The Risk-Reward Ratio On Apple Makes It A No-Brainer
My Case For Apple
I always talk about the risk vs reward paradigm, and I certainly feel like that is the main case for buying Apple. First off, a few important facts about Apple.
-Trades at a P/E of 10.22: To give you an idea, that is cheaper than companies like
Intel Corp (NASDAQ:INTC) 12.69
Microsoft (NASDAQ:MSFT) - 13.06
IBM (NYSE:IBM) 13.19
Cisco (NASDAQ:CSCO) 15.32
When I look at recent growth in revenues and earnings, I don’t see something that would justify such a valuation.
What Would Justify Apples Current Valuation?
The main thing that would justify such a P/E, in my opinion, would be for Apple to have more downside potential. I don’t see that happening anytime soon. To me, those companies are good examples of what Apple could end up being in a worst case scenario. The main concerns for Apple shareholders such as myself are:
-No New Products: One of the big concerns for shareholders has been the lack of new products. Ever since Steve Jobs left the company, Apple has been living off of its main products (iPhone, iPad, iPod, Macbook, etc) with little to no innovation. There have been rumors that products such as the iTV and the iWatch will soon launch, but those have been going on for a long time now with no results.
-Decreasing Margins:There have been rumors of a cheaper iPhone coming to the market and there is a debate over the benefits and downsides of such an approach. It’s unclear how good of a move this would be, but I don’t think anyone expects margins on existing products to improve. The fact is that competing products are getting better and Apple can no longer get away with the margins it enjoyed for a few years in the smartphone and tablet markets especially. For margins to increase, new products will need to become a major part of Apple’s business.
Of course, I wouldn’t say that these are foregone conclusions. Tim Cook has already confirmed that there would be many new products launched in the coming months (iRadio was the first announcement just a few weeks ago).
Declining margins are certainly a worry, but it’s far from a done deal. Also, declining margins in a market that is growing very strongly (and should continue doing so for some time to come).
If Apple is on pace to make $40 or so per share this year in what anyone would say is a down year and that we agree that Apple’s P/E is not going to get much lower, I think it’s reasonable to expect Apple to have a floor that is actually not too far from its current levels.
The Upside Remains Significant
Apple remains an incredibly strong franchise that could end up launching a big new product (such as a TV) in the coming months and that will continue to roll its existing products for some time to come. It’s also very reasonable to expect Apple’s P/E to come back up, which in itself would have a significant impact. I also think its way too early to give Android the victory over Apple. The fact is that there is a clear group of consumers that will continue the closed/simple ecosystem and lineup of products that Apple provides.
Apple also has an infrastructure of users that buy content through itunes, which, in many ways, is second only to Amazon in terms of merchandise search engines
When I look at Apple, I see a stock with very limited downside, but fairly significant upside, exactly the type of trade that I look for.