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Apple: Who Missed What?

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The headlines are everywhere: “Apple (NASDAQ: AAPL) misses estimates” or “Apple delivers disappointing results.” Let´s step back and think for a second, did the company miss estimates or did analysts miscalculate the number? More important for investors: is Apple cheap or expensive according to growth trends and future possibilities? Looking beyond the headlines, the current weakness in Apple may be a great buying opportunity.

Some perspective, please

Revenues for the quarter were above expectations at $35.97 billion, versus $35.8 billion expected by analysts, but earnings per share fell short of the estimated number at $8.67 versus $8.75. Still, Apple delivered an increase of 27% in sales and a 24% growth in net income, a performance that makes most companies green with envy.

iPad sales were the weak spot, while the iPhone did better than expected. On that issue, Tim Cook said K-12 (Kindergarten-12th grade) sales, which happen in the June quarter, had a negative seasonal effect on iPad sales when it comes to quarter over quarter comparisons. Also, all the rumors and anticipation regarding the iPad Mini have the effect of postponing iPad sales until the new product hits the market.

From the press conference regarding weak iPad sales:

The reason we had expected it to decline is that we believe based on the two or three years of results that we’ve got is that normally, we would see a seasonal reduction in the September quarter versus the June quarter, part of this reason is because K-12 heavily buys in the June quarter, K-12 doesn’t buy very much in the September quarter, it becomes the Higher Ed kind of move and Higher Ed is still buying notebooks for the most part and so there is some kind of normal seasonal that is exaggerated further when we announced the new product in March and have an enormous full quarter of demand in the June quarter and then when you compare that to the September quarter that would be natural phase down.

In fact, Apple has completely revamped its line of products in the last six weeks; iPhone 5, new iPad, iPad Mini, 13-inch retina MacBook Pro, new iMacs, and new iPods. It sounds logical to assume many customers have been delaying their purchases to get the latest version. This could have been a drawback in the last quarter, but it may also provide a big boost for the next earnings report.

There are some issues which will have a negative effect going forward, like delays in the iPhone 5 supply chain and lower profit margins for the iPad Mini. But on the other hand, Apple is reaching the most important part of the year with a fully refreshed line of products, so this sets the stage for a potentially very positive quarter in December.

The Price of Growth

The numbers were quite strong for a company of this size, facing product cycle headwinds and a tough economic environment. Besides, growth rates should not be evaluated in relationship to analyst’s expectations, but in comparison to the stock´s valuation. Is the company growing fast enough to justify the current stock price?

In the following table we compare some valuation and financial statistics for Apple versus other tech leaders like Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT).

<img src="/media/images/user_1532/aapl_large.jpg" />

First of all, it’s worth noting that Apple has higher profitability than any of the companies in the table as expressed by Return on Equity and Operating Margin numbers. So even if margins decline a few points in the future – which is quite likely - the company will remain among the most profitable in the world.

More importantly, Apple doesn´t need to grow at unachievable rates to justify its Price to Earnings or Price to Free Cash Flows ratios. In fact, Apple is cheaper than any of the companies in the table, except for Microsoft, which trades at a lower valuation in terms of forward P/E and P/FCF. Apple has beaten Microsoft in multiple ways over the last years, and has positioned itself for superior growth rates, yet both stocks are trading at similar valuations.

Considering its results for the last quarter – which may easily be underestimating future growth possibilities – Apple is a very reasonably priced stock, if not a complete bargain.

Bottom Line: A Great Company at a Fair Price

Growth rates in the neighborhood of 20/25% are better than fine for the biggest corporation in the planet, especially in a period in which numbers were negatively affected by new product launches.  Apple is a great company, and the valuation is attractive, so investors should just forget about all the noise surrounding the stock and simply hold Apple for the long term.

Know What You Own

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acardenal owns shares of Apple, Google and Amazon. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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