Time to take another bite of Apple?

The stock is still recovering from its first earnings miss in years. Apple needs to prove it can perform without Steve Jobs.

By Jim J. Jubak Nov 17, 2011 6:13PM
Up days have been unusual for Apple (AAPL) ever since it fell short of analyst expectations Oct. 18 when it announced earnings for the quarter ended Sept. 24. Apple shares lost nearly 2% Thursday to close at $377.41.

Shares did advance earlier this week on reports of October retail sales that showed solid growth in sales of consumer electronics. And that has raised hopes for holiday sales of electronics -- including the iPhone and the iPad.

With Thursday's close, the shares are down 10.6% from the Oct. 18 high of $422.24.

I think it’s too soon to say that Apple shares are headed straight up from here. A stock doesn’t shake off its first earnings miss in six years quite that easily. I think Apple still has to prove that last quarter was a fluke by reporting stronger-than-expected earnings for the fourth quarter.

But I think we’re seeing the beginning of the retreat of the pessimism that has surrounded the shares ever since the death of Steve Jobs.

The molehill problem in third-quarter earnings -- that Apple had sold fewer iPhones than projected, probably because the new iPhone 4S had cannibalized sales of older models -- has somehow turned into a mountain that Apple shares haven’t been able to climb.

There have been, for example, battery problems with the iPhone 4S and the new iOS 5.0.1 operating system. A bug in the operating system has led to faster-than-advertised battery drain -- with some users reporting a 70% battery drain in 6 hours. (Apple advertises eight hours of talk time for the 4S.)

An update to the operating system has fixed the problem for some users, but left others still complaining on Apple online support forums of continued battery problems.

And there have been more than enough worried analyst reports from Wall Street to raise doubts about iPad sales in the quarter that ends in December (Apple’s first fiscal quarter of 2012.)

In the company’s September quarter, iPad sales came in at 11.1 million, instead of the 11.7 million that Wall Street had expected. And inventory in the sales channel rose in the quarter to 2.5 million units, from 1.05 million in the prior quarter.

That has led to all kinds of speculation:
  • That Amazon’s Kindle Fire, on sale this week, will cut into iPad sales
  • While the anticipated March 2012 upgrade to an iPad 2S or iPad 3 will cannibalize sales in the current quarter
  • And after Amazon (AMZN) lowered the introductory price point for the Kindle Fire to $200, possibly forcing Apple to cut iPad prices.
The battery problem is a fleeting issue that will go away relatively quickly, just as earlier antenna problems did with the last iteration of the iPhone. Worries about iPad sales won’t be put to bed until Apple announces earnings for the first quarter of its 2012 fiscal year on Jan. 18.

That’s especially the case since the issue behind much of this worry is really about the management team that has followed Jobs. It’s hard replacing an icon.

Tim Cook, Apple’s post-Jobs CEO, doesn’t have to prove that he’s the second coming of Jobs. But he does need to put to rest the nagging doubts that Apple won’t be the same without the man who had become to investors the face and spirit of the company.

I still think Apple is an incredibly undervalued stock, and that there’s a lot more earnings growth in the pipeline. I think the stock is reasonably priced at $390 or so, but I’d really like to get shares near the $363 level of the 200-day moving average.

Long-term, I love the stock. Short-term, I’m still bargain hunting.

Jim JubakAt the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Nov 17, 2011 8:10PM
Smile There's so much competition looming in the mobile phone and tablet markets in 2012-13 I would not take a bite out of the current leader.
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