Apple's Worst Days Are Finally Gone

NEW YORK ( TheStreet) -- Life has proven time and time again that "all good things come to an end." Apple ( AAPL), which has suffered a 45% decline since reaching an all-time high of $705, is no exception.

That said, as an Apple shareholder and an unabashed "fan-boy," I can say (as objectively as I can) that this degree of "over-correction," which suggests the company was spiraling down BlackBerry's ( BBRY) path towards irrelevance, was irrational, if not complete nonsense.

Nevertheless, the Street was convinced Apple's run was over, even though Apple had just come off a first quarter where it posted record revenue of $54 billion. So investors were chewing their nails ahead of the second-quarter report in anticipation of what the company was going to say. But it still seems as if the Street applied selective hearing.

Revenue arrived up 11% year over year to $43.6 billion, which was enough to beat the consensus estimate by roughly 2%. It's also worth noting that Apple's revenue came in almost 6% higher than the $41.3 billion that was projected by long-time Apple bull Gene Munster, analyst at Piper Jaffray.

Remarkably, Apple managed to sell about one million more iPhones than expected, arriving up 3% year-over-year, despite increased competition from Samsung's dominant Galaxy line of phones and the improvements made by BlackBerry and Microsoft's ( MSFT). Mac revenue was a bit soft, though. The fact that Mac sales arrived just 7% higher year over year was discouraging.

However, given the overall state of the PC industry, which has fallen prey to tablets, weak Mac sales came as no surprise. Plus, Apple more than made up for this deficit from iPads, up 40% increase in revenue, or 7% higher than Street estimates. While Amazon's ( AMZN) Kindle Fire and Microsoft's Surface tablet are worthwhile devices, Apple's iPad still remains the standard and the number one choice among consumers.

Making Sense of Margins

The most popular cited bear argument against Apple, aside from its perceived lack of innovation, continues to be the company's compressing margins. While Apple didn't woo the Street this quarter with spectacular leverage, I don't think the company confirmed there is a problem, either. Bears will still disagree, and that's fine. But let's keep it in perspective.

Granted there was a six-point year-over-year decline in gross margins. But the mix shift in iPhones was largely the cause. Besides, it still arrived higher than Apple's own projections. Likewise, investors who constantly cite Apple's profitability as cause for the company's decline should also keep this argument in the context of many peers that would kill for Apple's level of profitability,- even on the low end.

While Samsung wins in volume, ask its executives if they wouldn't love to switch places with Apple. If you understand anything about business, their responses should be predictable. Along similar lines, investors should be encouraged that part of Apple's softer margins this quarter was (in part) due to an increase in research and development spending.

So for those who suggest that Apple is no longer innovating, there are signs the company is not sitting on its hands.

Making Sense of Guidance

While these numbers arrived better than expected, the Street remained broadly unimpressed, which is understandable. After all, Apple has just beaten lowered expectations. However, shortly after earnings were released -- if you were watching Apple's stock move during the after-hours session -- you probably noticed an initial surge to $427 per share. But it didn't last.

Following the company's guidance, which suggested a 10% and 20% decline in revenue and earnings per share, respectively, investors panicked pushing the stock down to $385. The Street realized that in terms of absolute results and guidance, which arrived much lower relative to Street expectations and models, this is arguably Apple's worst performance in almost a decade.

I think this was a brilliant move by the company -- tossing out everything, including the kitchen sink. Now, given that the stock has bounced up almost 15% to $442.78 (Tuesday's close) since reaching $385, I'll be the first to say it -- Apple has bottomed. With a weak third-quarter already expected, investors have to feel good that the worst is over.

The stock at current levels still seems too cheap to ignore. Given the revenue the company can still produce, $650 per share is not an outrageous target from here.

Consider that even when adjusting out Apple's $145 billion in cash and adding in just modest cash-flow projections, the stock still supports a fair value of $525 today, or 25% higher from here.

The good times are not back yet, but investors can certainly wave goodbye to the bad.

At the time of publication the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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