“Apple Inc. (NASDAQ:AAPL) computers? Aren’t those for artists and graphic-design nerds?” I asked the salesman demonstrating an early version of the Apple Macintosh desktop computer in the early 1990s. “I need a real computer, not something to paint pretty pictures on and design flowers with.”
“You will understand one day, friend,” he said with a smile.
I ended up purchasing an International Business Machines Corp. (NYSE:IBM) desktop and didn’t think much about Apple Inc. (NASDAQ:AAPL) — as a computer or an investment. That is, until 2007 — when everything changed.
But this change didn’t come from a desktop computer.
I have always had a preternatural attraction to cellphones, particularly smartphones. My obsession started with the very first Palm Pilot in the late 1990s and progressed through various alternatives before moving to the once-popular Research In Motion Ltd (NASDAQ:BBRY) series. I tried a new handset every six to 12 months.
Despite my doubts about Apple, the iPhone struck my fancy. It rode in on waves of publicity in June 2007, and the first time I touched it, I became an Apple aficionado for life. This phone was not just another gadget. It provided an intuitive connection between my mind, hand and device.
I’ve owned each generation of iPhone. They are the only smartphones I have purchased since 2007. As a fan of the iPad and iPhone, this former Apple Inc. (NASDAQ:AAPL) skeptic has become a true believer.
Obviously, I am not the only one who feels this way: Investors riding the mass movement to Apple’s products pushed its shares from under $100 at the start of 2007 to $700 in September 2012. As you can see from the chart, this trip higher was nearly straight up without a pullback during the 2008 financial crisis. In fact, Apple Inc. (NASDAQ:AAPL) temporarily became the world’s most valuable company in 2012, exceeding Exxon Mobil Corporation (NYSE:XOM) in market capitalization.
But since the September highs, shares have plunged to the $425 range, with only $75 to go before a 50% value slash. What has happened to this once high-flying stock?
The company blames a delay in supply-chain shipments and a failure by manufacturers to keep up with demand as major factors in the sell-off. In addition, many analysts hold the company to ridiculously high standards of performance. Even with record-breaking sales, analysts expect more; Apple’s recent failures to meet their expectations have hurt its stock price.
Apple is a victim of its own success. Although it’s unlikely the stock will ever reach its September highs again, a 100-plus-point recovery to the $550 range is possible.
That’s why I’ve outlined six reasons to buy Apple Inc. (NASDAQ:AAPL) right now:
1. Changing perception
Due to competitive pressure and a lack of hype-inducing products, Apple is no longer a growth stock. It is making the transition to a value stock, hence the selling.
Growth investors are comparing future growth with past growth, which makes future growth appear weak. The original growth investors are selling shares in their search for the next big thing, but value investors have not yet embraced Apple Inc. (NASDAQ:AAPL). This change in perception may take some time, but when it does, prepare for a rally.
2. Record results
Apple posted record quarterly revenue of more than $54 billion and a record profit of just over $13 billion in its fiscal first quarter. This was the result of nearly 50 million iPhones and 23 million iPads sold during the quarter — not to mention the more than $2 billion in revenue just from the iTunes Store, with record sales of music, apps and videos.
Any other stock would have soared on these stellar numbers. But as mentioned, Apple Inc. (NASDAQ:AAPL) is a victim of its own success, which has brought it with unrealistic performance goals. Once long-term value investors drill into these numbers, they should embrace the stock.
Apple produces a 2.5% dividend yield that could easily spike if the company decides to deploy its cash hoard. Apple has seen recent pressure from hedge-fund manager David Einhorn to release more of this money to shareholders through a proposed high-yield preferred stock program.
4. Cash stockpile
With its $137 billion of free cash and investments, Apple could just about weather the apocalypse.
But the majority of these funds are held overseas, and it would probably take a change in tax laws for them to be repatriated. In the event of such a change, these funds could take the form of share buybacks and dividends. That could increase share value in the eyes of value investors.
5. Potential disruptive products
Remember, we are talking about the company that created the iPhone and iPad. These set a strong precedent. Imagine the hype and stock rally if Apple Inc. (NASDAQ:AAPL) unveils another incredible product.
6. High margins
Apple’s profit margins are the highest in the smartphone business. The company boasts a 58% margin, which compares with 43% for Research In Motion Ltd (NASDAQ:BBRY). This provides a tremendous competitive advantage.
Risks to Consider: Many analysts consider Apple products to be overpriced, with a rapidly fading “cool”factor. In addition, the company’s market share in the smartphone category is slipping slightly due to competition (not to mention that the original driving force behind Apple, Steve Jobs, is no longer around to motivate the company to new heights). Always use stops and position size properly, no matter how much you believe in an investment.
Action to Take –> As long as the stock holds above the 200-week simple moving average of about $375, I like Apple as a buy with an 18-month target price of $550 to $575. Remember, the stock could go easily go higher if Apple introduces another disruptive product or begins to deploy its cash hoard.