Apple, Inc. (NASDAQ:AAPL)

Sharpfool213 (26.44) Submitted: 7/27/2012 9:26:24 PM : Start Price: $578.52 AAPL Score: -43.50

Coming off a comparatively “disappointing” quarter of 24% year-over-year revenue growth, Apple saw its stock drop a whopping $36 a share after hours. It's a little harsh considering Apple is likely to make a boat load of cash on the up and coming iPhone 5 and a 7-inch iPad. Perhaps this is a great buying opportunity.

Nevertheless, the quarter was the company’s third best in its history, coming on the back of two of its best quarters ever. Revenues from iPhone sales were up 22% y-o-y but declined almost 30% sequentially due to softness in demand for the higher-margin iPhone 4S as well as seasonality in China following the very successful launch of the same last quarter. iPad sales surprised on the positive, with unit sales exceeding 17 million and besting the previous record of 15 million in Q4 2011. To put that in perspective, HP, the world's largest PC vendor, sold "only" 13 million PCs in Q2.

Looking ahead, the company expects to see margins contract further in the next quarter as customers hold off on purchasing an iPhone in anticipation of the release of the iPhone 5 next quarter. However, as was seen last year, customers that held off purchasing an iPhone didn’t necessarily buy a competing product but waited until the launch of the iPhone 4S. Apple’s results last year were back-weighted with almost 40% of iPhone sales coming in Q4 CY2011 alone. Long-term, China will continue to contribute heavily to Apple’s growth and the pent-up demand for the iPhone 5, together with the holiday season, leading to an exceptionally good holiday quarter.

China holds a lot of promise for Apple considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only 17% in China and growing at a good rate). A deal with China Mobile, the largest carrier in the world by subscriber base, is looking increasingly likely following Qualcomm’s recent announcement and Apple’s similar deals with the other two carriers. This deal is very important for Apple as it instantly doubles its current addressable market for the iPhone in China and can act as the next big boost to its stock, given that the iPhone accounts for more than 55% of the company’s stock value now.

The margin contraction may have come as a shock to the markets but it was mostly due to a product mix that tilted more towards the lower-margin older products. What this means is that many customers might be holding off purchasing the higher-end iPhone 4S as rumors about the iPhone 5 circulate in the market. Apple talked about a ‘fall transition’ impacting margins in the coming quarter; so the iPhone 5 launch will most likely be scheduled towards the end of Q4 or early Q1. The huge pent-up demand to help Apple more than offset the current loss of sales with a very strong holiday quarter, a la last year.

How large is this "pent-up demand"? Well, A survey of more than 4,000 North American consumers by ChangeWave Research showed a record enthusiasm for Apple's next-generation smartphone, with nearly a third saying they were likely to buy one.

Of the people polled, 14% said they were "very likely" to buy a new iPhone for themselves or a family member, while 17% asserted that they were "somewhat likely" to do so. The 31% total of those who said they were likely to buy the iPhone 5 was 44% higher than the 21.5% who answered the same way in a survey ChangeWave conducted last year just before the launch of the iPhone 4S. Piper Jaffray analyst Gene Munster supports this assertion, predicting 180 million iPhone 5’s sold in 2013.

Further proof about the high pent-up demand that Apple’s products generate can be found in the company’s iPad sales this quarter. After a rather muted last quarter, Apple sold about 84% more iPads year-over-year and broke previous iPad records as it fulfilled the huge demand of customers that had held off purchasing an iPad last quarter.

Currently, the iPad contributes less than 12% to Apple’s value but a rapid expansion of the tablet market together with margin improvement due to falling component costs can lead to a bigger iPad contribution. Going forward, consumer market research firm NPD predicts that by 2016, tablets will outsell traditional PCs. They peg the iPad at 50% of the tablet market, down 20% from its current levels.

The bottom line - Apple is a rare combination of a value play and growth play. It has plenty of liquid assets on its balance sheet and is starting to make strides in China. It trades at a P/E of just 13.7 and displays astronomical growth year after year. In fact, net income has increased by 500% since the launch of the first iPhone in 2007. With the iPhone 5, iPad Mini, and iTV waiting in the wings, a dominant position in the smartphone market, a stranglehold on the MP3 player and tablet market, and ever-increasing Mac sales (26% of all laptops sold in June, according to NPD), Apple looks poised to become the first ever trillion-dollar company. There. I said it.