Here’s to those looking for a neutral analysis on Apple Inc. (NASDAQ:AAPL). This is the first of three articles where I introduce nine reasons to be bullish and one very important reason to be a bear. As a result, I label Apple as a neutral stock under a one year investment horizon. But before introducing my reasons, let me begin this article by looking at the statements of a very famous bear who thinks that Apple is in great danger.
No need to panic!
In “Danger Zone For This Week: Apple”, David Trainer mentioned three reasons to believe that Apple Inc. (NASDAQ:AAPL) is in the danger zone:
1) Apple’S ROIC of 124% is too elevated if we consider that this is “just another computer company”
2) Apple is no longer a value stock if we assume a more “normal” ROIC, and
3) Group thinking: many fund managers own Apple because “no fund manager or ETF provider wants to have to explain to investors why they did not own Apple Inc. (NASDAQ:AAPL) if the stock takes off again.”
This first article sets out to bring a counterargument to Trainer’s three reasons. In a nutshell, I will show that 1) Apple is not “another computer company”, 2) there are no reasons to assume a massive decrease in ROIC, and 3) Group thinking could have some benefits.
1) Apple’s different
To begin with, Apple Inc. (NASDAQ:AAPL) is not a computer company. They produce smartphones, iPads, and Macs. They own the iTunes store, an independent payments ecosystem which recently surpassed 50 billion downloads. Comparing Apple’s ROIC to “competitors” like Microsoft Corporation (NASDAQ:MSFT), Research In Motion Ltd (NASDAQ:BBRY), or Dell Inc. (NASDAQ:DELL), is therefore, not accurate. Microsoft does not produce smartphones. Blackberry does not produce computers. Dell Inc. (NASDAQ:DELL) is mainly in the business of personal computers. And none of them owns something similar to iTunes. None of them have succeeded in creating their own payments ecosystem!
I do, however, think that comparing Apple to Google Inc (NASDAQ:GOOG) in terms of ROIC makes sense, as they have similar business portfolios, specially when it comes to software. Google has its own payments ecosystem (Google Play), which is a direct competitor of iTunes. Furthermore, the war between Android and iOS in emerging markets already has a clear winner: Google. Notice, however, that a comparison against Google is far from being perfect. Google doesn’t really own hardware. This could change in the future, as Google is preparing an aggressive Google Glass release.
At any rate, according to Trainer, if Google Inc (NASDAQ:GOOG)’s 34% ROIC is the benchmark, the stock is worth only around $191. However, he also mentions that Apple’s current ROIC is 271%. In other words, he thinks that ROIC will fall from 271% to 34%. This is a very strong statement that needs to be supported with more than a reason. The only reason he provided is:
(…)Apple’s ROIC could fall if it returns to more normal levels, which I think is inevitable after the departure of Steve Jobs.
But there is no evidence that the absence of Steve Jobs will hurt Apple Inc. (NASDAQ:AAPL)’s innovative culture permanently. As a matter of fact, the “Steve Jobs” effect on market capitalization and stock price is statistically insignificant, as I will show in Part 2 (for those who cannot wait, check this awesome paper titled “Do Investors Care If Steve Jobs Is Healthy?”)
If we assume that stock price and market capitalization more or less reflect the real value of a given firm in the long run, we can infer that there is no statistically significant evidence that the absence of Steve Jobs per se will hurt the firm’s value.
2) Value
Trainer justifies its $191 estimate by saying that the elevated ROIC rate invites lots of competition. I agree. Everybody is interested in high margins. However, not everybody can compete well, especially against Apple Inc. (NASDAQ:AAPL).
To my way of thinking, only Samsung and Google Inc (NASDAQ:GOOG) are important competitors, especially in emerging markets. Just like Google competes against Apple in the software arena, Samsung competes in the hardware arena. And so far, Samsung is winning in market share, mainly due to the incredible growth that emerging markets saw in smartphone penetration.
