Don’t Ditch Apple Inc. (AAPL), But Approach With Caution

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What is happening to Apple Inc. (NASDAQ:AAPL)? Why would a company that was named “Most Valuable” last year have investors questioning whether it is still a buy? And with standards of the industry like the iPad and the highest selling phone on the planet, why does it seem that the company’s culture of innovation is waning? While I have no doubt of an Apple renewal, I see other companies making a greater play for growth such as Google Inc (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), and Oracle Corporation (NASDAQ:ORCL).

Over the past couple of months, the news from tech stocks has been “not good.” Sales of conventional computers dropped 14% worldwide last quarter, the industry’s worst-ever decline. Earnings reports from IBM, Apple Inc. (NASDAQ:AAPL), Intel Corporation (NASDAQ:INTC), and Microsoft Corporation (NASDAQ:MSFT) all disappointed Wall Street analysts. Instead of declining, however, the tech sector has actually powered higher.

Why isn’t Apple joining in?

It is my opinion that at a price of $440 per share, down from over $700 a few short months ago, problems exist not only in the stock but also in the company. Most investors have recognized these problems and adjusted for them, explaining the stock price drop. But the problems within still seem to be running rampant.

Apple Inc. (NASDAQ:AAPL)’s stock has collapsed, its fundamentals have deteriorated, and analysts have cut their price targets. As of yet, though, few analysts have downgraded and fully brought their forecasts into line with the new Apple reality. In fact, most analysts still rate the stock “buy,” and the consensus earnings forecast for 2013 is for 10% greater growth over last year.

As one can imagine, Wall Street’s profit targets have come down even more since last week’s disappointing guidance. The outlook may have been merely for the current quarter, but it has now stretched out through fiscal 2014. While shares of the company have fallen 17% in 2013, Wall Street’s profit targets have declined by 18% for fiscal 2013 and 23% for fiscal 2014.

Is the competition getting too strong?

Google Inc (NASDAQ:GOOG) seems to be the company most responsible for Apple Inc. (NASDAQ:AAPL)’s contracting margins. It has seen big success with its Android mobile operating platform. The profit target on Google for 2013 has grown from $45.68 a share to $46.12 a share over the past three months. So what is it that Google is doing right and Apple is doing wrong?

The first point is its diversification and growth into new areas. Apple Inc. (NASDAQ:AAPL) focuses on fewer types of products and put its major resources into them. That means that it depends on the robust success of a smaller number of product areas. The iPhone, for example, is still the single most important creator of profit at Apple. Google Inc (NASDAQ:GOOG) sees substantial income generated by its OS and partnership with Samsung and its “Galaxy” line, but the company still receives over 90% of its revenue through advertising.

Apple Inc. (AAPL)Google’s strategy is not to get the most from one or a few products to the exclusion of the competition. Rather, it joins with several companies and gets a piece of pie from all of them. Analysts and investors alike, in their anticipation of new Apple Inc. (NASDAQ:AAPL) products like the new rumored “iWatch,” are inherently saying that the company needs another “big hit” to make it. Google Inc (NASDAQ:GOOG), on the other hand, needs to only continue receiving revenue from its cloud computing services, mobile operating systems and advertising.

Apple’s other downfall

The other area where companies are beating out Apple Inc. (NASDAQ:AAPL) is in “playing nice with everyone in the sandbox.” Apple has always been a lone wolf when it comes to its hardware and software, trying to force partnerships and instead creating resentment and even legal problems.

Companies like Oracle Corporation (NASDAQ:ORCL) have been much smarter. By making some of its back end development software free to hardware vendors it has built market share for its systems and made it difficult for others to do the same, especially in future growth areas such as India and China. Moreover, while other companies focus on offering a cloud computing product (which, stand alone, is seen by some as limiting), Oracle offers support to other businesses through back end, database structuring, and implementation.

Oracle Corporation (NASDAQ:ORCL) reported a 3% increase in revenue, reaching $9.1 billion. Part of this was due to its software licenses and subscriptions which have performed exceptionally well, soaring 17% year-over-year. Oracle’s strong cash position, deep market penetration, and innovative strategies are what puts it on top.

So what should investors do?

Apple Inc. (NASDAQ:AAPL) stock should not be dumped just yet. While I do see some serious problems in the operations of the company, there could still be a rebound in the stock based on its dominating position in mobile computing. The company now has about $150 billion in cash ($137 billion as of Dec. 31), which means that Apple’s business itself is only valued at about $250 billion. Even if you assume that Apple’s revenue growth will pause and Apple’s profit margin will drop sharply–both of which appear likely to happen–the stock still looks attractive.

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