Has Apple Corrected its Issues?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last Friday’s trading session saw Apple (NASDAQ: AAPL) flirting with a full 15% correction from its recent high of over $700, even though the stock closed above that level at $604. Having announced the iPad Mini, reduced expectations for the holiday season and released earnings that disappointed only compared to incredibly aggressive projections, the company may finally have cleared the way for its stock to march higher. While not a pure contrarian, the fact that Apple analysts are reducing price targets and taking a more realistic view of the world should be seen as highly bullish for the stock.
The iPad Mini
Apple announced details of its new iPad Mini last week, to mixed reviews from critics and analysts. While the Apple faithful continue to rail against the naysayers, with a price of $329, the iPad Mini is quite a bit more expensive than options offered by Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) that price out at $199. It is not simply a question of is the Apple device better, it is a question of is it 60% better.
The discussion of the pros and cons of both the device and the pricing strategy are brilliantly laid out by fellow Fool, Anders Bylund, in his article “Why is the iPad Mini So Expensive?” His takeaway is that the intelligence of Apple’s approach must be based on empirical evidence because it is not obvious as a matter of pure strategy. The company will post significant sales this holiday season, but at the tightest margin Apple has ever attempted, competing with mere mortals like the Google Nexus 7 and Kindle Fire HD could prove to be a mistake.
The Muddled Earnings Picture
When Apple released results for the most recent quarter, some of the figures fell short of consensus estimates, despite being very positive in their own right. Where analysts had expected earnings of $8.75, the company posted earnings of only $8.67; that’s an increase in net income of only 24% and an increase in sales of only 27%. If you need one more only, the company only beat expected revenues of $35.8 billion with earnings of $35.97 billion. Headlines and “only” aside, the company put up some impressive numbers.
Apple followed up its meager earnings by slashing guidance for the holiday season, citing increased costs as a result of the number of new devices that have been released. The figure released from Cupertino was for earnings of $11.75 per share for the upcoming quarter against expectations of $15.49, lower by 32%, and below the $13.87 that was earned in the same quarter a year earlier. While Apple is regularly in the habit of lowering guidance, only to surpass its own figures later on, this cut is significant and should be taken a bit more seriously. The earnings miss is the function of overly exuberant analysts, but this guidance cut should be watched.
With all of the factors that have been pushing and pulling on Apple’s share price since hitting its record-high above $700, the stock has taken the much needed breather that I predicted. Since then, the stock has corrected by nearly 15% on a closing basis. Analysts have begun to set more measured price targets on the stock, and with the company lowering expectations, it may be time to enter Apple once again for the medium-term. While I have mixed feelings on the direction that the company has taken on a variety of products, and I strongly believe that competition is intensifying, Apple remains a special company and a solid value at current levels. Heading in the holidays, Apple is a buy for your core portfolio.
Interested in Additional Analysis?
The stakes are high and the opportunity is huge after Apple’s introduction of the iPhone 5, so to help investors understand this epic Apple event, the Fool has released an exclusive update dedicated to the iPhone 5. By picking up a copy of this premium research report on Apple, you'll learn everything you need to know, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, 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.If you have questions about this post or the Fool’s blog network, click here for information.