Apple Inc. (AAPL): How Rotten Is This Fruit?

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Samsung is playing a hard game

SAMSUNG ELECT LTD (NASDAQOTH: SSNLF) is rallying largely because of the success of the Galaxy S family. The Samsung Galaxy S3 and the Note II Android phones are killing the competition because they give the user an environment similar to the iOS at a much lower price. The wide range of handsets and tablets has firmly established Samsung in every strata of society and given it tremendous scope for growth and innovation. Also, Samsung enjoys the benefits of backward integration as it owns the facilities where it develops various parts of the phones, like chips and screens. While Apple too has some facilities, it is dependent on other companies like Samsung, from where it sourced components like lithium batteries to make its iPhones.  And the most profitable of all of Samsung’s strategies is its access to the Chinese market, where it owns 29% of the market share according to research firm IDC. Apple owns 21.8%, but does not have the strategic alliance with China Mobile, the world’s largest mobile carrier, that Samsung does. Apple has been a little too late in targeting the Chinese market.

The dubious boon of cash reserves?

While Apple reported flat earnings for the fourth quarter, Samsung’s profits have rocketed by 76% in the same quarter. Naturally Apple’s stock has fallen by almost 10% in the last four days and by almost 35% since it hit its all time high in September. The hopes of Apple dipping into its much spoken about cash reserves to brighten the situation doesn’t hold much value, because they are in foreign currency deposits in countries with lower tax rates. To use them in any way the US tax rates will become applicable, making their cash reserves a tad bit overplayed.

What I would buy

If you had to pick a tech stock I would suggest a buy on Samsung and on stocks like Intel Corporation (NASDAQ:INTC) and Google. Intel is the world’s largest semiconductor manufacturer, and while PC sales are in a decline, Intel still has opportunities in the emerging markets. It is also rapidly developing its processors and chip technologies for use in new age products like smartphones and tablets. The stock is cheap and offers a dividend of over 4.5%. While Google has seen a slump recently, it is a very good long term option too. It has almost doubled profits and tripled sales in the last 4 years. And it is expecting a 25% jump in profits for FY2013 over FY2012. Google owns a majority market share of cellular operating systems thanks to Android, making it the one company that need not fear the takeover of the computer by the mobile phone.

As for any existing exposure in Apple, I’d say sell 75% and hold 25%.  For me Apple has reached its top and will not be reaching those heights anytime soon. However, news is going around that Apple will soon be using its cash reserves to conduct a $10 billion buy back operation. If this happens in a phased out and timely manner, Apple may be able to bounce back.

It has faced similar situations in the past, but we should still wait and watch.

The article How Rotten Is This Fruit? originally appeared on Fool.com and is written by Sujata Dutta.

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