Apple’s problems are more than skin deep

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Just about any way you look at Apple Inc., it's a cheap stock. It will likely get even cheaper.

On Wednesday, the share price briefly dipped below $400 (U.S.), marking its lowest level since December 2011. Apple has now surrendered the title of world's most valuable company to Exxon Mobil Corp.

The iPhone maker's stock has fallen about 43 per cent from its record high in September, and may appear to be a tantalizing value to anyone who missed out on its meteoric rise during the past decade.

The bargain-hunters should proceed with caution.

To be sure, the stock is hard to ignore from a valuation perspective. It trades at just nine times earnings, which is a bargain next to the 15 times earnings valuation for the broad S&P 500.

That's also Apple's lowest valuation over the past 12 years and makes it cheaper on a price-to-earnings basis than Microsoft Corp., a technology company that's looking more and more like a staid utility.

But Apple's appealing valuation suggests the market has more than a few concerns about the company's future – and yes, the market is often very right about these things.

Some of these concerns are short-term issues. The latest concerns flowed from reports that a supplier of audio chips for the iPhone and iPad had seen a build-up of inventory, which points to a potential decline in Apple sales in the current quarter.

There are also lingering concerns about Apple's product pipeline. The company has recently produced little more than tweaks to existing iPads and iPhones rather than doing what it does best: Developing exciting new products that revolutionize consumer behaviour.

And then there is the frustration over Apple's enormous cash pile, where some investors want the company to boost its dividend or distribute cash to investors through a new class of preferred shares.

None of these concerns is insurmountable. Apple can open its vaults tomorrow, unleashing the cash investors so desperately want.

It could also announce a new product that will overshadow the iPhone and iPad, just as those products pushed aside the importance of the iPod music player several years ago.

The bullish faithful are no doubt clinging to these hopes, even as analysts revise their target prices on Apple shares.

But Apple's longer-term issues are far thornier and are the biggest reasons why the share price has been in a sharp descent for most of the past seven months.

First, Apple has capable leadership but it doesn't have a visionary. Since Steve Jobs died in October, 2011, Apple's share price has underperformed the S&P 500 by nearly 30 percentage points.

This 18-month period of underperformance – during which new iPhones and iPads have been released – carries a message: If Mr. Jobs was largely responsible for Apple's success, it is not going to be the same company without him.

Second, Apple's brand-name cachet is in decline as rivals gain traction – at least among smart phone and tablet makers.

Until recently, it was hard to understand why any consumer would consider anything other than an iPhone or iPad.

Now, they are merely two among many worthy products. According to market researcher IDC, Samsung has become the smartphone leader worldwide, in terms of sales. The cutting edge features on its latest device, the Galaxy S4, are being met with the sort of praise once reserved solely for the iPhone.

If you want to take a really grim view of Apple, you could compare it to Research In Motion Ltd. RIM, too, surrendered the technological edge to competitors who crowded out the BlackBerry. RIM, too, looked exceptionally cheap when it continued to report record quarterly results.

It's hard to imagine Apple falling to such extreme depths as the BlackBerry maker, given Apple's size and product diversification.

But RIM does demonstrate an unfortunate reality of the tech industry: Once down, superstars have a tough time getting back up.