Apple: Pessimists Missing Company's Improving Prospects

| About: Apple Inc. (AAPL)

"When The Facts Change, I Change My Mind. What Do You Do, Sir?" - John Maynard Keynes

Pessimists in Apple (NASDAQ:AAPL) stock are ruing their inaction in early trading Monday as the company is vastly exceeding expectations in selling its new 5S and 5C iPhones. As I stated during the sell-off in the stock after the new iPhone unveiling on September 10th, the pullback was a significant buying opportunity. Hopefully regular readers of my columns on these pages followed my lead and picked up additional shares.

Shares are soaring Monday on three positive catalysts:

  • The company reported selling 9M combined of the iPhone 5S and iPhone 5C in the first three days following their launch. This is significantly above the consensus calling for sales in the 5mm to 6mm range. 7.75mm was the most optimistic analyst projection.
  • Apple also stated with its release of weekend iPhone sales that it expects Q4 revenue to be at the high end of a guidance range of $34B-$37B.
  • Finally, and as importantly, it expects Q4 gross margin to be at the high end of a guidance range of 36%-37%. This is a critical measure to stock appreciation as declining gross margin is one of key arguments that skeptics on Apple consistently bring up to back their dismal expectations for the company.

In a less critical news release, the company said that 11M unique listeners have already tuned in to iTunes Radio.

I believe we are in the early innings of a turnaround in Apple's stock as the worst case scenario (new iPhones will not sell well) is taken off the table and the company's near term prospects seem to be improving by the week. One of the key positives that was overlooked in the iPhone unveiling two weeks ago is that NTT Docomo (NYSE:DCM) will now be a carrier for the new iPhone. This gives Apple access to 60mm subscribers in Japan that have the income to purchase Apple's premium products.

In addition, another positive catalyst is on the horizon. As I have articulated recently, the company seems to be on the verge of signing a distribution deal with China Mobile (NYSE:CHL) and its over 700mm subscribers which should result in tens of millions of additional annual iPhone sales. I place a high probability of this occurring by the end of the year and it does not appear to be yet fully priced into the stock price.

Summary: Even after the stock's ~10% rise from the iPhone unveiling inspired sell-off bottom, the shares are still cheap at around 8x forward earnings (and look for these earnings estimates to be taken up this week as the result of the huge launch numbers of the new iPhones) once subtracting the company's over $140B in cash and marketable securities on its balance sheet.

Apple's new iPhones are off to a stellar sales start and it has a huge positive catalyst (China Mobile deal) on the horizon. The shares also provide a ~2.5% dividend yield and the company still has $40B left to buy back stock in the medium term. So my question to pessimists on the company's prospects is this. Are you going to buy the shares here at just under $500 a share or are you going to wait until the shares hit $550 and beyond? STRONG BUY

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.