3 Things to Think About Before Buying Apple

Updated

Disney (NYS: DIS) CEO Bob Iger figured he would put his money where his new board seat is last week, buying $1 million worth of Apple's (NAS: AAPL) stock shortly after being added to the tech giant's board of directors.

Let's get this straight: Iger's move was strictly symbolic.

There's no point in arguing that Disney's impressive helmsman is rich and that $1 million isn't necessarily a lot of money to him. It's always a lot of money to anyone. The reason why the purchase appears to be done primarily as a public show of confidence is because Iger has known Apple all too well for years.

It was Iger that orchestrated Disney's purchase of Pixar from majority shareholder Steve Jobs, a move that made Jobs Disney's largest single investor. Apple and Disney have been partners early and often under Iger, as Disney video content made its way to the once-fledgling iTunes digital video store when the other major studios were still unsure.

If you want more proof that Iger snapping up a chunk of Apple's stock at $375 is more for show than for investment purposes, consider that Iger was buying into dividend-less Apple around the same time that he was jacking up Disney's yield by 50%.

Bulls will argue that the circumstances don't matter. Iger is making a shrewd purchase. Apple is growing a lot faster than its earnings multiples in the low teens suggest. Apple is the undisputed tablet king, and it's raking in the lion's share of the profits in smartphones. Nearly everything Apple touches turns to iGold. Who would be silly enough to bet against the class act of Cupertino?

Well, let's go over three things to consider before investing in the world's most valuable tech darling.

1. Apple's future doesn't necessarily have to be better than its present
The head-turning days of ridiculous growth for the iPhone and iPad treated Apple brilliantly in the past, but its growth is decelerating. Analysts see earnings climbing by 25% to $34.62 a share this new fiscal year and a mere 12% to $38.86 a share in fiscal 2013.

Yes, Wall Street's targets value Apple at a seemingly cheap 11 times fiscal 2012 earnings and a little more than 10 times the following year's projected profitability, but analysts have gone from underestimating the tech giant's earnings power to overestimating bottom-line results.

After years of consistently trouncing analyst estimates, Apple came up short in its latest quarter. Investors dismissed the oversight on the iPhone 4S delay, as if analysts don't know what they're doing. Well, it happened.

Right now Apple is losing market share in both tablets and smartphones. Amazon.com (NAS: AMZN) has reportedly shipped millions of Kindle Fires over the past month. Google's (NAS: GOOG) Android has been gaining market share at Apple's expense for several quarters now. Android phones have gone from 25.3% of all smartphone sales a year ago to 52.5% now, according to tech tracker Gartner. The iPhone in that time has shrunk from 16.6% to 15%.

The bullish crutch is that Google may be giving away Android, but Apple's the one hogging up all of the profit share in smartphones. Well, that may be true, but as developers shift their attention to Android's wider adoption rate, paying a premium for iOS phones and tablets won't make as much sense in the future.

2. Steve Jobs is gone
Maybe it's just a coincidence that Apple's first quarterly miss in years happened under CEO Tim Cook. Maybe it's just a fluke that consumers were underwhelmed by Cook's introduction of the iPhone 4S. However, if I ask customers walking out of an Apple Store who Apple's CEO is, I'm guessing that less than half know that it's Cook.

There's nothing wrong with having a helmsman who doesn't gravitate to the spotlight. Disney is better off with Iger than it was with the flashier Michael Eisner. However, Apple needed Jobs to let consumers know that a smartphone didn't need to have physical keyboards and that a tablet was magical.

Cook will have no problem improving on Apple's product line with next year's iPhone 5, iPad 3, and full-blown high-def television. Unfortunately, the marketing message will suffer.

3. The halo effect cuts both ways
Apple has been one of the market's biggest winners over the past decade, and it all started with the 2001 introduction of the iPod. Apple's success in portable media players -- and the iTunes ecosystem that launched two years later -- created a halo effect, boosting sales of Apple computers.

The iPod has been fading for several quarters now, but the success of Apple's iPhone and now iPad are keeping the halo effect alive.

However, the same thing is happening at Amazon and Google. The success of the Kindle stirred up interest in Amazon's entry-level tablet. Google's market-trouncing popularity in smartphones is finally starting to carry over into tablets. The next Apple won't be Apple.

It doesn't matter that Apple has a growing network of namesake retail locations to keep the ambassadorships growing. Gateway and Dell (NAS: DELL) had stores. Even Microsoft (NAS: MSFT) is setting up in select malls. Apple is really only as popular as its ability to grow its reach, and that's easier said than done in a crowded room of halos.

If you want to see what the tech giant does next, consider addingAppleto My Watchlist.

At the time thisarticle was published The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Google, Walt Disney, Microsoft, and Dell. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Disney. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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