Apple Stock: Disproving the Bears

We've seen a glimpse of the future. At Apple's Worldwide Developers Conference on Monday, the company unveiled a few new products, a software refresh for OS X, and the long-rumored iTunes Radio. The star of the show, however, was the Jony Ive-influenced refresh of iOS 7, which served up some nice eye candy. The show's glitz and glamour, however, wasn't enough to excite the market about Apple stock, which fell again over the next two trading days.

Apple stock is down about 38% from its 52-week high of $705 last September, and it seems nothing is good enough to send it higher. Sentiment for Apple stock is clearly not in the company's favor. But is the stock really deserving of a valuation of just 10 times earnings?

The market most likely continues to turn a cold shoulder to Apple stock based on three fundamental complaints:

1. Sales are slowing
Yes, sales are slowing. Year-over-year revenue grew by just 11% in Apple's most recent quarter. Even worse, net income was down 18%. But that's OK. Apple isn't priced for growth anymore. The assumed growth rate of the market for Apple stock at today's price is about 3%. In other words, Apple simply needs to grow EPS at the rate of inflation to reward investors.

But analysts seem to disagree with the market's paltry expectations for Apple stock. On average, analysts expect EPS to grow 20% per year for the next five years. How? On the strength of Apple's massive share-repurchase program and potential new categories such as television and wearables.

2. Margins are eroding
The company's gross margin has definitely taken a hit, down about 1,000 basis points from the year-ago quarter. However, with cheaper iPhones on the horizon for emerging markets, the company would still probably achieve higher gross margins than in other segments. The higher sales in this most profitable segment (a result of the price drop) could boost the company's overall gross profit margin.

3. Apple is losing market share
Slowing sales and declining margins are ultimately a result of increased competition from lower-priced smartphones. There's no denying it: Google's Android, powering many options that put less of a strain on the wallet, is taking the smartphone market by storm. According to IDC's May report, Android shipments are up a whopping 79% in the first quarter of 2013 from the year-ago quarter. Perhaps even more telling is that within this same time frame, Android shipped 162.1 million phones compared with Apple's 37.4 million. There's definitely an enormous and fast-growing market for cheaper smartphones.

But for those who think this spells the end of Apple's reign, there are three important indicators that suggest Apple will be able to hold its own in the premium smartphone arena: unmatched retention, sky-high customer satisfaction ratings, and mind-boggling usage statistics.

A different stock
Finally, investors should simply keep in mind that Apple isn't a growth stock anymore. In fact, Apple now makes an excellent dividend stock. In this light, the stock is doing great. It's generating loads of cash, customers still love Apple products, and the company pays out a nice dividend yield of 2.8%, which is certainly nothing to scoff at.

Apple has a history of cranking out revolutionary products ... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

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Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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