Apple Inc. (AAPL): The Agony and Ecstasy of a Bull

Apple Inc. (NASDAQ:AAPL) is currently trading cheap if its fundamentals are taken into consideration. The stock has lost around 33% of its value in the last six months. After climbing to $700, it is now hovering around its 52-week low at $420. Adding further fuel to the fire, Goldman Sachs recently dropped Apple from its conviction buy list, making the stock plunge another 5%. Let’s discuss this stock in detail and find out whether this low offers a good buying opportunity to the investors, or the stock is bound towards a new low.

Even though the decline in the stock is making investors wary, the dividend yield of 2.5% is somewhat pacifying the situation. Last year, Apple Inc. (NASDAQ:AAPL) announced its first quarterly dividend in 17 years, which translates into $10 billion in dividend payments annually. With this move, Apple succeeded in establishing itself among the income investors as well.

Apple Inc. (AAPL)Along with the dividend, the company also started a share buyback program to enhance its earnings per share. The buyback, which started in September 2012, is expected to continue for a period of three years, with a total spending of $10 billion. With both dividend payments and the buyback program combined, Apple Inc. (NASDAQ:AAPL) will utilize more than $40 billion of its cash balance until 2015.

However, I believe investors can expect further increases in dividend and buybacks. The solid size of the company’s cash balances, and the deteriorating stock price can put pressure on the company to announce something more substantial.

Next catalysts – Bull or Bear?

Lower-end smartphone market

Apple Inc. (NASDAQ:AAPL)’s downfall is mainly attributed to the maturing growth in the top-end smartphone market. Also, it is facing gross margin pressure with increased competition in the sector. Investors are even questioning the company’s capability of innovation after the untimely demise of Steve Jobs.

With all these pressures, the company is planning to revive its strategies to arrest the decline. To broaden its portfolio, it might target the emerging markets with a low-priced iPhone in the coming few quarters. With this move, Apple would hit at budget smartphones in the emerging markets, which would contribute around 75% to the total smartphone market by 2017 (up from 65% in 2012).

The lower-end iPhone is expected to be launched around the third or fourth quarter of this year. With this addition, Apple Inc. (NASDAQ:AAPL) is aiming at $500 million of the total addressable market next year. However, on the flip-side, the lower-end smartphone will definitely hit the premium brand image of the company. It will be really interesting to see whether, and how, Apple provides an iPhone experience at a lower price.

Recently, Nokia Corporation (ADR) (NYSE:NOK) also ventured into the lower-end smartphone space with its two Lumia phones, the Lumia 720 and the Lumia 520 with Windows 8 platform. With these launches, the company is trying to win back its spot in the emerging markets which it once dominated.

I believe it is easier for Nokia to gain the upper hand in emerging nations as compared to Apple Inc. (NASDAQ:AAPL). Nokia Corporation (ADR) (NYSE:NOK) will benefit from its reputed brand image in these markets in terms of durability and price efficiency. On the other hand, Apple has always been known for its high-end luxury products, and price-sensitive consumers can be a bit apprehensive about its products.

Intensifying competition

Last month, Apple’s biggest competitor, Samsunglaunched the latest version of its flagship phone, the Galaxy S4. This phone will be the biggest threat to the iPhone this year in the high-end market. The Galaxy S4, which runs on Google Inc (NASDAQ:GOOG)’s Android, has some attractive and unique updates to its previous S3 model.

I believe the S4 will continue to drive the growth story for Samsung, making the battle more intense for Apple. The company will start shipment of this smartphone in late April, and it will be launched with 327 carriers in more than 150 countries.

Apart from the high-end market, Apple Inc. (NASDAQ:AAPL) also has to compete with Samsung and their lower-end smartphones. Samsung already owns a respectable place in this market too, and is continuously expanding beyond high-profile devices. In 2013, Samsung has already unveiled eight handsets, out of which only the S4 belongs to the high-end space. The low-end phones generally cost about $100 and are targeted at emerging markets, such as Indonesia and India.