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Why Apple Investors Shouldn’t Fret Over iPad Air Flop

Posted
10/23/2013 8:47:00 AM
By: Wyatt Investment Research
Referenced Stocks:AAPL

Apple's ( AAPL ) latest product announcement yesterday came with the usual hubbub. But the bigger event occurs next Monday, when the company releases its fiscal fourth-quarter earnings.

Apple unveiled a thinner, smaller tablet called the iPad Air yesterday in San Francisco, as well as a new iPad Mini. The iPad Air was the headliner. It is the "lightest full-sized tablet in the world," said Phil Schiller, Apple's vice president of marketing. It's 20% thinner than previous versions of the iPad and weighs just 1 pound. It's also eight times faster than the original iPad. The iPad Air will go on sale beginning Nov. 1.

But the iPad Air failed to wow investors the way past Apple product announcements have, and shares actually slipped a few ticks yesterday.

Until recently, new product announcements routinely gave Apple shares a nice 10% bump. That hasn't been the case lately, however. What investors want to see from Apple is something that's truly new - not just the latest iPad.

Apple must instead impress investors with continued growth. That makes Monday's earnings report critical.

Apple hasn't sustained the same breakneck growth pace it delivered two or three years ago. From 2008 to 2012, Apple's earnings per share increased almost nine-fold. After a record-breaking December quarter in 2011, however, earnings have slowed. In the last three quarters, earnings per share fell well shy of the previous year's numbers. The company actually missed analyst estimates in the fourth quarter a year ago - a rarity in the last decade.

As Apple's profits have slowed, the stock has pulled back . Thirteen months ago, Apple was on top of the world after topping $700 a share for the first time. By April, the stock had fallen 44% in seven months, dipping below $400. It appeared as if it might take years for Apple to recover.

Instead, the stock has righted the ship and Apple shares have risen 31% since June. A solid earnings beat in July accelerated the rally. And the success of the company's iPhone 5s and iPhone 5c, which combined to more than double the company's U.S. smartphone market share in September, have added more fuel to the recent run-up in Apple's share price.

Though shares dipped after the new product announcement yesterday, a solid earnings beat next week could turn that around quickly.

At less than 12 times forward earnings, Apple is still ripe for further share price appreciation. Analysts have pegged an average price target of $550, or 6% above its current price. At least one analyst thinks it could rise as high as $777.

No longer able to make jaws drop the way it once did, Apple will instead have to rely on the strength of its balance sheet to extend this rally any further.

Apple became the largest technology company in the world thanks in part to its signature flash. Now it just needs a little more substance.