Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Why Apple Inc. (AAPL) Is Different

Page 1 of 2

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.

Apple Inc. (AAPL)

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.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!