Is New Money Buying a Top in Apple?

by Jeff Reeves | September 17, 2012 9:49 am

I personally own Apple (NASDAQ:AAPL[1]) stock … but I’m sad to say I wasn’t smart enough to buy it years ago. I jumped on the bandwagon very recently, buying in at $550 during the spring malaise on the prospect that Apple stock would bounce back strongly.

It has — pushing new all-time highs near $700 now. But I have to wonder how much more Apple has to run, and whether it might be prudent to take some money off the table.

The question is similar but slightly different for new money. The big question is, “Do you keep buying AAPL stock and risk a top, or do you move on to other things?”

Let’s briefly explore the arguments for and against Apple stock right now:

5 Reasons You Shouldn’t Buy Apple Stock

  1. Other Options: There are a host of other investments out there that are outperforming. Hell, simply tracking the market has returned 10% to 15% this year depending on the index. Apple’s returns are nice, but it’s not like there are no other options for investors.
  2. Critical Mass on the iPhone: The iPhone 5 launch is pretty much the last thing that Apple can do for its flagship smartphone. Tablets — obviously Apple’s own iPad as well as the Kindle from Amazon (NASDAQ:AMZN[2]) — are the new frontier. Smartphones are getting “smarter” and cheaper every day thanks to Google (NASDAQ:GOOG[3]) Android devices, and a lot of the first-mover flash of the iPhone is gone.
  3. Critical Mass on Profits: Oh and by the way, the iPhone is not just a flashy gadget but a mega-profit center for Apple. Though Apple has around a 9% smartphone market share globally, it sucks up 75% of the global profits[4] thanks to its high-margin iPhone. If iPhone sales can’t grow, profits can’t grow either. Tablets can’t grow fast enough and with rich enough margins to replace that. The company missed on its Q3 earnings report, and investors might be in store for more of that as the iPhone wave crests.
  4. Trouble in China: Subsidies are the big way Apple gets its profits so robust in the U.S. — with Verizon (NYSE:VZ[5]), Sprint (NYSE:S[6]) and AT&T (NYSE:T[7]) offering iPhones for $200 or so to consumers and picking up the balance of a roughly $600 tab. China has big growth potential for Apple, yes … but a lack of subsidies means the newest iPhone model is cost-prohibitive for many. Thus it has just a 7.5% market share in China[8].
  5. Crowded Trade: With all the institutional buyers who have plowed their cash into Apple and all the retail schmucks like me who want to go along for the ride, it’s hardly like Apple is some kind of unsung tech stock here. When a trade becomes this popular and branded a “sure thing,” you often are better served by moving on. Better to sell a few months too early than a few months too late after the bottom falls out.

5 Reasons to Buy Apple Stock

  1. Fairly Valued: Despite a huge run-up, Apple stock still only has a forward P/E of 13.1. That’s hardly the nosebleed levels of 110 at AMZN. Google is trading at a forward P/E of about 14.3 right now. And even after its flop, Facebook (NASDAQ:FB[9]) still is boasting a 34.9 P/E ratio. So let’s not act like Apple is some mammoth bubble set to crash and burn, because fundamentally it’s pretty fairly valued.
  2. Cash King: Sure, Apple might be losing some of its smartphone edge. But with a staggering $27.7 billion in cash and short-term investments and another $89.6 billion in long-term investments, I think it has the war chest to figure out the next big thing.
  3. Cautious Guidance Portends Surprise: Yes, earnings missed in Q3. But Apple has a long history of low-balling estimates — and the fact that it guided down for Q4, the period when the iPhone 5 will hit the books, tells me that there might be some more artificially low expectations at play here. Considering the iPhone 5 is the first multi-market launch — with the gadget hitting the U.K., Canada and parts of Asia on the same day as U.S. sales start — could mean a big push in the early days. After all, iPhone 5 pre-orders sold out in an hour[10]. That says a lot.
  4. Going Low-End, Too: The iPad continues to dominate the tablet market, and though Amazon just launched a new line of Kindle devices[11], there are rumors that a smaller iPad mini will be available before Christmas[12] to take the fight to the low end of the tablet market at a $299 price point. Also, while the iPhone 5 is set for typical mark-ups, the launch coincides with a move to sell the iPhone 4S for $199 — and give away iPhone 4s free in America to anyone who signs a contract with a major carrier. This shows that while Apple still is a premium brand, it’s willing to give older technology a much lower mark-up to get to consumers unwilling to pay full price for new gear.
  5. You Really Want to Sit This Out? The biggest reason I didn’t buy Apple in 2011 was because of the run-up — not because I didn’t believe in the company, its products or its valuation. I simply didn’t think it was possible for Apple to keep it up. Eventually, I stopped watching and started investing … and I haven’t looked back. So ask yourself what’s keeping you out. If you have a legitimate concern like the ones listed above, that’s fine. But if you’re simply doubting that the run can continue, then you’re missing the point. If you believe in the stock, buy the stock.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Apple.

  1. AAPL:
  2. AMZN:
  3. GOOG:
  4. 75% of the global profits:
  5. VZ:
  6. S:
  7. T:
  8. just a 7.5% market share in China:
  9. FB:
  10. iPhone 5 pre-orders sold out in an hour:,2817,2409717,00.asp
  11. new line of Kindle devices:
  12. iPad mini will be available before Christmas:
  13. “The Frugal Investor’s Guide to Finding Great Stocks.”:

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