Unarguably, a company which has become a generic name for innovation is what Apple Inc. (NASDAQ:AAPL) is all about. Apple Inc. (NASDAQ:AAPL) has grown several folds with all the innovation that it has brought to the technology world, however, whether or not the company has lived up to the unprecedented standards set by Steve Jobs is a question which remains largely unanswered.
But, the larger question now would be, if I should invest? What about the whopping 82% market share that iPad has in the tablet market? This represents a perfect investor’s dilemma. I would suggest, let’s wait till the last word of this article. For now, how about having Apple Inc. (NASDAQ:AAPL)’s smart watch that the company is likely to add to its product portfolio soon, surpassing tablets, laptops, and smartphones?
Should I invest?
Although the company hasn’t implicitly stated that it will introduce any new product in the near future, the fall of 2013 and throughout 2014 could well be times when Apple Inc. (NASDAQ:AAPL) restores its pride as the most innovative company globally.
Market Folks
Should I invest in Apple Inc. (NASDAQ:AAPL) is the million dollar question that puzzles me. When I look at the stock market trends, Apple’s stock price of about 9 times its earnings, which is well below the average 15 times that the market is currently trading at, the plummeting of the stock price below $400, which was the lowest in the last two years, all of these could well be a reflection of the decreasing market share that Apple has experienced lately. While there’s nothing sadder than a momentum stock that’s lost momentum, current numbers certainly make Apple’s stock valuation all the more attractive, it’s trading at its lowest valuation in many years.
Not only this, but with speculations of innovative products to be launched at the end of this year and throughout next year, this could well be an ideal time to invest. And while trees don’t grow all the way to the sky, Apple has far greater innovation, greater revenue, and greater investor interest than many of its competitors. All of these are what an investor is ideally looking for. Also, not to forget is the impressive dividend yield of 2.80%, the numbers may just get you evaluate your excess funds that you currently hold.
Digging into financials
Apple’s latest product introduction was its 128 GB iPad late last year. In its latest quarterly earnings, the company reported $43.6 billion in revenue, up from $39.2 billion during the same quarter last year; however gross margins experienced a dip from 47.4% to 37.5%. Also, the company’s growth in terms of iPhone sales has been relatively sluggish than what it has been in the past, experts attribute this to the competition that Samsung has posed lately.
However, Apple holds $145 billion in cash, which is a big positive from a long-term investor’s perspective. Having a strong balance sheet suggests that Apple feels comfortable with its current liquidity position, and has sufficient funds to allocate towards its future R&D initiatives. This could prove to be the most critical point in boosting the company’s sales and margins in the offing, the effects of which would be evident in stock movements.
| Product | Sales for Q1 2013 (Million Units) | Sales for Q1 2012 (Million Units) | Change |
| iPhone | 37.4 | 35.1 | 6.6% |
| iPad | 19.5 | 11.8 | 65.3% |
| Macs | 3.95 | 4.0 | -1.25% |
| iPods | 5.63 | 7.7 | -26.9% |
Has innovation halted?
A lot has been debated over the fact if the innovation at Apple could be attributed merely to the presence that Jobs’ charisma had, for little innovation and differentiation has been introduced by the company ever since. What we can deduce from the numbers and the trends that are put before us, Apple has not innovated on a larger scale lately, instead most of the changes that the company has brought to its products have been in the form of software introductions.
This has been a major issue that Apple brand loyalists have experienced — the perception of innovation-giant has somewhat faded in the recent past. This is where management at Apple needs to focus on. The brand image must not go away and Apple has to hold on to its loyal customer base. Once that happens, the stock price and capital gains on them are likely to grow again.
Apple is not the only company that needs innovation push. Nokia Corporation (ADR) (NYSE:NOK) with its recent troubles, and especially after its dismal first-quarter earnings, needs a new jaw dropping innovative product to take its market share back to where it was. Lumia did prove a bit successful, but was sadly offset by the declining sales of Asha. Samsung’s new Galaxy S4 has further reduced Nokia’s market share to less than 15%, with no profits to account for that market share.
Nokia’s recent steps to cut its billion dollar dividend and to sell its headquarters in order to raise cash are positive, but these were indispensable decisions Nokia had to take as its corporate debt rating stands almost one step away from default.
From an investment point of view, Nokia Corporation (ADR) (NYSE:NOK) trades at a forward looking P/E of 27 times and that’s based on analyst expectations of increased Lumia sales going forward. On the other hand, Apple trades at a forward looking P/E of 10 times and that’s based on conservative analysts’ estimates, as always. The investment choice based on this metric is very clear.
But, is Apple’s kingship over?
For years, Apple has positioned itself virtually as a king in the field of innovative gadgets and tech savvy products. However, all the product lines that Apple has introduced face intense competition, and the stiffest is in the smartphone category from none other than Samsung. With all that has surrounded the two industry giants with regards to the lawsuits pertinent to the design, Samsung has recently looked to outplay Apple in terms of product features and the customer experience that it guarantees.
The results are backed up by strong sales growth reported by Samsung, which is up about 60% on a YoY basis. This is contrary to Apple’s sales growth that has been around 6.6% for the same period. Not only Samsung, but due to lower costs that LG Electronics experiences, that too is posing stiff competition to Apple. LG has experienced a growth of 13% in the smartphone category. This certainly signifies the need to innovate on part of Apple, and that too in a way that helps the company maintain its claim of being a global brand.
| Brand | Market Share in Smart Phones |
| Apple | 17% |
| Samsung | 33% |
The road ahead
The road ahead for Apple does not appear to be a walk in the park. Instead, the company is ready to face all the competition that is in store. However, Tim Cook remains determined that the company shall live up to its innovation leaders’ reputation, and shall continue doing the same. In this regard, although the latest media reports suggest that the launch of a smart watch with the option of a connected TV could have to wait till the fall of this year.
A final word
All in all, Apple is too big a company to be ruled out with a slightly slack period, and instead this could be just the ideal time to buy Apple shares. Following the general finance rule of buy low sell high — Netflix’s recent impressive comeback as an example — it can be safely said that this would be the trend towards the end of this year for Apple’s stock as well. A single product introduction which breaks through the shackles of innovation is what the stock needs, and it is firmly believed that management at Apple is wary of the fact that investors’ confidence must not wash away.
The article Apple: It’s Time to Break the Shackles originally appeared on Fool.com and is written by Nauman Aly.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
