OK, Apple Haters, You’re Right: But as Just Another Tired Old Tech Stock, Is it Cheap?
Apple (AAPL) has freaked out lots of investors lately, sending its share price down more than 20% in two months with unexpectedly weak earnings and forecasts. Take a close look at Apple numbers, though, and one has to wonder how any long-term investor scared silly by this can stand to be in stocks at all.
The most touted red flag in Apple’s recent reports is a gross profit margin it forecasts to slide for 40% to 36% in the fourth quarter. Rising production costs for new versions of the iPhone, and iPad, as well as updated versions of iPods and Mac computers, are eating into profits.
How alarming is this? It’s popular to note that the Apple margin hasn’t been below 40% in four years. It may be more useful to look at the trend. In fact, gross profit margins have improved more at Apple in the past four years than they did at Qualcomm (QCOM), a smartphone parts maker that’s fantastically popular with investors; at Microsoft (MSFT) and Dell (DELL), which are both top hedge fund buys this year; and at Google (GOOG), where buy recommendations outstrip others by about 3-to-1. (Note that the chart shows the change in gross margin; not actual profit margin).
It’s not a great year for margins for any of them.
Of broader concern to Apple investors is what that margin squeeze says about the company’s competitive edge. Past Apple products have so outshined competitors’ that consumers accepted significantly higher i-stuff prices, but the competition has greatly improved. In the third quarter, Samsung took some of its market share for phones, and Amazon.com’s (AMZN) cheaper Kindle Fire ate into iPad sales. If Apple’s costly product improvements are good enough, Apple’s profit margins should improve next year as it once again dominates. If not, sales growth will decline, as will the rate of profit gains.
For conservative investors, the question here is whether Apple is worth investing in if Apple becomes just a good competitor rather than a consistent stand-out in everything it touches. It assumes that the company, like any strong business, can still put out new products that can excite customers, even if they don’t change the world again. (Although as a company with thousands of the brightest developers on the planet, and R&D in a variety of industries, it still might.) And if we evaluate Apple as such a mortal investment, rather than the rampant riser we’ve come to expect, the company still comes out as a perfectly respectable value play.
Apple’s annual revenue growth rate could halve and still be at double-digit levels. This is a company that tripled sales in four years, during a recession, even as one of the biggest companies in the country.
Apple’s still strong profit margins mean that its share price valuations have never grown out of hand. Its PE ratio stands at barely 12 on historic earnings and under 10 on next year’s projections. These ratios are much better for Apple buyers now than those of other big tech companies.
Apple’s dividend yield is near 2% now. Sure, Dell will pay a lot more, but that company is definitely shrinking.
It’s quite possible that the Apple dissing will get louder in coming months, particularly if the Christmas selling season shows signs of weakness. Perhaps there’s little downside to putting off an investment decision here. Or shareholders might want to take some profits in Apple now and save some for reinvesting there later. Everyone who bought Apple before this year can sell today and still make lots of money. That’s not something one can say about Google, or Microsoft, or Dell, or Qualcomm.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
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