When You Invest in Apple, What
Are You Really Betting on?

Invest in AppleWith the release of the new “iPhone 5,” I believe Apple, Inc. (NASDAQ/AAPL) has set the stage for a massive year-end sales event. While technology stocks in this sector are hyper-competitive and the hardware is increasingly becoming commoditized, the ability for Apple to differentiate itself and its products from the crowd will be what will continue to drive its corporate earnings.

First, let’s get to the new iPhone. A huge portion of Apple’s income stream, the iPhone represents approximately two-thirds of the company’s corporate earnings. The iPhone 5 is bigger and more powerful, and it runs on the new high-speed wireless network. Interesting to note, Apple is not leading other technology stocks in any of these categories. Yes, that’s right; Apple is now catching up to some of the capabilities of products from other technology stocks. For example, while the new iPhone is increasing the screen’s size to four inches, there are numerous phones with screens of 4.5 inches or larger.

What’s really behind Apple is the ecosystem of “iTunes.” The ability of the company to lock you into its operating system among several different products is unique among technology stocks. Having said that, its corporate earnings are massively skewed to the iPhone. Apple is essentially a one-product company that offers other products to “lock” consumers in its ecosystem. It’s a brilliant strategy.

But believe it or not, even though its share price has skyrocketed over the years, under fundamental metrics, Apple isn’t expensive. With a forward price-to-earnings (P/E) ratio of just over 13 and a P/E-to-growth (PEG) ratio of 0.7, it’s priced at a discount to its growth rate, especially when compared to other technology stocks. But investing in Apple is questionable. (Read “Is Apple a Buy Right Now?”) Investors are worried about a company that has so much of its corporate earnings coming from one product; they are worried that Apple can’t keep up its massive growth levels.

Having said that, I do think the iPhone 5 will be a blockbuster. I have a feeling many consumers held off buying the “iPhone 4S” to get the new iPhone 5. The only issue is that the competition among technology stocks is going to continue to increase. Any stumble, and you’ll see a shift to other products, because the differentiation in the actual hardware is starting to be removed. What was once a head-and-shoulders superior product is no longer prevalent, and the only way Apple sets itself apart from other technology stocks is through brand recognition. This has certainly been effective in driving corporate earnings over the last few years.

Apple Inc. Chart

Chart courtesy of www.StockCharts.com

Looking at the chart, one interesting thing to note is that Apple has been above its 200-day moving average (MA) for a long period of time; not many technology stocks can say that. Also, the RSI is currently not in overbought territory. Note that in from February to March, the Relative Strength Index (RSI) was showing signs of being overbought, but the stock was able to effectively consolidate and start another uptrend. While corporate earnings will be strong this fall, I’m beginning to wonder about the strength going forward over the next few years. Many other technology stocks are building strong devices; it will be interesting to see if Apple can maintain this level of corporate earnings growth for an extended period of time against such heavy competition.