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"One man with courage is a majority." - Thomas Jefferson

Apple (AAPL) delivered its first quarterly earnings report of the New Year after the bell on Monday. Despite many positives, the stock sold off in post market trading. The main drivers of the sell-off were investor disappointment that iPhone sales for the quarter (51mm) were short of consensus estimates (55mm to 57mm).

In addition, the company gave conservative guidance for the upcoming quarter. Finally, investors might have also been disappointed that revenue from Japan only rose 11% despite a 40% gain Y/Y in iPhone sales. However, this was due to the huge debasement in the Japanese Yen over the last year as the Japanese Central Bank embarked on its own huge QE program. This currency devaluation is unlikely to have the same impacts in the quarters ahead.

One of my first actionable trading ideas in Tuesday's early morning trading is to significantly increase my stake in Apple if losses of 7% to 8% in pre-market trading come to fruition. Investors seem to be overlooking multiple positives within Apple's quarterly report and any sell-off presents a solid entry point to add to my position.

Overlooked positives:

  • Let's start with the obvious. Earnings per share came in $14.50, 41 cents a share over consensus. This was first quarterly Y/Y earnings gains in five quarters.
  • Revenues came in at a whopping $57.59B, $130mm over expectations.
  • Gross margins came in at 37.9%, 70bps above consensus.
  • iPhone ASP (Average Selling Price) rose to $637 in FQ1 from $577 in FQ4 and $582 in FQ3.
  • iPad sales came in at 26mm, above expectations of 24mm to 25mm, an all-time record.
  • Revenue from China rose 20% Y/Y. This was before any incremental sales came in with huge distribution deal with China Mobile (CHL) hit the ledger. The iPhone was officially launched on the carrier on January 17th and will start to show up in subsequent quarters.
  • Revenues from Apple's software & services division (iTunes, iPod, AppStore, etc..) rose 19% Y/Y to $4.4B. This is pretty amazing given iPod sales plunged 55% to under $1B in sales. This shows the power of the AppStore and the potential to monetize Apple's 575mm iTunes users which is increasingly being discussed.

Finally, the statistic that jumped off the page for me was the following. Apple's net cash & marketable security hoard increased $12B Q/Q to a mind boggling ~$159B. It pays to put this figure in perspective. The company provided its shareholders with more than $10B in dividend payouts and $30B in stock buybacks in 2013. Yet its cash holdings still increased by some $12B during the quarter which is roughly the market value of Alcoa (AA), until recently a Dow 30 company.

Look for Carl Icahn and other activists to push harder for the company to return even more cash to shareholders in the months ahead. It almost seems like the company is printing so much cash it does not know what to do with the bounty.

Bottom Line:

Although iPhone sales were disappointing and forward guidance tepid - which probably is a case of under promising with the intention of over delivering in the quarter ahead - there is much to like about Apple's results.

The stock in pre-market is selling at less than 12x forward earnings, a 20% discount to the overall market multiple. It also should increase revenues by ~8% in 2014, which is twice the rate expected from the S&P 500 over the next twelve months.

This does not take into account the company's almost $160B cash hoard. This is more than Warren Buffett's and Bill Gate's net worth combined with still enough left over to buy Netflix (NFLX) and Twitter (TWTR). Investors can choose to be disappointed in the results or use the opportunity to add additional shares in this undervalued tech giant. I know what Carl Icahn and I will be doing this morning. BUY

Source: Doubling Down On Apple