The Great Apple Sale

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

Apple (NASDAQ: AAPL) reported record sales of $54 billion and record profit of $13 billion.  For this wondrous feat the stock has been rewarded by losing as much as $50 billion in market cap in after hours trading.  There are only two streets in the world where such a thing makes sense.  The first is Wall Street.  The second? Bourbon Street.

This is a stock spanking unlike any publicly traded discipline I've ever seen.

Companies have been punished before

You may be quick to point out that it's not uncommon for high flying companies to have their stock price drop even when reporting sensational earnings.  One need look no further than Chipotle Mexican Grill (NYSE: CMG) in July of last year, or to BP Prudhoe Bay (NYSE: BPT) in August.  Both were punished more than Apple with Prudhoe Bay losing over 20% in stock price over the course of about a week.  Chipotle lost that much in a day.

Chipotle was a different situation than the situation that Apple is going through right now.  Chipotle's P/E ratio was over 60 at the time.  That is tolerated for a time on the stock market.  But then in July came the terrible news for the stock:  the company's growth was slowing.  The high valuation couldn't take it.  Shares fell. Nowadays Chipotle looks to be more fairly valued given their continued growth and forward P/E at around 28.

Prudhoe Bay was an interesting case.  An article was published suggesting that the market cap for this stock was higher than available money for payouts.  This bizarre piece of information spooked investors.  They later started trickling back and now the stock is trading for about the same price it was before the incident. Investors came back for good reason.  While no one can be positive how much oil is there, even pessimists estimate there is oil here through 2025 (Likely there is much more oil there).  That gives you plenty of time to get into this high paying royalty trust.

We've seen stocks drop before, but I can't think of a time when a company with Apple's growth, size, and valuation have ever been punished like this.

Remember when?

What is happening to Apple is similar to what happened to Priceline (NASDAQ: PCLN) back in August. Priceline was slammed 17% in one day when its guidance fell below analyst's estimates.  If you recall, Priceline's revenue for that quarter was actually up 20% and net income was up an impressive 43%.  Was that really bad news for investors?

I suggested that the market did all of us long term investors a favor on that day.  That was the day for those of us who had been waiting to get in.  I suggested that it was the time to buy.  Shares are up 19% in the five months since then.  It's heart wrenching for the people who were already in.  For those of us who were waiting to get in it made our hearts jump.  This was good news for us.

Collateral damage

There is some more good news that comes from a hammering like this.  In Apple's case, they have a lot of other companies whose movements are tied to Apple.  Cirrus Logic just happens to be one of those companies.  If you are long on any of these other companies, today is your day to double down.

My Foolish conclusion

Saying that Apple is a good investment is as polarizing as saying that Tim Tebow is a NFL caliber quarterback. People quickly take sides.  I know that there are going to be people who disagree with this, but I think that Apple is the best value it has ever been.

Just to keep things in perspective, Apple now has $137 billion in cash.  What can a proven innovator do with that kind of money?  $137 billion goes a very long way.  Consider that Apple could pay cash to buy both Dell and Hewlett-Packard outright without even having to spend half of their cash reserves.  With the profit they made just this quarter, they could pay cash for both Netflix and Coinstar.  I'm not suggesting that Apple will or even should do any of these things.  I just want to point out how much money this company actually has to work with.  The $54 billion in revenue is about the same as the GDP of Costa Rica.

If you love Apple's stock, don't let yesterday's earnings report rattle you.  This is a time to go back to why you thought Apple was a good investment in the first place.  Now, evaluate your past convictions with the latest news.  Has anything changed?  If not, this is the time to at least hold.  If you're able, this may be the time to buy more.  Days like this are the buy-and-hold investors bread and butter.  The day our favorite company goes on sale.


thequast owns shares of Cirrus Logic. The Motley Fool recommends Apple, Chipotle Mexican Grill, and Priceline.com. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Cirrus Logic, and Priceline.com. 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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