The Case for Buying Apple Into Earnings

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

Negative sentiment towards Apple (NASDAQ: AAPL) is at record highs, and the recent negative story from the Wall Street Journal has only exacerbated the fears surrounding the stock.  The consensus opinion clearly recommends staying away from the company for now, unless until we get more information about the state of its business from its earnings release next week.

I would never make an investment decision based solely on earnings expectations for a single quarter, but the risk and reward equation is looking increasingly attractive on the long side as Apple approaches its earnings release.

Extra, Extra: More Old News!

Apple traded briefly below $500 per share on Monday after the stock got hammered again due to an article by the Wall Street Journal stating that the company had cut its component orders for the iPhone 5 from Asian suppliers. Even worse, the article states that the decision was likely based on lower than expected iPhone demand as lower cost Android smartphones are stealing market share away from Apple on a global scale.

It's no secret at all that Google´s Android is the dominant smartphone platform outside the US, especially in emerging markets where the carrier subsidy model is not very popular and lower cost smartphones typically lead in terms of market share. But this still doesn't explain why “lower than expected demand” is the reason for the order cut.

To begin with, Apple typically cuts orders after the holiday quarter, this has been observed time and time again over the last years as the holiday period marks a record in sales for the year. This dynamic seems due to pure seasonality, and has nothing to do with overall demand trends.  

Besides, there are some strong reasons to believe that Apple is shortening its product cycle for the iPhone as new models with different screen sizes and colors could be reaching the market by mid-year. This would be an extra reason for a component order cut, and not be precisely related to weaker than expected demand.

The numbers don't make any sense either, according to the original report, Apple halved its orders from 65 million displays originally planned for the March quarter. A reasonable estimate for the March quarter is in the area of 30 to 40 million units, so why in the world would Apple order so many units for such a seasonally weak post-holiday period in the first place?

Latter versions of the Wall Street Journal article don't mention the 65 million figure anymore, so it looks like they are trying to do some damage control without being up front about it. Besides, news over production cuts for iPhone 5 components have been going around for more than a month.

The Wall Street Journal article doesn't even mention all those previous reports form media outlets and Wall Street analysts, so I think there is a big chance that they are just repeating outdated and widely distributed news. I don't think this report deserves much attention from investors, and it may ultimately be detrimental for the Wall Street Journal's reputation.

Demand Looks Strong

Apple is cutting components orders, but that doesn’t necessarily mean that demand for the iPhone 5 is weaker than expected. In fact, based on recent sales data from AT&T (NYSE: T) and Verizon (NYSE: VZ), iPhone sales are probably doing much better than you would expect based on the Wall Street Journal article.

AT&T announced that it sold more than 10 million smartphones in the fourth quarter of 2012, topping its previous record quarter of 9.4 million set in the fourth quarter of 2011. This included best-ever quarterly sales of Android and Apple smartphones. As for Verizon, the company announced an annual increase of nearly 27% in smartphones activations, and it also said that the data included a higher mix of iPhones than in the previous year.

The data looks quite encouraging, and it has prompted analysts at Bernstein to make some simple extrapolations and increase their iPhone sales estimate for the quarter to 55.8 million units, which would be considerably above the current average estimate of 47.6 million by Wall Street analysts.

Retail reports during the holidays have been very bullish regarding Apple's sales, and the iPad Mini is booming according to almost every report. Even if we see some margin compression, chances are that Apple may report better than expected numbers next week, especially considering that the news flow has been so unfoundedly negative recently.

Long Term Decision, Short Term Timing

Apple is not a buy on speculation about the coming earnings release. Competitive strength, innovative culture, brand recognition, financial strength and a dirt cheap valuation, among other things, are the reasons to buy the stock with a long term perspective.

When it comes to the short term implementation of the decision, however, I would prefer to take a position before earnings are announced, at least an initial position, because it's looking like Apple may report better than expected numbers next week.


acardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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