Should I buy shares in Apple?

Shares in Apple lost almost 5% on Wednesday, touching a new 52-week low of $403.67 (£264.71).

With the stock having lost over 40% of its value since its $701.95 peak in September 2012, is it time for investors to take a bite?

"Tepid quarter"

The company is due to report a "tepid quarter" when it posts results for its March period next Tuesday, according to Bernstein Research.

"If our estimates for this quarter and guidance are correct, and Apple does not announce that it is returning incremental cash on the call, we suspect Apple's stock could come under further near-term pressure," analyst Toni Sacconaghi wrote in a note to clients.

In addition, broker Goldman Sachs removed the stock from its 'conviction buy' list at the beginning of April, stating: "The most recent product cycle has not driven the market share and new user growth we had anticipated, and we believe Apple may find it difficult to hit consensus expectations in the March and June quarters."

At its update in January, the technology giant said its second-quarter revenues would be between $41 billion and $43 billion, below analysts' expectations of $45 billion.

Increased competition

Investors may also be worried that Apple's products could be losing their edge over the competition, notably Samsung, which uses the Android operating system.

Android is estimated to have taken 69% of the smartphone market in the last three months of 2012, up from 53% a year before, according to research firm IDC.

The iPhone generates a 55% profit margin for Apple, and its popularity has been the engine behind the firm's transformation into the world's most valuable listed company. But in January, reports that production of liquid-crystal displays for the iPhone's screens had been slashed due to lower-than-expected demand spooked investors.

Others have voiced concerns that Apple is not competitive on price in key emerging markets, where many cannot afford its products and other firms sell smartphones at much lower prices.

"We believe the stock's outperformance over the next 12 months will be more closely tied to whether or not the company's next product cycles can reinvigorate market share momentum and installed base growth," stated analysts at Goldman Sachs. "We are optimistic in this respect, but there is still considerable uncertainty around the timing and impact of these product refreshes.

"Until this uncertainty is resolved, the stock's upside potential should be more limited than we previously anticipated."

Dividend a floor for share price?

Both Bernstein Research and Goldman Sachs still rated the stock a 'buy'. This positive recommendation is largely attributed to potential shareholder returns.

Analysts at Goldman Sachs, for example, believed Apple was set to announce a new capital allocation plan in short order, adding that "a substantial increase in its dividend and/or share repurchase authorisation could provide a healthy floor for the stock price".

Morgan Stanley went a step further, commenting: "Apple could roughly double total annual return to $25-30 billion, which would match the S&P IT sector average of 68% free cash flow return.

"We expect Apple to increase its dividend yield to over 3% from 2.5% and return the rest through buybacks."

It is these shareholder returns that have recently landed the company in hot water - one of its investors, David Einhorn, in February called for the technology giant to issue "perpetual preferred shares" to resolve its perceived cash-hoarding problem. At the time, he implied that the company's strategy to stockpile $137 billion in cash was improper and proposed the "iPref" shares to pay a $2 dividend each year in a bid to attract new investors.

Catalysts on the horizon

Morgan Stanley also pointed out that Apple has a number of near- and long-term catalysts on the horizon.

Short-term catalysts include new iPhone products, including a lower-priced iPhone for emerging markets; new carrier partnerships; and larger cash returns to shareholders; while long-term catalysts include expanding store, online and carrier distribution in China and other emerging markets, like Brazil and India; a larger tablet market; and a potential smart TV or watch product in 2014.

"We believe Apple's shares discount a significant deceleration and maybe a decline in revenue and earnings that is unjustified in light of multiple medium- and long-term growth drivers," Morgan Stanley concluded.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.