Monday, 1 April 2013

What's Going on with Apple ?

Things have been rough for Apple (AAPL) shareholders over the past year. The stock, once the darling of Wall Street, has fallen over 25% over the past twelve months. CEO Tim Cook’s performance after Steve Jobs’ departure has been mixed, as South Korean giant Samsung has landed blow after blow against the Cupertino, Calif.-based manufacturer of iPhones, iPads, iPods and Macs. Last week, two new negative headlines greeted long-suffering Apple shareholders – increased regulation in China and slumping iPad Mini shipments. Should investors be worried about these two problems?
Last Friday, China’s state media reported that Apple would face “strengthened supervision” from the country’s consumer watchdogs. Apple has recently been hit by a flurry of negative PR in China, the company’s second-largest market, related to accusations of double standards in customer service and returns policies for its items. Apple has repeatedly denied those allegations, claiming that its services and policies are the same worldwide, but that has failed to stop the ongoing media bashing of the company – which lasted for five consecutive days last week.

In response to the media circus, China’s SAIC (State Administration for Industry and Commerce) recommended that regulators increase its standards for “contract supervision” on electronics manufacturers “such as Apple,” and to “punish illegal activities in accordance with the law.” Those statements, published by The People’s Daily, reflect the country’s official position, but Apple’s popularity with consumers has prompted a pro-Apple backlash from Chinese fans. Some users on Weibo, the country’s largest microblogging site, defended Apple, stating that many state-owned Chinese electronics firms were far more deserving of reprimands for poor service.

In addition to the PR mess, Apple is also caught up in patent litigation lawsuits in Shanghai, where it faces a Chinese firm accusing it of infringing on its patent for Siri’s voice recognition software. To top that off, a state-owned Shanghai animation studio is suing Apple for allegedly selling its movies without approval. China has been a tough market for Apple to thrive in, ever since it was required to pay $60 million to Shenzhen Proview Technology last year to settle a lengthy dispute over the ownership of the iPad trademark.

Lastly, Apple is reportedly cutting its shipments for the iPad Mini for the second quarter of 2013. The number of devices shipped has been reduced roughly 20% to 10 million to 12 million. According to some analysts, that number could still slide to 9 million. There are several reasons that demand for the iPad Mini has waned so quickly.

First, the 7-inch market, led by the Kindle Fire, is becoming increasingly crowded with competitors such as the Galaxy Tab and Google Nexus 7 all vying for a piece of the pie. Second, the iPad Mini could be cannibalizing its higher-margin full-size iPads – which means that the supply has to rebalanced. Apple still expects to sell approximately 33 million iPads and 55 million iPad Minis this year. Third, Apple could be clearing out the first generation Mini to make away for a second generation product – which could arrive during the holiday season.

Although PR and legal woes in China along with lower shipments of iPad Minis have rattled some Apple investors, I think that neither headline has a long-term impact on the company’s fundamentals, which remain rock solid. Apple currently trades at 8.9 times forward earnings with a 5-year PEG ratio of 0.53 – making it a fairly undervalued growth stock at today’s prices.