Well, another week goes by, and another big move takes place for Apple (NASDAQ:AAPL).
Shares have rallied in the wake of Apple’s earnings report, when we found out both the top and bottom line beat estimates in Q2. Apple stock is up about 10% since that April 23 announcement.
But this came amid the first profit decline at Apple in more than a decade thanks to predictably shrinking margins.
Earnings were the typical good-news/bad-news scene that has been so common for Apple — which only adds to investor confusion. Is Google (NASDAQ:GOOG) Android really converting iPhone and iPad users, or are gadgets like the Amazon (NASDAQ:AMZN) just competing on cost?
Is Apple a great long-term buy thanks to massive cash stockpiles and reliable cash flow, or are we seeing a company paralyzed by unrealistic expectations and a failure to continue its track record of innovation?
These are just a few questions that investors have on their minds when debating the merits of Apple stock. Here are a few more issues worth noting:
Quality Control: Apple took some heat recently for sending as many as 8 million subpar iPhones back to Foxconn. This is news not just because of the sheer size of the shipment and because of previous concerns that Apple was suffering from a production bottleneck for the iPhone 5, but because it smacks of the “un-Jobsness” that some fear has crept into AAPL. The Apple Maps debacle and other high-profile missteps could be a cause for concern if the biggest selling point for Apple is its premium interface that is so user-friendly.
iBonds: Apple has $140 billion in cash and investments, so it hardly needs to beg for spare change. But with debt so cheap, the company decided to float a $17 billion bond offering to fund an ambitious share repurchase plan and dividend scheme to return $100 billion in capital to shareholders by 2015. The move is very shrewd; consider AAPL got 30-year debt at just 3.883% and 10-year debt at 2.415%. Both of those rates are only marginally above current inflation levels … so it’s almost “free money” for Apple to play with.
Price Cuts: Apple just reduced the prices on its iPads, which has many speculating that a new line of devices is due out this summer. Similarly, there are rumors that a cheap iPhone will hit the market this year. This strategy of attacking the lower-end market flies in the face of previous Apple strategy that involves premium devices for premium prices … but since AAPL is already losing the war on margins, it appears the company is prepared to play the volume game now instead. That’s a different animal and could go either way for Apple.
So how does all this add up?
Well, I think a long-term investment in Apple might serve you well from an income perspective. AAPL’s dividend yield is around 2.8% after the recent increase, and it is difficult to imagine the company slashing or eliminating that payout anytime soon. However, the growth picture is pretty grim, and I doubt Apple has much momentum when it comes to growing earnings or sales. That means share prices will stay pretty flat or track the market.
As such, I don’t see a compelling reason to buy Apple — especially after the stock’s recent pop. Anything around $400 might be a decent entry price for Apple, since I wouldn’t be surprised to see it set a new 52-week low sometime this summer if bad news and a bad market conspire to hold AAPL back.
In short, shop around and don’t grab at Apple unless shares roll back. It might be a decent long-term investment … but it’s going nowhere in the short-term, and the future remains too uncertain to go stock-chasing right now.
- I don’t think Apple stock will hit $500 again anytime soon. (The Slant)
- Russia’s richest man likes Apple right now and just snapped up $100 million in shares. (Value Walk)
- Daniel Gross wonders if Apple is actually the worst example of American business at work. (The Daily Beast)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.