Should Apple Be A $200 Stock?

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Fortune estimates that 29 of 36 analysts covering Apple rate it some form of buy, with a median price target of $605 per share. One analyst, who dubbed the company the “trillion dollar baby” based on his belief that Apple will one day have a market value that exceeds $1 trillion, still maintains his price target of $880 per share.

Maybe so. But scratch beneath the surface, and there is an argument that Apple isn’t so much a great bargain as it is a classic “value trap” — a company whose stock price is depressed for good reason.

Start by looking closely at what has been the driver of Apple’s phenomenal growth — the iPhone, which accounted for just over 50 percent of Apple’s fiscal 2012 revenues and almost two-thirds of profits, according to one longtime Apple analyst.

Although Apple did hit estimates for iPhone sales in its last quarter, the stock declined in part because of intimations that the age of the iPhone might be coming to an end. “Fight to unseat iPhone intensifies,” wrote the Wall Street Journal in late January, which said that while two-thirds of the smartphones Verizon said it activated in the fourth quarter were Apple devices, more than half were older, heavily discounted models. The Journal also reported that iPhone sale srose less than the overall increase in the global smartphone market. Meanwhile, a Reuters piece reported that in Singapore and Hong Kong, Apple’s share of mobile devices seems to be falling. Reuters noted that these regions are leading indicators of what’s going to be hot in Western Europe and North America.

Apple’s position is still enviable. But built into Wall Street’s stock price targets was the expectation that the iPhone would rule the world. And for a while, it looked like it would. But maybe that was a fluke. After all, Steve Jobs didn’t build devices that were supposed to appeal to everyone. Instead, he built expensive products for which Apple, and Apple alone, curated the technology that would be available to users. That’s not a recipe for market share dominance.

One reason Apple looked like it would dominate despite that mindset is the quirkiness of the mobile phone market. In many areas of the world, including the U.S., mobile phone purchases are subsidized, so even though Apple’s phone is far more expensive, the carrier pays more, and the end customer doesn’t see all of the price difference. There has long been a discussion about whether that arrangement will come to an end, and there are a few reasons to believe it might. If bandwidth is indeed in short supply, then the carriers will have more clout, and they’ll start pushing back against the subsidies. That implies margin pressures for all mobile phone makers, but in particular Apple, given the abnormal subsidy it has been able to extract. In addition, if the iPhone is no longer the single must-have product, then Apple may lose some of its clout with carriers. Apple’s virtuous circle—because customers crave its products, carriers have not choice but to pay up — could turn vicious.

Some stellar new product, like a full-blown Apple TV or an electronic payment system, or something we haven’t even imagined, may be about to explode on the scene. Maybe. As a company, Apple doesn’t talk about what’s next, and anything is possible. But the evidence isn’t promising. On Apple’s most recent earnings call, Chief Financial Officer Peter Oppenheimer said that today was the “most prolific product period in Apple’s history … in the last few months, we’ve introduced new products in every category we make.” But the products are more evolutionary than revolutionary. And what we do know is that many of the people who created the Apple that now exists — Jobs, former retail chief Ron Johnson, former software chief Avi Tevanian, former hardware maestro John Rubinstein — are no longer there. Just like the Magellan Fund of the 1990s wasn’t Peter Lynch’s Magellan, this company is no longer the same Apple.

There are also challenges. For instance, Apple TV isn’t iTunes: The cable companies seem to understand that they are better off protecting their own ecosystem, instead of letting the wolf in the shape of Apple waltz in the door and pick off the choicest part of their revenue stream. And while Apple could indeed blanket the earth with products that fill every niche, that would entail a very different strategy than the one that brought the company to where it is today.

You might argue that all these fears are reflected in Apple’s discounted stock price. But while the stock is cheap based on the profits of the past few years, value investors generally look to what they call normalized earnings, or true earnings power. To put this a different way, price-to-earnings ratios don’t matter that much when you don’t know what real earnings are. We won’t know for a few more years, but there’s an argument that Apple’s last few years of blowout earnings have been well above normal. If that’s true, then Apple’s real p-e ratio might be much higher than it appears.

Apple believers also point to Apple’s massive cash hoard—$137.1 billion and counting—as a floor beneath the stock price. (The Wall Street Journal has pointed out that since much of the cash is parked overseas, adjusted for taxes, it’s more like $111 per share, but that’s still an awful lot of money.) Historically, Apple has been disciplined with its cash, and Chief Executive Officer Tim Cook is regarded as a master of supply-chain management, meaning that even if Apple’s volumes decline, the company isn’t going to start bleeding cash. The counter is that, especially in tech land, companies that start to dry up on innovation soon start to burn cash, whether because shareholders demand more and more return in the form of dividends or because the company feels forced to do cash acquisitions. In Apple’s case, its retail stores could become a millstone around the company’s neck if huge sales of high-margin iPads and iPhones no longer pay for all that premium real estate.

Too dire? Quite possibly. But just because Apple’s stock once sold for almost $700 doesn’t mean it should ever see those heights again. Just ask the investors who owned AOL back in 2001.

PHOTO: The Apple logo is shown on the front of the company’s flagship retail store near signs for the central subway project in San Francisco, California January 23, 2013. REUTERS/Robert Galbraith

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