Apple Inc. (NASDAQ:AAPL) hit its high of $700 per share in after-hours trading on Sept. 17, 2012. What has happened since then hasn’t been favorable for the tech giant at all. So what has gone wrong for Apple, and why has it declined in value so much? It seems that Apple Inc. (NASDAQ:AAPL) is losing its way of innovating and creating products that fans would love to buy.
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.