Longtime investors know there's a fine line between value traps and value plays. Value traps are stocks that look cheap relative to their projections and trailing earnings, the problem being that the estimates are too high and the trailing data isn't relevant. In contrast, value stocks are those that are generally forgotten and undervalued on the basis of what they'll be generating in the coming years. In the attached video, value investor Vitaliy Katsenelson of Investment Management Associates explains why he sees Apple (AAPL) as a classic trap.
Right now the company has gross margins of 25%. Such margins would be impressive for a software company. For a company making most of its money creating gadgetry, 25% simply isn't sustainable.
The way Apple became so profitable over the last few years was by creating leverage off their R&D. In other words, revenue growth outstripped aggressive spending on creating new products and software on the back-end. That's outstanding performance but also not the kind of results that can be counted on in the years to come.
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Three years from now Apple is going to have a hard time selling $700 phones, is how Katsenelson sees it. That's not a slam on Apple, simply the law of competition. Apple in many ways created the marketplace for smartphones and tablets, but that doesn't change the fact that dozens of new competitors will eat into those margins and market share. Unless sales growth outpaces R&D by as much as it has over the last decade, Apple is going to become much more expensive on a multiple basis.
Katsenelson comes back to the most frequent concern expressed by Apple bulls: Steve Jobs is gone and he's not coming back. Under Jobs Katsenelson notes Apple could turn on a dime and, as a result, keep pursuing new, fresh products. The jury is very much out as to whether Tim Cook can be as effective.
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All of which leaves Apple stock too expensive for Katsenelson to consider it a value play. If he gets a chance to buy it $100 lower he'd be interested, but unless and until that happens, he's staying on the sidelines waiting for a better chance to take a bite of the shares.
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