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Why Investors' Inexplicable Disgust for Apple Is Misguided

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The company's position is a little shaky, but there's no reason for all this panic.

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What's happening with Apple (NASDAQ:AAPL) right now – the general visceral aversion to the company's shares – is almost irrational enough to end up in the next edition of the medical textbook used to diagnose mental illnesses.

Why? Well, let's talk numbers first. Apple announced Wednesday afternoon that it had sold a record 47.8 million iPhones in the fourth quarter of 2012, up 29% from 37 million in the same period a year earlier. Sales of the iPad tablet rose 48% over the year-ago period to hit a record 22.9 million devices.

Impressive, no? Well, not if you are an Apple worrywart. Those folks are brooding over how many new iPhone buyers are out there. How many people are willing to keep paying up to replace their iPhone with the latest version of the device? Estimates are that at least half of Americans now own a smartphone of one kind or another, and odds are that if you really want an iPhone, you have one. How many times do you want to upgrade the device? And do consumers continue to see the changes as upgrades (especially after the doomed Apple Maps app)? Or are they likely to switch to another device?

Apple may have won the battle with Samsung (PINK:SSNLF) over patents, but the outcome of the war itself – which smartphone manufacturer will dominate, or whether a more competitive smartphone universe will drive Apple's margins lower – remains unclear. On the one hand, Verizon (NYSE:VZ) announced it activated more than six million iPhones in the fourth quarter. On the other, only about half of those were the newest model and thus sold at the highest margins.

Apple bears also worry about the possibility that the new iPad mini – sold at a lower margin – will cannibalize sales of the traditional iPad. And they are concerned that Amazon's (NASDAQ:AMZN) new range of Kindle Fire tablets – ultra cheap devices, relatively – will nibble away at the iPad market share from another direction.

There are some genuine concerns here. Consumers generally have shown that they are very price conscious. Apple's newest products don't get offered up at a discount. As more and more Americans end up owning smartphones, the rate of growth will slow; those that have yet to hop aboard the smartphone bandwagon may well have been deterred by the price, and be more willing to buy older and less pricey models and less anxious to upgrade constantly.

Those are all valid fears, but they're not enough reason to embark on the kind of panicky selling that sent Apple's shares plunging almost 10% in the wake of the earnings announcement.

By many measures, Apple now looks cheap. Its shares now trade at 11.64 times trailing 12-month earnings. While revenue growth fell short of expectations, it still jumped 18$ at a time when revenue growth is even harder to find, with many S&P companies eking out higher profits only by squeezing costs.

The S&P 500 (INDEXSP:.INX) index trades at an average of about 14.5 times trailing earnings. This quarter, the S&P 500 is expected to see a modest – very modest – increase in profits, while Apple eked out only a 0.1% increase in profits. Those Apple profits looked smaller on a per share basis, because there has been some dilution.
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