Should I Buy Apple? 3 Pros, 3 Cons

by James Brumley | August 8, 2012 8:30 am

In a normal environment, with a normal company, applying just a little bit of trading discipline makes it relatively easy to handicap a stock.

As anyone who has been a student of the market for any length of time can tell you, though, we’re not in a normal environment (in several ways) right now, and Apple (NASDAQ:AAPL[1]) is no normal stock.

That doesn’t mean it can’t be handicapped, however. It just means you have to factor in that Apple can be so, well … Apple-like. By that, I’m just saying we all have to acknowledge that, sometimes, rabid Apple-mania can take hold of the stock and make it do things — for better or worse — that most stocks never would do.

Got your arms around that? Great. Now, with that in the back of your head, here’s an honest look at the stock’s current upside and downside.

The ‘Pro’ Case

1. It’s still not exactly clear if Samsung’s Galaxy series of smartphones has been popular of late because they’re just that cool, or because Apple hasn’t launched a new phone since June 2010. That’s when the iPhone 4 debuted. (The iPhone 4s was released in October of last year, and it was remarkably better than the 4. But, it was still the “4.”) Most are assuming, however, that Apple fans are simply holding out for the iPhone 5, which should be unveiled sometime in early September. If the preliminary reports are to be believed, though, pre-demand for the imminent iPhone is stronger than it has been for any of the other iPhones[2]. Ergo, Apple could be due for a very strong calendar year.

2. Incredibly enough, Apple is making convincing arguments in its patent-infringement case against Samsung[3]. As it turns out, the iPhone’s design and functionality really was top-of-mind when Samsung started to design the current generation of smartphones. Apple still needs to connect the last “ripoff” dot, however, but if it can do so, it might mean a $2.5 billion payday for Apple. That, or it keeps a bunch of Samsung products off of U.S. shelves.

3. While the 19% of Americans that own iPhones means the other 81% of them don’t own an iPhone, only a very small segment of that “other” 81% actually are legitimate potential buyers. That doesn’t mean iPhone sales are hitting a ceiling, though. Sales of the iPhone in China are just now starting to accelerate. Although China’s iPhone 4 sales slumped in the most recent quarter compared to the prior one, that’s not unusual after a hot new product launch. Besides, the iPhone 4’s Siri voice-activated assistant didn’t speak Mandarin or Cantonese. The iPhone 5’s Siri does, meaning the country’s 1 billion consumers could go ballistic when the new phone debuts there.

The ‘Con’ Case

1. While it’s tough to deny that Apple is the king of cool when it comes to consumer technology, last quarter’s earnings miss[4] still is a miss. The pros were looking for a profit of $10.37 per share, but the company only brought home $9.32. Yes, Apple didn’t have a new iPhone to tout, but it’s not like analysts didn’t know that, and it’s not like it didn’t have the iPad on the menu. The miss might be a sign that the bigger-picture revenue/earnings engine isn’t going to live up to lofty expectations. (Note that YOY earnings still grew by 19% last quarter, so take the “con” with a grain of salt.)

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2. Even with the stock’s 17% correction between early April and mid-May, AAPL shares still are uncomfortably overextended. As of the last look, the stock is 21% above its key 200-day moving average line. That’s very unusual when talking about a well-established large-cap name, and leaves the stock ripe for a dip regardless of what admittedly is a reasonable valuation. As was noted above, this stock can disconnect from the company’s results and outlook, which can be a good thing or a bad thing, depending on the circumstances.

3. Tablet sales, in general, still are picking up steam, but the “race to cheap” is accelerating as more and more players like Google (NASDAQ:GOOG[5]), Dell (NASDAQ:DELL[6]) and Hewlett-Packard (NYSE:HPQ[7]) jump waist-deep into that game. This ultimately will take a toll on demand for the iPad, and possibly take a toll on margins. Though still decent, profit margins on the iPad are about half those of the iPhone. And, if rumors of the 7-inch-screen iPad are true[8], then the margins on those smaller tablets will be even weaker than the current 9-inch version. While Apple eventually will discount its goods to compete (or clear them out), it might be happening sooner on the tablet front than Apple likes. Point being, if Apple is going to generate major earnings growth, it has to happen with the iPhone.


I’ve made no bones about not being a huge fan (personal preference) of most Apple products, and I’m also not a fan of stepping into technically overbought stocks. Yet, there’s a reality with Apple that requires me to give credit where it’s due.

That reality? Apple lives up to the hype, and logical or not, consumers are going to go berserk — in a good way — when the new iPhone launches. That won’t help the current quarter’s numbers much, but I’ve got a feeling that calendar Q4 (Apple’s fiscal Q1) is going to be enormous, and you don’t have to pay an outrageous P/E to ride that near-term train.

I still have doubts about Apple’s long-term prospects, but for the near-term, the pros are easily more meaningful than the “cons.” So, should you buy Apple? Yes — I can see a price of $750 by the time the company reports its first-quarter numbers in early 2013.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. AAPL:
  2. stronger than it has been for any of the other iPhones:
  3. patent-infringement case against Samsung:
  4. last quarter’s earnings miss:
  5. GOOG:
  6. DELL:
  7. HPQ:
  8. rumors of the 7-inch-screen iPad are true:

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