Should I Buy Apple? 3 Pros, 3 Cons

by Tom Taulli | September 12, 2012 6:30 am

Unless you’ve been on another planet, you probably know that Apple (NASDAQ:AAPL[1]) plans to launch its iPhone 5 today[2]. According to a J.P. Morgan report[3], this could actually result in a 0.25% or 0.5% increase in U.S. GDP for the fourth quarter!

Such a huge impact alone seems to give investors the green light on Apple stock. But then again, no investment is guaranteed.

So, should you buy Apple? To see, let’s take a look at the pros and cons:

Pros

Insanely Great Products: Apple is not necessarily a pioneer. Instead, the company’s genius shines through in the reinvention of products, such as the smartphone, the MP3 player and so on — and Apple’s next attempt will be aimed at television. This strategy has not only resulted in huge sales, but it has locked customers into the Apple brand. It also has meant crushing once-formidable rivals[4] like Nokia (NYSE:NOK[5]) and Research In Motion (NASDAQ:RIMM[6]).

Ecosystem: At the core of everything is the iOS operating system — the underlying software that powers all of Apple’s products. This system makes it easier to build loyalty with developers, who are incentivized to keep developing on the platform. Apple also has the advantage of its entrenched iTunes system, which has more than 400 million customers.

Valuation: For the growth stock of the century, Apple’s valuation is fairly reasonable, with a price-to-earnings ratio of 15. That’s less than other big-name tech companies, such as Google (NASDAQ:GOOG[7], 20), Facebook (NASDAQ:FB[8], 67) and Amazon (NASDAQ:AMZN[9], 300+).

Cons

Competition: About three-quarters of Apple’s revenues come from the iPhone and iPad — and both categories (smartphone and tablet) are attracting substantial competition. For smartphones, units running Google’s Android OS continue to gain ground — with Samsung proving to be a particularly troublesome player, though the patent suit verdict[10] must now be played out. Also, Google itself plans to leverage its handset business that came with the Motorola acquisition. The iPad is feeling some pressure, too. Microsoft (NASDAQ:MSFT[11]), for example, is going to launch the Surface tablet[12], which could get a nice boost from its Office Suite, while Amazon is marching forward with its updated, lower-cost Kindle tablets[13].

Finding Growth: Apple inevitably will succumb to the “law of large numbers.” In other words, it will become nearly impossible to keep up its substantial growth. But there’s also an increasing risk of blunder. Already, Apple is gunning for a variety of new markets, such as the cloud and Internet radio (a la Pandora [NYSE:P[14]]). Plus, while Apple also has opportunities in emerging markets, China hasn’t exactly been a stroll in the park[15], and lower purchasing power in many nations will put pressure on margins.

Steve Jobs: While he has been gone for almost a year, his death still remains a huge loss for Apple. While the company’s current team is strong[16], there are still risks that it will fail to continue the winning ways of Jobs. Already, some ominous signs have peeked through, including the surprisingly disappointing performance of Apple’s Siri technology.

Verdict

Again, it’s hard to be bearish on Apple[17]. Its growth probably isn’t going anywhere, and its valuation remarkably remains attractive.

Still, there’s enough reason for at least caution on investors’ part. Apple’s stock is up more than 60% this year, and what’s more, the stock has generally shown weakness after a major product launch — averaging an 8.5% decline for the past four iPhone debuts[18].

So should you buy Apple? Yes, just not yet. Investors would be better off waiting for the iPhone hype — and if history plays out, the post-iPhone slide — to subside. But afterward, long-term investors should feel free to buy. Apple’s future still looks bright.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[19], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[20] and “All About Commodities.”[21] Follow him on Twitter at @ttaulli[22]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. launch its iPhone 5 today: http://investorplace.com/2012/09/why-this-is-the-biggest-apple-event-ever-iphone-5-aapl/
  3. J.P. Morgan report: https://mm.jpmorgan.com/EmailPubServlet?h=-825pgod&doc=GPS-938711-0.html
  4. crushing once-formidable rivals: http://investorplace.com/2012/09/apple-the-kingmaker-or-company-breaker/
  5. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  6. RIMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIMM
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  9. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  10. patent suit verdict: http://investorplace.com/2012/08/apple-wins-1b-jury-verdict-over-samsung-patent-charges/
  11. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  12. Surface tablet: http://investorplace.com/2012/06/under-the-skin-of-microsofts-surface/
  13. its updated, lower-cost Kindle tablets: http://investorplace.com/2012/09/amazon-unveils-updated-kindle-fire-and-kindle-fire-hd/
  14. P: http://studio-5.financialcontent.com/investplace/quote?Symbol=P
  15. hasn’t exactly been a stroll in the park: http://investorplace.com/2012/08/apple-shocker-it-is-an-also-ran-in-china/
  16. company’s current team is strong: http://investorplace.com/2012/09/is-the-post-jobs-apple-starting-to-emerge/
  17. hard to be bearish on Apple: http://investorplace.com/2012/08/the-bearish-case-for-apple/
  18. for the past four iPhone debuts: //www.marketwatch.com/story/apple-shares-volatile-in-launch-windows-2012-09-11
  19. IPOPlaybook: http://investorplace.com/ipo-playbook/
  20. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  21. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  22. @ttaulli: https://twitter.com/ttaulli

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