Apple (AAPL) shareholders got a much-needed shot in the arm this week when the company released its quarterly earnings. Apple’s iPhone sales came in at 31.2 million vs. the consensus estimate of 26.5 million. Not bad, all things considered.
The story isn’t all good, however. Apple is not immune from the decline in traditional computers, and sales of its Mac fell pretty significantly. The iPad also saw a drop in sales—14.6 million vs. 17 million last year.
And finally, there is no news on the next “it” product, meaning that, for the foreseeable future, Apple will depend on an aging portfolio of products.
So what now? Is Apple a buy? Or is the recent strength in the stock price just a blip in a long, secular decline?
First, a dose of realism is needed. Apple is no longer a revolutionary game changer. That spark died with Steve Jobs, and the competition has more or less caught up. But that’s ok. Apple’s products are still among the best, and Apple is still the standard to beat. Its customer loyalty—which borders on fanaticism—will probably fade with time, but it won’t happen tomorrow.
What about margins? Aren’t Apple’s margins slipping?
DECLINING MARGINS
Yes, they are. But then, this is an industry-wide problem. The top-end smartphone market is saturated in the developed world, and each iteration of product is getting incrementally less impressive. The “wow” factor is gone, and we’ve all become desensitized.
What do I mean by this? I carry a Samsung Galaxy S3. The S4 has slightly better features but not enough to convince me to upgrade. A slightly faster processor or a slightly better camera is not incentive enough, and neither are the bells and whistles like eye-movement controls.
My point here is that Apple’s problems are not unique to Apple. The whole industry is looking at leaner margins. The question now is simply what is a fair price?
EXPECTED EARNINGS
At $438, Apple trades for 10 times expected earnings, which is a massive discount to the broader market. On a price/sales basis, Apple is actually cheaper than Microsoft—2.43 vs. 3.36
Now, to be clear, I like Microsoft’s prospects going forward, and I like their mix of businesses better than Apple’s. I am a major long-term Microsoft bull. But the fact is that Apple is cheap.
PUT IT ON YOUR WATCH LIST
If I could buy Apple at a 3% dividend yield, I would do it in a heartbeat. This would mean a stock price at $406. If Apple hits those levels, I’m a buyer. If not, I’ll bide my time.
