Temptation: Should you buy Apple's shares?

After a stellar three years since the launch of the iPad, Apple's sales were always expected to slow this year, but what Wall Street latched on to was concrete evidence that competition is starting to erode Apple's profit margins, which at 38 per cent are a couple of percentage points below what the company normally reports. When lacklustre sales of iPhone 5 handsets are included, then investors did not need much excuse to head for the exits - even though earnings were, in fact, higher than expected and up 7.2 per cent over the year on an adjusted basis.

In what was supposedly a bad quarter Apple sold 48m iPhones and 23m iPads.

Growth versus value

On this side of the Atlantic, we find Wall Street's obsessive focus on what companies achieve quarter-by-quarter faintly ridiculous and frankly inimical to good decision-making by company executives and indeed investors. Just because Apple missed a few profit targets does not turn it overnight into an awful company.

However, in Apple's case, there is perhaps a long overdue appraisal beginning, with the market starting to ask far-reaching questions about the company's performance, its growth prospects and whether it is time to start paying out more of its vast cash reserves as bumper dividends – the balance sheet contains $137bn of cash and equivalents, a figure that seems to just keep on climbing with nigh on $40bn added in the past year.

Given Apple's flirtation with bankruptcy in the 1990s, that's a reassuring figure. But it has also proved something of a poisoned chalice – some interpret the fact that it has neither spent nor returned this huge fortune as a signal that the good ideas that elevated it to the position of the world's most valuable company have stopped flowing. And that means that, far from being what Bearbull once described as "a dream stock", Apple could now be viewed as simply a slightly more exciting than average, but nevertheless still somewhat dull value stock.

Certainly that's what its valuation is currently telling us. At a trailing PE ratio of 10.5 - falling to just seven if its huge cash pile is stripped out - the company is not expensive compared with the technology sector average of 22. Ex-cash, it’s nearly as cheap as basket cases such as Hewlett Packard or Dell. It's not even expensive relative to the US market as a whole, which seems utterly bonkers considering its incredible profitability.

This reflects two fundamental facts: for all of its go-ahead pretensions, Apple is a Grande Dame in the technology world, with at least one cycle of mega-growth already behind it in the mid-1980s. Secondly, it now deals in the kind of phone and tablet markets where competitors are starting to thrive. In other words, the company is already well past its mature phase and, if you'll pardon the analogy, has sent the children through university and is about to settle down to a life of Radio 4, with occasional trips to John Lewis.

Cheaper competition

Apple's problem is less about middle aged complacency, though, than the fact that other electronics companies have upped their game. Having once had markets largely to itself, Apple now faces a slew of rival products that can challenge it on value for money and offer a wider variety of form factors, helped along by Google's cheaper Android operating system that it licences, Windows-style, to a multitude of vendors.

That's opened up the tablet market to the numerous consumers for whom paying $399 for an Apple tablet computer just isn't an attractive option. Amazon's Kindle Fire, for instance, is proving to be a formidable rival to the iPad; smaller and less than half the price without compromising on features. Along with Korean giant Samsung, non-Apple smartphones and tablets are winning overall market share - although the iPad held 54 per cent of the global tablet market in 2012, according to research group IDC that will drop to below 50 per cent this year as rivals launch new products.

Samsung's most recent fourth-quarter results are reflective of this shift in the landscape - its Nexus tablet is now the most popular device in Japan, for instance. That's just one example of why the Korean electronics conglomerate saw its net profits surge by 76 per cent in the last three months of 2012 to 7.04 trillion ($6.6bn, £4.2bn), with the Galaxy smartphone boosting sales. These impressive figures are based on growth in developed markets, which even Samsung predicts is now starting to slow as everyone who really wants a smartphone already owns one. Sales growth then becomes a matter of tempting people to change models and offering a broad range of products in different price brackets, which is what Samsung specialises in.

Amazon's Kindle Fire is proving to be a formidable rival to the iPad.

Perhaps more serious for Apple, and to a smaller extent for Samsung, is the growth of competition from emerging local developers in China and India. These smaller companies have started to manufacture tablets and phones for a fraction of the cost that the main players can - some Chinese brands sell for less than $100 and an Indian company is offering a tablet computer, the Aakash, for a subsidised price of $35. That poses a huge challenge to Apple as it calls into question the company’s basic strategy of selling a small number of high-end products with wide profit margins - and has led to much speculation that Apple will respond by launching stripped-down gadgets to tap into lower-end markets.

That could pave the way for a contract with one of China's large mobile operators - a factor that has long been touted as the next leg up in Apple's profit growth, but which has so far proved elusive. Yet the current management has consistently rejected the idea of diluting its margins by selling a cheaper version of its tablet or phone to put it within reach of Indian and Chinese consumers. This has a solid basis in history, as the company does not want to repeat the mistakes of the 1990s when it chased market share with low-margin products and nearly went bankrupt. But that also means the company could find itself confined to slow-growth developed economies where core customers already own all of its products. Equally, Apple also said it would never launch a smaller iPad, but subsequently launched the iPad Mini, seemingly in response to the success of the Kindle Fire. Whatever the case, management faces a strategic choice: Apple can either find a way of getting new consumers to buy its products, or settle down to lucrative ex-growth in its core markets.

How Apple's growth stacks up against peers

Assessing the management

The paradox of a successful and charismatic founder is that it makes the job of the following management team that much harder - a fact that two years after the untimely death of Apple's enigmatic founder Steve Jobs the market doesn't seem inclined to forget.

Certainly, the challenge faced by Mr Cook in convincing the market that his vision can match that of his predecessor should not be underestimated – and nor, given the debate as to whether Apple has shifted from growth to value stock, should its importance. Certainly, whatever your view of Steve Jobs as a person, it is undeniably true that he gave a sense of direction to a management team that always had a reputation for internal conflict, even if his main gift was to recognise the potential in the ideas of his subordinates and use his sales skills to publicise them. He deserves credit for rescuing the company from bankruptcy and building a structure that is likely to outlast his influence.

It is difficult to get much of an impression of new chief executive Tim Cook, but his track record is not to be sniffed at. He boosted Apple's margins dramatically after reorganising its supply chain when he first joined the company. He also effectively ran the company for long periods when Jobs was on sick leave, which was a lot towards the end of his illness.

Since taking the hot seat, he moved quickly to contain the fall-out from Apple's botched launch of its maps system for the IoS6 operating system for the iPhone and iPad where, memorably, whole towns disappeared from the system, including Stratford-upon-Avon, and leading to at least one documented case of a motorist getting seriously lost in the Australian Outback. Long-time executive Scott Forstall was sacked for the maps debacle after leading its development team. Mr Cook also displayed a ruthless streak in the sacking of former Dixons executive John Browett after only six months in charge of Apple's stores around the world, as retail same-store sales stuttered. Then again, he hired him in the first place, which along with problems with product availability in the run-up to Christmas has led to suggestions that his operational prowess may be overstated.

Which means that, overall, the jury is sill out on Mr Cook's leadership and it remains to be seen whether he can resist the pressure to boost its growth through some kind of acquisition spree, or accept the company's changing profile as an income share and be satisfied with Apple's lucrative niches. For those who doubt Mr Cook's ability, it might be worth remembering Warren Buffett's dictum that great companies can survive average management - but it is also worth remembering that Mr Cook's track record suggests he isn't just an average manager, either.

Apple: the technical view

Apple has looked rotten from a technical viewpoint for some time now. While the stock's woes have really started to dominate the headlines over the last couple of weeks, the charting set-up soured in early November. The key event was the price's breach of its 200-day moving average, probably the most widely watched line in technical analysis. When a price is above this line - and especially when that line is rising - most technicians would classify it as an uptrend. The abortive attempt to get back above this level in early December then compounded the negative picture.

The technical main case for investing in Apple now comes from the fact that the stock is now oversold. Its weekly relative strength index has plunged to 30 per cent, its lowest reading since the dark days of late 2008, just when the stock was forming a major bottom. Oversoldness like this often leads to major rallies, if only temporary ones. And it can be especially effective as an indicator when combined with a favourable fundamental valuation. This applies to longer-term investors, rather than short-term speculators, however. Traders would probably wait for a short-term uptrend to re-establish itself before buying here.