Apple 's stock registered its biggest drop in a year on Tuesday, as sluggish iPhone sales and a downbeat second-quarter revenue forecast sent investors fleeing. Apple (ticker: AAPL) shares were down nearly 8%, or $43.25, to $507.20 in midday trading.
However, today's selloff is a buying opportunity.
The bad news is that new business in China isn't offsetting sluggish smartphone sales in North America; Apple sold a record 51 million iPhones during the quarter, while analysts expected that 54 million to 56 million units would be sold. The company blamed carrier changes to phone upgrade policies, though consumers may be sitting on their hands, awaiting the possible launch of a new iPhone with a five-inch screen later this year.
Apple also forecasted that second-quarter revenue would be between $42 billion and $44 billion, below the $46 billion Wall Street estimate.
However, Apple announced better-than-expected first-quarter results late Monday, with net income of $13 billion, or $14.50 per share, which was ahead of the $14.07 analysts expected for the fiscal first quarter, ended in December. Revenue of $57.6 billion also exceeded estimates.
Moreover, Apple has a thriving ecosystem, with hundreds of millions of credit cards on file, and roughly $159 billion in cash and equivalents on its balance sheet, or about $157 in net cash per share.
Apple sells tens of millions of devices per quarter, with just under 90 million in the most recent quarter. And it does so at premium prices with a healthy 38% gross margin. Compare that to Microsoft (MSFT), which has spent its cash hoard on questionable acquisitions, and is tied to the declining PC market.
Apple stock also reflects little regard for strong iPad sales and the possibility of huge upgrade cycles, if and when Apple finally reveals a smartphone-tablet.
Apple has an attractive 2.4% yield, and could boost its dividend this spring. The company used $7.7 billion in cash flow for dividends and share repurchases in the latest quarter, bringing cumulative payments to $43 billion, CFO Peter Oppenheimer said.
And yet, the stock trades at only 11.65 times the consensus earnings estimate of $43.42 per share for fiscal 2014, and at around 8.5 times forward earnings (excluding cash from the stock price).
We're not alone in thinking Apple is cheap. Late Tuesday morning, activist investor Carl Icahn tweeted that he had just spent another $500 million on Apple shares, bringing his holdings to roughly $4 billion. Icahn is demanding that Apple return more cash to shareholders.
If Icahn doesn't get his way, and ultimately walks away from the fight, some investors who've bet on his activism resulting in a big repurchase might dump the shares, which could weaken the stock price.
And while Apple appears to be losing smartphone market share, it could reverse that trend as it boosts emerging-market sales and introduces new smartphones in North America.
With Icahn dialing in yet again, we wouldn't bet against the stock.
E-mail: dimitra.defotis@barrons.com
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