Why Investors Should Not Worry About Apple's Miss

Oct.19.11 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) reported weaker than expected September quarter results yesterday missing both revenues and EPS estimates. Apple’s revenue was $28.3bn (vs. Street $29.7bn) and EPS was $7.05 (vs. Street $7.38). The miss was primarily due to lower than expected iPhone sales as customers waited for the 4S launch which was announced earlier this month.

I believe the Street underestimated the degree to which September was a transitional quarter for the iPhone. However, given the initial momentum iPhone 4S has seen in October, I don’t think light iPhone shipments in September quarter should be a cause for concern. iPhone 4S is seeing strong demand with over 4mn units sold in just 3 days of launch.

More importantly, Apple has guided C4Q above consensus on both revenue and EPS. This is important as Apple is a conservative company and there have been only three instances since 2006 when company has guided better than analyst expectations. Further, Apple’s management is comfortable that gross margins won’t deteriorate despite iPhone price cuts, and Apple expects record iPhone and iPad units in the December quarter.

To sum up, I believe Apple’s fundamentals are firmly intact. Apple continues to remain a secular growth and market share gain story in the smart phone and tablet space. I would recommend buying the company on today’s pullback given low valuations and several upcoming catalysts over next few quarters like strong iPhone 4S sell-through, holiday sales, and anticipated iPad 3 and iPhone 5 launches next year.

In addition to Apple, several iPhone component suppliers also took a hit after hours yesterday. Some of them are Broadcom (BRCM), Qualcomm (NASDAQ:QCOM), TriQuint Semiconductor (TQNT), Cirrus Logic (NASDAQ:CRUS), Corning Inc. (NYSE:GLW) and Omnivision Technologies (NASDAQ:OVTI). I believe any pull back in their stock price today could be a good buying opportunity for short term as strong sales trend of iPhone 4S will help their stock price recover sooner rather than later.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.