Since hitting over $700 in Septembers, shares of Apple (NASDAQ:AAPL) have been in free-fall. The stock price is now at around a mere $395. In fact, Apple is no longer the world’s most valuable company.
The volatility may not be over still, though. On Tuesday, the company will release its fiscal second-quarter results. As should be no surprise, investors are not expecting good news.
Of course, could the one-time tech darling’s recent struggles make now the time to buy? To see, let’s take a look at the pros and cons:
Moat. It’s powerful for Apple. Consider that the mighty Facebook (NASDAQ:FB) decided not to enter the hardware side of the smartphone business because it would simply be too difficult and expensive. In the case of Apple, its mobile platform is downright stunning. It has extensive relationships with global suppliers, who are often under exclusive arrangements. There is a thriving ecosystem of app developers that have produced over 1 million apps. Of course, Apple has a premium brand and chain of stores that attract huge numbers of customers. More importantly, the mobile market is expected to continue to grow at a nice ramp. According to a recent report from IDC, the number of smartphone shipments is expected to go from 772.4 million in 2012 to 1.52 billion in 2017. During this period, tablet shipments are forecast to go from 128.3 million to 352.3 million.
Extreme Pessimism. Wall Street has been aggressively downgrading the earnings estimates for Apple. A big reason is that a key supplier, Cirrus (NASDAQ:CRUS), had a terrible quarter. The fear is that Apple built too many units of the iPhone 5S and iPad Mini. Yet when the sentiment gets extremely bearish, there is usually a nice opportunity to snag a bargain. If there are even some moderate surprises, the stock could be poised for a rebound. For example, there is probably lots of pressure for Apple to launch a new product, such as a TV or a smartwatch. There’s even buzz that the company will create a virtual wallet system, which could be a huge revenue driver.
Valuation. It really is dirt cheap, with the PE ratio of 9X. Plus, when you strip out the $150 billion in cash, the multiple is a mere 5X. Keep in mind that Google (NASDAQ:GOOG) has a P/E ratio of 24 and Microsoft (NASDAQ:MSFT) has a multiple of 16. What’s more, Apple has a fairly decent dividend yield of 2.7%. If anything, the company will probably continue to increase the payout as well as pump-up the share buybacks.
Innovation. The loss of the legendary Steve Jobs has been huge. While Apple still has many world-class designers, coders and executives, the company seems to have lost some of its mojo. For example, the commercials have been mostly unmemorable and there have been a variety of product flops, such as with Maps and Siri.
Competition. It has also been intense. For the most part, Samsung has caught up with Apple in terms of features and even pizzazz. In fact, to help boost market share, it looks like Apple may start offering lower-priced models. This has its downside too, though, as it will mean facing even more competition, such as from Nokia (NYSE:NOK) and BlackBerry (NASDAQ:BBRY), as well as putting inevitable pressure on margins.
Changing Dynamics. Of course, Apple relies on the upgrade cycle. Generally, a person will replace a smartphone every two years or so. But going forward, this may change — that is, the upgrade cycle may get longer. The fact remains that with less innovation with new handsets, there are not as many compelling reasons to buy a new phone. Plus, the carriers like Verizon (NYSE:VZ) and AT&T (NYSE:T) are trying to move away from subsidies. This could be another driver that pushes out the upgrade cycle.
It’s true that Apple’s growth is slowing. A big part of this is the “law of large numbers.” With over $150 billion in annual revenues, it has gotten pretty tough to find new opportunities. So in quick fashion, Wall Street has reset the valuation, which is more reasonable now.
Despite all this, there is room for decent upside. There will likely be new releases of the iPhone 5S and iPad Mini in the second half of this year, which should create lots of excitement. At the same time, the mobile market should continue to ramp at a nice pace.
To top it off, Apple still has a tremendous organization, strong brand, an amazing ecosystem and a tremendous distribution footprint. Oh, and the cash flows should remain strong and the dividend yield is likely to increase.
In light of all these factors, Apple the pros outweigh the cons on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.