Lately we have seen a lot of speculation as to “what is wrong” with Apple Inc. (NASDAQ:AAPL). Obviously something is wrong with Apple Inc. (NASDAQ:AAPL)’s stock considering it has fallen from over $700 down to around $460. The issue with the stock is the type of investor who would want to own shares at this point. Apple is transforming from one of the most loved growth stocks to a loathed value stock, and therein lies the opportunity for long-term investors.
One thing people often forget to mention is that Apple Inc. (NASDAQ:AAPL) yields 2.4% while only trading at 9.1x forward earnings. At 8.7x forward earnings you can buy Microsoft Corporation (NASDAQ:MSFT), who can barely get their toe wet in the mobile phone market, is seeing PC sales plummet due to tablets, and has to deal with a little company called Google who is giving away a cloud version of Microsoft Office. Google Inc (NASDAQ:GOOG), who is currently the only real competitor in terms of a mobile OS, trades at 14.4x forward earnings with no dividend. For 9.1x forward earnings you are buying Apple Inc. (NASDAQ:AAPL), which is one of the greatest retailers in the world, with $6,050 in sales per square foot. The closest retailer is Tiffany & Co. (NYSE:TIF) at $3,017 per square foot.
Challenges on the horizon
Apple is not without challenges. Unlike the United States, much of the rest of the world’s telecommunications companies do not subsidize their phones. That means that the iPhone 5 starts at $649 not $199. This also means that many consumers are going to either choose cheaper Android phones or earlier iterations of the iPhone, which will hurt margins. Considering this, as well as the competition from companies like Samsung with their Galaxy S III in the high-end smartphone market, the 5 year projected growth rate of Apple Inc. (NASDAQ:AAPL) at just under 19% may be too high. The recent pullback in stock price has already more than compensated for a deceleration in the growth rate. If Apple’s projected 19% growth rate gets cut in half, Apple’s PEG ratio would still only be about 1.1. Google trades with a PEG of 1.26 and Microsoft trades with a PEG of 1.17.
It’s not like Apple is the next BlackBerry. Apple has almost $40 billion in cash and continues to generate lots of cash quarter after quarter. On top of that, Apple’s production of the iPad, iMac, and iPhone cannot keep up with demand according to Tim Cook on Apple’s most recent conference call:
The hot spot market is projected to grow by 19.8% of CAGR from now until 2025, outpacing many other industries. This growing market creates opportunities as the need for Wifi increases (ref 1). One major reason for growth in the hot spot market (or Wifi as a service market) has been the growing adoption of BYOD (Bring Your Own Device) in large settings. For example, whole cities (such as Santa Monica, CA) offer Wifi that any mobile device can tap into. (ref 2 and 3)
Smart City Investments are expected to reach $326 billion by 2025 (or possibly as high as $820 billion) as cities adopt Wifi as a service to mitigate growing populations. (ref 4)
As people increasingly depend upon their mobile devices for communications, entertainment, and even purchases, the growth of BYOD presents opportunities for companies that provide Wifi as a service, advertising and hardware to make it all possible. (ref 5)
In addition, innovations in Internet speeds and bandwidth in venues such as airports and sports stadiums create new opportunities to deliver high quality advertising content to devices which are connected to the network. With such breakthroughs as 5G being projected to grow at a CAGR of more than 53% over the next five years, video ads will soon be delivered to in-venue devices like never before. (ref 6)