Are Apple Stock Investors Discounting the Halo Effect?

Are Apple Stock Investors Discounting the Halo Effect?

Despite the negative sentiment currently surrounding Apple stock, Gartner has identified Apple as having a greater homogeneous presence across smartphones, tablets, and computers than any of its competitors. These findings could be a testament to Apple's ability to create "halos" around its products, which turns first-time Apple buyers into long-term Apple customers. Considering shares currently trade in the single-digit P/E range, perhaps Apple stock investors are underestimating the company's ability to create customers for life.

The secret sauce
To boil it down, the strength of Apple's halo hinges on long-term customer satisfaction, and in order for Apple to continuously score high marks with its customers, it must continue to make excellent products. Luckily, iPhone customer satisfaction remains remarkably high despite the competition intensifying. The iPhone has received nine -- yes, nine -- consecutive J.D. Power and Associates awards for "Highest in Customer Satisfaction with Consumer Smartphones." For those keeping track at home, that's every award possible since the iPhone was introduced in 2007. Additionally, the iPhone ranked first for the second year in a row on the American Consumer Satisfaction Index.

600 million halos
When Apple hosted its Worldwide Developers Conference last month, it announced that over 600 million iOS devices have been sold since the iPhone's inception. Although it's a far cry from the 900 million Android activations that Google announced back in May, it gives the company a potentially enormous base of repeat iCustomers.

Additionally, it's believed that Apple will begin introducing an iPhone trade-in program that will allow previous iPhone owners to upgrade to the iPhone 5. The used devices would be refurbished and ultimately end up in the hands of emerging-market customers. Not only would this be a way for Apple to speed up the acceleration of iPhone sales, it would give the company an opportunity to expand its user base in emerging markets. Given the historically high levels of iPhone satisfaction, Apple stock investors could view this as a positive development since it would likely expand Apple's user base, and thus, its halo.

Wake up, Mr. Market!
With over 2 billion total computing devices being shipped throughout the world each year, investors have apparently grown unwilling to pay a premium for these device makers. As a result, Apple stock investors believe the company should only trade with a single-digit P/E ratio, which implies that investors are either questioning the quality of its earnings, or they anticipate little to no earnings growth in the future. Considering the widespread fear of cannibalization to Apple's business model, it's pretty safe bet that the latter scenario is likely.

Although Apple stock investors may fear that users will "trade down" to cheaper products like the iPad Mini or a rumored "cheap" iPhone, cheaper products give Apple an opportunity to expand its addressable market. As long as Apple can keep these users that would've otherwise been unable to afford an Apple product satisfied, these short-term cannibalization fears could be easily mitigated by strength of Apple's long-term halo effect, which keeps consumers coming back for more.

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Fool contributor Steve Heller owns shares of Apple and Google. The Motley Fool recommends Apple, Gartner, and Google. The Motley Fool owns shares of Apple and Google. 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.

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