriber increase had to do with Netflix’s new original show “House of Cards.” It seems there is a huge need for original content shows on streaming services, and this increase in subscriber growth just proved it.
The company now has around 36 million subscribers. Despite a slowing of subscriber growth for the next quarter, I believe that Netflix is still a strong long- term buy. I say this because it can still expand its service out to international markets.
Netflix, Inc. (NASDAQ:NFLX) has been on a roll this year, and it seems it may continue to edge higher. Netflix is up 125% for this year, and is also the best-performing S&P 500 stock so far this year.
Netflix reported first-quarter earnings of $0.05 per share on revenue of $1 billion. In the same quarter last year, Netflix reported a loss of $0.08 per share with revenue only at $870 million. It’s clear the company continues to expand its library of content. I feel that over the coming years, Netflix will continue its growth in the online-streaming market.
Competitors in the mist
One of Apple Inc. (NASDAQ:AAPL)’s main competitor is Google Inc (NASDAQ:GOOG), and that company currently has a bigger market share than all other platforms. Data as of February shows Google Inc (NASDAQ:GOOG) having 51.7% of smartphone subscribers, while Apple is currently at only 38.9%. This is partly in due to the fact that Google’s Android phones are on hardware that more people want.
Google did well in its first quarter 2013 earnings. It announced revenue of $14 billion, which was inline with analysts’ estimates. The inline revenue performance may be because Google was struggling with its mobile advertising. Like other competing companies though, it has to figure out a way to transition its costs-per-click from desktop to its mobile advertising. Despite the revenue only being inline, the earnings per share came in much better than expected. Earnings came in at $11.58 per share for the first quarter of 2013.
I feel this company still has some tricks up its sleeve. The CEO said that its acquired-Motorola unit is expected to come out with some interesting innovations, the first of which being a screen that doesn’t shatter when it’s dropped. The second one is a battery-life that lasts much longer than the current average smartphone. Either way, Google Inc (NASDAQ:GOOG) is also a good long-term play. The company boasts a market cap of $265.9 billion!
The smartphones that sell the most with Google’s Android operating system are the Samsung smartphones. What makes these phones more popular are two things that are simple for Apple Inc. (NASDAQ:AAPL) to adopt. The first is the phone’s screen size. This is important for people to be able to view movies and navigate the phone with more ease. The second fix would be reasonable prices. Samsung has many low-end smartphones that are affordable for consumers that don’t want to spend so much for an iPhone.
Samsung recently announced that it has taken 30% of global smartphone sales. Samsung is severe competition for Apple, and unless Apple can start to innovate again it will be stuck in the mud. Apple announced that it only has 17.5% of global smartphone sales, shipping only 37.5 million units in the first quarter.
Final thoughts
Apple seems like it will head lower in the short term. If you are a long-term investor I wouldn’t sell as of yet, but at the same time I wouldn’t be adding more shares either. I would be cautious to see if Apple announces a new product that can boost the stock once again, and increase margins. Unless Apple Inc. (NASDAQ:AAPL) can bring out a smartphone that people will want to buy, the stock will stay stagnant for a long time.
If Apple ever hits its all time trading high of $700 per share again remains to be seen, but it will need to first lift its 17.5% smartphone sales to a higher percentage. Otherwise, Samsung and other smartphone makers will continue to eat away at its market share. Until then I remain cautious, and will continue to believe that Apple has lost its way.
The article Apple Has Lost Its Way originally appeared on Fool.com and is written by Terry Chrisomalis.
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