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Apple Goes Cheap – Why AAPL Is Putting a Premium on Value

Apple stock aaplApple (AAPL) just had its big fall event, and iPads were front and center. CEO Tim Cook wooed customers (and, of course, Apple stock investors) with the fifth generation of the device dubbed the iPad Air — a tablet that’s 20% thinner, weighs in at only 1 pound and of course boasts more processing power.

AAPL is surely still trying to stay on the cutting edge of mobile technology with this slick new iPad, however one of the more interesting facets of the Apple event this week was the focus on value.

Sure, the iPad Air with only WiFi connectivity starts at $500, and a revamped iPad Mini with retina display starts at $400. But these new Apple products allow for the older models to be discounted — giving AAPL a clear path to both high-end and low-end sales.

And increasingly, Apple stock is reliant on those low-end sales.

Apple Stock Relies on the Low End

With the new iPad Mini with retina display out, AAPL will offer its original iPad Mini for as little as $299 — on par with the 9-inch Kindle Fire HD tablet that starts at $230 via Amazon (AMZN), and the 7-inch Nexus tablet from Google (GOOG) that starts around $200.

This is quite similar to the moves in recent years to attack the low-end through regular upgrades of the iPhone. Sure, AAPL launched its multicolored iPhone 5C this year (to mixed results), but more noteworthy is that the iPhone 4S is now available for free through Verizon (VZ), Sprint (S) or AT&T (T) with an extended contract.

While the newest gadgets obviously deliver the biggest profit pop for Apple stockholders, it’s important to remember that these older models are crucial to keeping Apple competitive as consumer electronics prices stay very low. And more important, in the still-growing world of tablets it’s crucial for AAPL to keep getting new users familiar with its products on the cheap in the hopes that someday they will upgrade to the high-end version.

It used to be that Apple could build a great device and then simply wait for the sales to show up … and ignore anyone who groused about price or availability. But thanks to increased competition, particularly on prices, it has become increasingly important to simply get something in front of those low-end consumers before someone else does.

Finding Value With AAPL

The value focus should be twofold for investors in Apple stock — the first being an eye on Apple products, but the second being the dynamics of AAPL itself as a publicly traded company that has clearly transitioned from growth to value.

Earlier this year, Apple reported its first year-over-year profit decline in a decade. The company also committed $100 billion in buybacks and dividends after a bond offering. And to top it off, AAPL trades for a forward price-to-earnings ratio of about 12 — even before you back out the $146 billion in cash Apple stock is sitting on.

Apple is clearly a value pay … though with AAPL stock trading around $520 right now there is a case to be made that it’s fairly valued, not undervalued.

Whatever your take, the strategy of Apple is simple: Stay dominant and sacrifice margins for reach. That means the growth is over, and AAPL is a value investment in every sense — in its product line, and in its investment makeup.

While AAPL will continue to upgrade its premium gear to generate high-margin sales, it’s increasingly evident that the regular upgrade cycle is also a way to give last year’s gadgets to consumers on the cheap — playing the low end and the high end at the same time.

Related Reading on Apple Stock

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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Comments
  • Drake Richter

    They are doomed.

    Not to fail – too many loyal customers for that – but we’ve already seen their peak. Google and Samsung continue to put out impressive products, and the mobile game has finally woken the sleeping giant; despite a rocky start, Microsoft is in nowhere near as bad a position as Apple was at their own low point not terribly long ago, and public opinion has been shifting in interesting ways.

    It’s all very exciting to watch.