Is This The End Of Apple's Run?

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) recently released its Q4 earnings. For the second quarter in a row, the company missed the mark analysts expected. Does this signal the end of Apple's rise, or is it now a good buying opportunity?

Apple reported earnings of $8.67 per share compared to analysts' expectations of $8.75. iPad sales fell short of predictions by about 1 million units. However, concerns about iPhone sales, with a late quarter iPhone 5 launch, turned out to be largely unfounded. Revenues marginally beat out estimates, but gross margins were unchanged from a year ago.

Apple announced on Tuesday that the sale of its 100 millionth iPad occurred about two weeks ago. Extrapolating that information, many could predict Apple would miss expectations for iPad sales for the quarter. The impending launch of the iPad mini likely caused consumers to take a wait-and-see approach to their tablet purchase. All that is to say, the market should have built an iPad miss into the price of the stock.

While revenue was up 27% from the same period a year ago, gross margins did not change. Apple refreshed nearly its entire product line this year. Each refresh will cause margins to drop, but as the company continues to sell the same models over time, margins will improve. In the coming year costs of material will go down and supply chains will become more efficient. If sales continue to rise at this rate, Apple's profits will begin to meet and exceed analysts' estimates once again.

Apple's biggest weakness this year has been its supply chain management. CEO Tim Cook is supposed to be a supply chain guru, but continues to drop the ball in attempts to meet demand on new products such as the iPhone 5. Certainly, there could be worse problems for a company than having too much demand, but impatient consumers may decide to purchase elsewhere. Apple needs to strengthen its supply chain in order to reach its full profit potential.

The current quarter is usually the best period for consumer technology companies. This holiday season people have more options than ever. Microsoft (NASDAQ:MSFT) launched its flagship tablet, the Surface, on Friday. Priced in parity with the iPad at $499, Microsoft is looking to go head-to-head with the market leader. Indications are that pre-sales have been strong as none of the three models are available to ship for 3 weeks. However, Microsoft has not released a report on how pre-orders have gone.

Additionally, rumor has it that Google (NASDAQ:GOOG) will release a budget tablet in time for the holiday season in an attempt to take further market share on the low-end. Google's Android operating system is now on over 40% of tablets sold, and a tablet priced under $100 may be the perfect holiday gift for young techies.

A large part of Google's market share is in products it does not directly produce. Google gives away its Android software free, and makes money on apps sold in the Google market place and licenses on its own apps such as Gmail. The leading Android tablet is Amazon's (NASDAQ:AMZN) Kindle Fire. Amazon is able to sell the tablet at low margins and make money by selling ebooks for the device. Couple low margins with low cost of materials and software, and Amazon's offerings trounce Apple's pricing making them potentially more attractive to buyers.

So how will Apple's new toy compete? The iPad mini went on pre-sale Friday morning. Within twenty minutes, the white model sold out. Indications are that this is a product people want, and are willing to pay a premium over Amazon and Google.

I believe this is because Apple is capturing a new market - consumers looking for a mid-priced, small form-factor, premium product. While some more price sensitive consumers will choose the less expensive products from Amazon and Google, Apple will gladly let them go to keep its margins on the iPad mini high.

The margins on the iPad mini are over 40%, which is higher than the larger model iPads. A successful product launch at the beginning of the holiday season bodes well for Apple's chance to demolish both its revenue and earnings guidance and beat analysts' estimates.

Additionally, Apple's late quarter iPhone 5 launch turned out to be the most successful phone launch in history. Despite a slow supply chain backing up orders for weeks and complaints about the new OS, people were willing to wait for the next iteration of Apple's best-selling product. Strong sales ought to continue into the holiday season.

Looking forward, Apple has the potential for two major product launches next year. The rumors of an Apple iTV product are still just rumors. However, the company confirmed plans for a music streaming service on Thursday. I believe Apple's position in the digital music market will make a new product a great success.

The ability for the company to integrate the product with its iTunes, iPod, iPhone, and iPad will boost early adopters of the streaming service. GPS in its products will allow Apple to provide users with more targeted ads, which is more attractive to advertisers. Therefore, I expect Apple will demand higher advertising rates than competitor Pandora (NYSE:P), and generate more revenue through both price and volume.

Apple plans to integrate the product into automobiles, providing drivers with a hands-free Siri that users can tell where they want to go and what kind of music they want to listen to among other things. This is where Pandora has made headwinds in the last year, integrating its streaming service into in-dash systems. I believe Apple's future product has the ability to trounce Pandora's in-car technology and take significant market share as more cars integrate the technology.

With Apple falling through $600 on Friday, I believe the current stock price represents a fantastic buying opportunity for Apple. A product line refresh caused deflation in margins. Those will improve going forward. Sales of those new products are strong, and I believe will continue to show strength through the holiday season, particularly on its highest margin products, the iPhone and the new iPad mini.

The competition is plenty, but Apple looks to be the far and away strongest competitor. The next product from Apple, online music streaming, is a natural progression in its digital music dominance and should prove very successful.

Apple has a forward P/E ratio of just 11.36 and expected growth of about 22% resulting in a small PEG of about 0.5. Comparatively, the industry trades at a smaller P/E of just 9.3 times earnings, but a PEG of 0.7. Essentially, those looking for high growth in the computer hardware industry should look to Apple at this price level. Sweetening the deal is Apple's 1.74% dividend, for which it has plenty of cash to continue raising. At less than $600 after a market beat down, I consider Apple a strong buy.

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

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