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Apple's (AAPL) stock fell 6 percent on Wednesday amidst an earnings miss by Cirrus Logic (CRUS), attributed to "weaker than expected iPad mini sales," with Cirrus Logic noting that the weakness was due to consumers waiting for the next iPad mini. This note resulted in many speculating that iPad mini sales might miss expectations by about 20 percent. Although this kind of miss would typically be a "big deal", I suspect the "news" has already been priced in. At the current price of $400, Mr. Market has priced in Apple's earnings falling 40-50 percent from where they are today, no new "meaningful" products emerging ever, and Apple having no intention of putting its $150 billion "war chest" to good use. Were Apple currently near a 52 week high, I might be a bit worried, however at $400; it seems likely that all "good news" has been sucked out of the stock, and all "bad news" has been priced in.

Estimates Have Hit Rock Bottom. It will be hard for Apple to disappoint.

The estimates for Apple's 2014 earnings "range" from $40-60 per share, with most ignoring the impact of any potential "new categories." Although these numbers are the "official" estimates, I suspect at the current price, Apple is being priced for 2014 EPS of $20-30, with earnings remaining stagnant or falling further going forward, a "scenario" that is based on conjecture at best, and ignorance at worst. Next week, Apple will report earnings, and the truth will be revealed, dispelling the "uncertainty" that has caused Apple's stock to fall by 40 percent. With a PE of 5.49, (400-159.14) / 44.1), excluding cash, Apple is being valued at less than half the value of Microsoft (MSFT), whose PE is 12, excluding cash. This is particularly fascinating, since Microsoft's profit has been in decline for years, with some speculating that Windows will be dead by 2017. While the market for PC's and Windows has been in decline, the market for Mac's and OSX has remained relatively strong, with Mac sales increasing 7 percent during Q1, according to Gartner. There appears to be a very serious disconnect in how the market is pricing Apple's stock.

Potential for a buyback

If Apple announces a huge buyback, say $100 billion, the uncertainty surrounding Apple's "war chest" would be removed, and the stock could experience a monster rally. Although it's possible that the market will view a buyback as a gimmick to stabilize the stock, I believe the market would view such an act "positively". Some have speculated that Apple should raise the dividend yield to 4 percent. I suspect this would prove be a poor use of Apple's free cash flow, and would be perceived negatively. With Apple's stock being incredibly cheap, it would be irresponsible for Apple to "give away" its cash. Apple should do as Warren Buffett says and "buy back the stock"

When Steve called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. [laughs] I said, then buy back your stock. He didn't. Now, when our stock went from $90,000 to $40,000 to $45,000, I wrote about, we wanted to buy the stock. We didn't quite manage to. But if you could buy dollar bills for 80 cents, it's a very good thing to do. (Warren Buffett)

Conclusion

Although it's possible that Apple's stock will touch $360, wiping out all gains since 2011, this would likely mark an absolute bottom. At $400, the downside risk to Apple's stock is $40, and the potential return by going long is $400, based on the "most bullish" and "most bearish" estimates, and a full retracement back to Apple's stock price from 2011. Unless Apple announces that it missed expectations by 40-50 percent, I am confident the stock will rally after earnings. It will be very difficult for Apple to disappoint.

Source: Apple Is Not Worth Less Than Microsoft