Is Apple a Buy at $604?

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Since hitting a record closing price of $702.10 on September 19, Apple (NASDAQ:AAPL) shares have fallen nearly $100, closing at $604 on Friday after releasing its latest quarterly earnings report.

Earnings grew 24 percent from the year earlier to $8.2 billion, or $8.67 per share, in the September-ending quarter, falling short of Wall Street’s expectations for $8.84 per share. And while Apple marginally beat revenue expectations, average gross margins were almost unchanged from the year-earlier period.

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The figures that are giving investors the most concern are iPad sales. Apple sold 29.9 million iPhones in the quarter, up 58 percent on the year, but iPad sales grew just 26 percent, with 14 million sold in the July through September quarter. Analysts had expected roughly 15 million iPad sales, and though iPhone sales beat expectations, the miss prompted a continued sell-off among more concerned shareholders.

Of course, CEO Tim Cook reminded analysts in his conference call that a seasonal slowdown was to be expected, especially considering that the third-generation iPad had been on the market since mid-March. “In addition to all of that, it’s clear that customers delay purchases of tablets due to new product rumors, and these intensified in August and September.”

Cook refers to rumors that Apple was working on a smaller, less expensive iPad, which the company ultimately announced last week and which began pre-orders Friday. He also blamed rumors when iPhone sales fell short in the third quarter, with CFO Peter Oppenheimer backing him up: “We’re reading the same speculation about a new iPhone as you are and we think this has caused some delay in purchasing.”

Sure enough, the rumors proved true as they so often do when it comes to Apple, and the company launched the iPhone 5 in September, eleven months after the iPhone 4S debuted. And despite the iPhone 5 going on sale near the end of the quarter, iPhone sales ended up beating expectations for that period.

Rumors about an iPad mini were persistent, but no one was expecting Apple to also launch a fourth-generation iPad at its “special event” last week. Apple’s stance that rumors hurt sales relies on the premise that consumers are holding off their purchases for the new device. If that’s the case here, then Apple may be losing iPad buyers to the iPad mini — no one could reasonably have been holding out for a new full-size iPad, as the fourth-generation device was not expected to debut until next spring.

With a significantly lower price point, investors and analysts are concerned that the mini will cannibalize iPad sales, perhaps taking a bigger bite out of existing iPad sales than it does from competing tablets. Amazon’s (NASDAQ:AMZN) Kindle Fire tablets, the biggest players in the low-end market, are still priced lower than the mini, and because they run on a version of Google’s (NASDAQ:GOOG) Android software, there are a plethora of applications available for those devices — Apple isn’t likely to win over many Kindle buyers with its App Store.

That means the mini will rely heavily on Apple’s mobile operating system, the current iteration of which is iOS 6, which has been lambasted by the media and consumers alike. Its other main selling point is its design, which is another way of saying how cool it looks. The sleek, modern design of Apple’s products, as well as the fast rate at which they become obsolete, has turned them into a sort of status symbol. For now, Apple is sure to win over some users looking for that “cool” factor, but the mini doesn’t do much to address the issue of price, the main driver of the lower-end market.

If would-be iPad buyers start opting for the mini — it’s size does make it more portable, and the lower price tag can’t hurt — then Apple’s unit sales may not be impacted, but its profits could be. The company needs to win over new customers rather than drawing existing customers to lower-priced products.

Only the company’s next quarterly results will tell us what has been the impact of the mini on iPad sales and revenues, but with the mini already stirring concerns, Apple falling short on iPad sales in the last quarter is only adding fuel to the fire. Shares were already trading lower thanks in large part to negative press surrounding iOS 6 and Apple’s first foray into maps.

Thursday’s earnings report should ensure that Apple shares remain around their currently depressed level until investors are reassured that the company can continue to perform as it has in the past. Such reassurances could come from higher-than-expected initial iPad mini orders or another iOS update — or perhaps investors will have to wait for holiday quarter earnings to know whether Apple can regain its lost footing. But whatever the catalyst may be, one thing seems certain: Apple is not done.

Apple storeLet’s just consider the positives for a moment, which so often get overlooked whenever Apple falters. Firstly, earnings were up 24 percent from the year-earlier period, and only slightly fell short of analysts’ predictions, which were perhaps pegged a bit too high to begin with.

Furthermore, Apple sold nearly 30 million iPhones in the quarter, even though the new iPhone 5 wasn’t released until a little more than a week before the quarter ended. That means iPhone 5 sales could be a huge driver in the current quarter. After all, the phone did break pre-sale records last month — it very well could continue to break sales records during the holiday quarter, which is notoriously the biggest for most consumer companies, especially tech.

Finally, the iPad mini could still blow everyone away. Because it’s a new product for Apple, no one is yet sure what to expect, and that’s what’s creating a lot of the concern. But with pre-sales beginning Friday, the first signs of how well the mini will do are already starting to arrive. Just hours after Apple began taking orders, the white model in all capacities sold out. Also, Apple sold out of the 16GB black iPad minis in just 35 hours. Rather than receiving the device on Friday, November 2, those placing their orders now are facing wait times of up to two weeks.

Market watchers have some big expectations for the mini, with millions expected to be sold this quarter. If the iPad mini is able to justify its price to consumers, it may successfully draw buyers from Amazon’s Kindle, Barnes & Noble’s (NYSE:BKS) Nook tablet, and other smaller tablets with comparably lower price points, and not simply away from the 10-inch iPad.

Maybe, then, this should be seen as a buying opportunity. Apple could soon leave $600 behind for good — it seems likely given the company’s overall trajectory. Shares are up over 50 percent this year to date, and trading roughly $200 above where they were in October 2011, when Apple reported record initial orders of the iPhone 4S — figures that were trounced by the iPhone 5 last month.

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