Currently, the stock is cheap, as it sells for 13.70 times forward earnings, and yields 2%. Out of $618 billion in market cap, you also have some downside protection in terms of almost 1/4 of the market cap being in a net cash position on Balance Sheet. So if you have confidence in Apple being able to roll out new products/services and generate high margins and high earnings for foreseeable future, then it might be a good hold for you. If you also get something like a valuation expansion, you could probably do pretty well for yourself as well. And in the meantime, you will likely be paid a nice growing dividend, while you are waiting. If earnings start dropping from here however, you may see losses in capital, and the dividend will be in danger. The low P/E ratio reflects the overall bearishness on the company’s ability to maintain profits going forward, given the intensely competitive nature of the smartphone market. Sales of smartphones have accounted for a large part of Apple’s growth over the past five years. Competition from Samsung, LG, and HTC has eroded Apple’s market share.
On the other hand, Apple has been the dominant leader in smartphones. This is evident by the high amount of profits earned, high margins, and high customer loyalty. iPhone’s are perceived as quality products, which is why people are willing to pay a premium for them. The company’s other competitors have not done as well. More recently, Samsung’s newest phone has been having some issues, which have led to it halting sales to the recent model. This could be advantageous to Apple in the short-run, assuming that its latest phones do not catch on fire either. If the design flaw is due to a Samsung related issue, then Apple will clearly benefit. If the design flaw is due to an issue related to a supplier however, or a flaw that is copied from Apple, then Apple may not benefit as much from this fiasco.
The issue with Apple is that if there is something wrong with the iPhone, and a product has to be recalled, it would really affect the bottom line given the fact that it accounts for 2/3rds of sales. So if you are an Apple investor, I am hopeful that the quality control is up to par.
So my conclusion is that the world of technology is unpredictable. While some brand affinity exists, the rate of innovation is high enough to warrant consumers to switch to another competitor. I know that Apple is trying to build a moat.
I am hesitant because I do not see it as a recurring product you would buy over and over. For example, with Nike (NKE), I am not sure technology will easily disrupt the way you put shoes on. If there is change in shoes, it will be very slow and gradual, which would allow Nike to respond. There are significant improvements along the way, and the company invests to be the best brand, but I don’t think technology plays same role as say Apple. I could be wrong, or I could be right. Let’s circle back on this one in 10 years.
Since this business is outside my margin of safety, I will not invest in Apple ( though I do own it indirectly through the mutual funds I own in my 401 K).
