By Greg Jensen
Not too long ago, Apple (AAPL) couldn’t do any wrong in the eyes of the street. Analysts competed with each other to give ever higher price targets (Anyone remember $1100?) and any mention of possible problems was seen as heresy. Even after the stock price began falling, the true believers could not be swayed. Over the last few months, analysts’ sentiments have changed. The prevailing wisdom is that the competition has caught up in the phone and tablet markets, and even Apple’s core customers seem wary of frequent minor tweaks to existing products. The “Jobs factor” has passed with the man and serious innovation seems a long way off. There is some truth in each of these assertions but, while sentiment can be powerful, the numbers never lie.
Add in the Q2 numbers released yesterday, sales of $43.6 Billion and EPS of $10.09, and a fairly clear trend emerges. Sales are still strong but, as the competitors have caught up margins are being squeezed and were a “disappointing” 37.5% in the quarter. Disappointing compared to street expectations of 38.5% but stellar if you compare that to Samsung’s operating margin of around 14.5%.
It is beginning to look like 2012 was an anomaly. AAPL was so dominant that increased competition was inevitable. That’s the way capitalism works. It looks to me like they made the most of a small window of opportunity and are now consolidating; working on new products and returning some cash to shareholders. If 2012 was an exception, we should maybe be looking at AAPL’s performance relative to 2011.
Compared to then, sales are around double what they were and EPS is up over 114% in Q1 and over 57% in Q2. AAPL spent the second half of 2011 hovering around the $400 per share mark, right where it is now.
I understand that expectations are different, but it is hard to escape the conclusion that AAPL represents great value at these levels.
If you don’t believe 2012 should be discounted, let’s look at what a continued margin squeeze means. 2013 combined Q1 and Q2 EPS is down 8.67% from 2012, so let’s assume that that gets worse and Q3 and Q4 EPS shows a combined 15% decline. That would give total 2013 earnings of $39.18 and a P/E of just over 10 at the current price. Once again, the stock looks, at worst, fairly valued.
Tim Cook spoke a lot yesterday of innovations in the pipeline, but he has said that before and there is no way of knowing when or what they will be. More importantly, he stated in response to a question about margins that AAPL was being run “for the long term”. The company seems to have come to terms with a return to more normal margins, shouldn’t we?
The case for AAPL at these levels doesn’t depend on the next big thing or a big swing in investor sentiment, rather just good, old-fashioned number crunching. I don’t think we’re about to race back up to $700, but, whichever way you look at it, AAPL at around $400 looks like a buy.