While it may be easy to be lured in by this recent dip in the share price, the truth is that Apple is actually facing some very serious, and potentially harmful, issues — and this could greatly affect the share price negatively in the near future.
Why Apple may seem to be a good value
At first glance, shares of Apple Inc. (NASDAQ:AAPL) would appear to be a good buy. After all, the company’s P/E is below that of the overall market average — signaling that the share price has room to grow. In addition, Apple has done a good job of piling a large amount of cash reserves.
Yet, since the fall of 2012, Apple Inc. (NASDAQ:AAPL)’s shares have looked like a bargain — even though they were trading in the $500 to $600 range. An investor who bought in at that time on the basis of obtaining a “cheap” stock has likely lost a great deal of money in the process. The lesson here may be that cheap price still doesn’t always represent a great value.
Numbers may be too deceiving
There are also those who lean more towards technical analysis when making a determination about which stocks to buy and sell. Given the case for Apple, the numbers would likely paint a rosy red picture. But here again, it is easy to be deceived.
Because a company’s hard-numbered financials are always representative of how that company performed in its past, tomorrow’s share price of even the best performing company yesterday could still plummet on bad news today or tomorrow. Investors must always remember that “past performance does not guarantee future results.”
In Apple’s case, the low price-to-earnings ratio is based on the company’s past profits — which is essentially very unlikely to be repeated going forward. In addition, Apple Inc. (NASDAQ:AAPL)’s low forward P/E ratio is much more likely based upon way too optimistic future earnings projections. Following this logic, investors who dive in based on these numbers alone are likely to be disappointed.
Apple is getting lost in the crowd
To add fuel to the fire, Apple — the company that produces highly unique and sought after products like the iPod, iPad, and iPhone — has recently fallen into more of a mediocre role where consumers have a choice in which company they purchase their device from, oftentimes at a much reduced price elsewhere.
Morphing into more of a “me too” product producer that, in all likelihood, will need to lower its product prices to stay competitive is also likely to push the quality of its products up — thus reducing the gross margin and possibly also the share price — of Apple down ever further.
Pointing fingers at competitors
One of the biggest reasons that Apple’s products are no longer the “best thing since sliced bread” has come from the introduction of Android devices. In fact, some may even say that Android has obliterated the iDevice kingdom altogether.
While Apple Inc. (NASDAQ:AAPL)’s snazzy iPhone was at one time believed as the best smartphone available, consumers now know that this is no longer the case. In fact, there is not only a wide variety of Android devices to choose from — but many other devices can outperform the Apple iPhone today.
On top of that, companies such as Google Inc (NASDAQ:GOOG) — with its Nexus — and Samsung‘s Galaxy phones are offering similar or better capabilities than the iPhone.
Apple’s weak attempt to drive away its competition has consisted of eliminating Google Inc (NASDAQ:GOOG)’s services from iPhone and other iDevices, and replacing them with Apple’s own services. This, however, has backfired, as apps like YouTube and Google Maps have been turned off or eliminated by default. This has not made Apple Inc. (NASDAQ:AAPL) customers happy campers. As Google Inc (NASDAQ:GOOG) continues to give away Android for free, Apple will continue losing market share to the former. Google is also introducing Nexus smartphones that cost half the price of iPhone and deliver a similar performance on a widely accepted ecosystem.
Comparing some similar stories
Investors who are still considering the purchase of Apple’s shares (or in some cases, more of Apple’s shares) are not being comforted when comparing Apple’s current situation with similar companies in the past.
Take, for example, Microsoft Corporation (NASDAQ:MSFT). The shares of Bill Gates’ baby soared to tremendous heights during the 1990s — only to fall into a much lower range for the next 15 years. This leaves potential investors questioning whether a similar situation will take place with Apple. Microsoft Corporation (NASDAQ:MSFT) is expected to show flat earnings this fiscal year and trades at 17 times that earnings. If Apple is growing slower than Microsoft, then the former’s P/E value of 11 is justified. Sufficient to say, Google with its earnings growth still in the high-teens deserves a much higher multiple than both Apple and Microsoft.
One thing that seems to have kept Microsoft Corporation (NASDAQ:MSFT) afloat, though, is its well diversified product portfolio, as well as its position in several different sectors — including the highly popular Xbox gaming system. A recent move by ValueAct to take a $2 billion stake in the company, backing Microsoft as the next cloud giant, only elaborates the importance of the technology going forward, the technology in which Google is currently way ahead of Apple.
Unfortunately for Apple Inc. (NASDAQ:AAPL), the lion’s share of its past products have been primarily dependent on its iPhone sales. And, with the competition from Android continuing to surge ahead, Apple’s iPhone market share is most likely to continue in its downward spiral.
The iPhone’s Market Share Is Dead In The Water.
The final word — Don’t buy raw Apples
Although Apple’s share price is currently estimated by analysts to rise into the mid-500s over the next 12 months, it may still be best for investors to steer clear of this stock — at least for the near-term or until the fruit is ripe enough to be bought at a cheaper price. One reason for this is that the forward looking estimate is just simply that — an estimate — and is based upon the future, not yesterday’s performance of the company.
The article Don’t Invest in Apple Before You Read This originally appeared on Fool.com and is written by Nauman Aly.
Nauman Aly has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Nauman is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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