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Is Apple Entering a Period of Decline?


Not to worry: The market letdown after a rare quarterly earnings shortfall won't last.

Let's face it, one of these days Apple (AAPL) will fall back to Earth. It's the natural order of things, a virtual certainty.

It happens to all the world-beaters eventually, whether their name is Babe Ruth, Walt Disney, Tiger Woods, or Sony (SNE). Reflexes dull, cells age, knees fray, the focus fades, paradigms shift.

Fourteen years ago, Apple was a basket case down to its last chance, leaning heavily on its recently rehired founder and the forbearance and the cash of a heavyweight rival it once mocked. As of yesterday, it was the most valuable company on Earth, a distinction it will probably lose this morning once the selling starts.

So yes, change is frequent in the technology arena, and Apple hardly needs reminders of this impermanence so soon after the death of its leader. Business is booming so loudly right now that the distant future is inevitably shaping up as a letdown.

But the more immediate letdown recorded last night-in the aftermath of another quarter of startlingly good results-is almost certainly a fluke rather than the beginning of the end.

The end is nowhere in sight. What ought to be in sight is Apple's hoard of $81 billion in cash, up from $51 billion a year ago and $34 billion in the fall of 2009.

How much should a cash machine like that be worth, considering it's also the preeminent technology developer of its time, dominant in the booming tablet market, the pace-setter in the similarly fast-growing smartphone space, and the fastest grower in the stagnant but still vast and fragmented PC industry?

I'd be willing to start the bidding at more than 9.5 times the (underestimated) forward earnings after subtracting all that cash already in the bank, which is what Apple would be fetching at $400 a share.

The numbers announced last night "missed estimates," of course, so do we really know this is not the start of the decline phase? We know because the entirety of the "shortfall" relative to expectations came in iPhones, which sold slowly this summer as consumers held off until the unveiling of a new model two weeks ago. Days into the iPhone 4S launch, Apple has already made up the ground it lost last quarter, and built up lots of year-end momentum.

Which shouldn't overshadow Apple's spectacular performance in the most recent period. Revenue rose 39%, while earnings jumped 54%. The guidance for the January quarter calls for a 38% revenue increase, and that's likely to prove conservative given the popularity of the latest iPhone.

Mac revenue was up 26% year-over-year in an industry that saw 4% growth. And Apple is only starting to scratch the surface of its opportunities in China, already its most important overseas market.

This is the world's most accessible luxury line and its most admired brand. The company is dominant and minting unencumbered cash at a rate of more than $2 billion a month.

Pressed by the analysts about the possibility of returning some of that windfall to shareholders, new CEO Tim Cook didn't bite, but also didn't rule anything out.

That's a hell of an insurance policy to own against the inevitable fall from grace. Inevitable, but hardly imminent. I'd be an enthusiastic buyer below $400.

Editor's Note: This article was written by Igor Greenwald of


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No positions in stocks mentioned.
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