Apple’s shares had become so popular that people would ask, “How’s the market today? How’s Apple.” But Apple has fallen from grace since becoming the stock market’s most important company in terms of market capitalization or total share value, surpassing integrated energy company Exxon Mobil (NYSE: XOM) long ago. Apple (Nasdaq: AAPL) shares have fallen 35% since marking their 52-week high in September 2012. The stock is down 14% in 2013 alone. It’s because of investor concern that the company might not be able to continue to grow at the awesome pace it had posted in the past. Indeed, the problem with Apple is Apple, because its great success has grown it into a behemoth, with the law of large numbers now working against the company. But after falling so far so fast, selling in the stock may finally be tiring and it may be time to buy AAPL again.
Apple’s glorious rise into the favor of America was driven by its iconic leader’s vision. Steve Jobs led the company into glory with disruptive innovation, altering the way people listen to music, how they use their mobile phones, and the way they view computing generally. The iPod, iPhone and iPad have helped to make the Apple brand one of the most recognizable globally. The products are tops in class across their categories, which Apple either reinvented or invented. As a result, the company grew its earnings per share at a stellar pace of 71% over the last five years, according to Yahoo Finance data. But after displacing rivals Nokia (NYSE: NOK), Palm (acquired by Hewlett-Packard (NYSE: HPQ)), Motorola and Blackberry (Nasdaq: RIMM) and establishing itself, the company now faces serious competition from Samsung, Google (Nasdaq: GOOG), Microsoft (Nasdaq: MSFT), Amazon.com (Nasdaq: AMZN) and all others matching the look and feel of Apple’s innovative gear.
With earnings growth came share price appreciation. From the close of trading at the end of 2003 to the stock’s intraday high of $705 in September of 2012, an investment in Apple stock would have increased by 6,558%. Still, with the analysts’ consensus forecast for just 14% EPS growth annually over the next five years, investors are asking an important question about the future, as evidenced by the stock’s steep fall since September. Where will future growth come from? Expansion of iPhone distribution into China still offers a significant opportunity to Apple, but it has formidable competition now, so it would have to share the space.
Some, including your author here, say growth should come from new product development and the introduction of a smart television by Apple. Television is a product segment that has been relatively unchanged for decades. But there has been interest in innovative development in the segment of late, with technology lending to sleeker and more convenient flat screen design, improved resolution and even 3-dimensional viewing.
Outside of rumored television R&D, the company’s development efforts have mostly been alterations of its existing products, which some say could be cannibalistic. Whether they are or not, they are reactionary to the development of products by competitors. The iPad Mini for instance defends against the successful efforts of rivals with smaller and lighter tablets. The company may also trade profit margin and returns in order to appeal against lower price-point gear offered by rivals. But the best defense is offense, and so investors pose a valid question.
The stock’s decline has probably been exacerbated by capital flows, with investors perhaps putting money to work in the generally rising stock market this year, and using their AAPL capital as a resource to do so. But with the nascent market rally finally finding an obstacle in the economic reality check presented to it this week, capital draws from AAPL holdings may dissipate. Also, at its just discounted valuation, with a P/E-to-growth ratio of 0.7 on a better than market growth forecast (with a figure under 1.0 representing fair value if you expect the stock’s growth to just match market performance) AAPL would present value. Impetus is certainly on Apple’s management team to stop the bleeding in its stock. So, with the possibility of a new catalyst on the horizon, whether it is a new product introduction or expansion into emerging markets, and given that recent negative capital flow drivers may be exhausted, it may be time to buy Apple shares again.