Stay Out of Apple

 | Oct 19, 2011 | 8:38 AM EDT
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Arguably the most widely anticipated report in Corporate America, Apple (AAPL) released its third quarter earnings report yesterday after market hours.

The immediate headlines focused on the fact the Apple's EPS of $7.05 in the quarter missed analysts' estimates of $7.28. Depending on which estimates you use, this was Apple's first quarterly miss since 2002 or 2004. Regardless, the $7.28 estimate was a consensus figure, with varying individual estimates.

Whether it's Apple or any other company, when it comes to quarterly earnings, don't miss the forest for the trees. After falling nearly 10% on the earnings "miss," shares stabilized as investors were comforted by the company's fourth-quarter EPS guidance of $9.30, well above consensus estimates of $9 per share.

Apple's influence on the evolution of technology places it in rare company with the likes of Microsoft (MSFT) and Google (GOOG). Further, the value creation the company bestowed on investors over the past eight years is legendary. As investors, it feels good to be nostalgic. But what is important is the future. And Apple's future is bright.

The iPad will do for the computer industry what the iPhone did for the smartphone industry. Yesterday, I read an article about how NFL teams are throwing out paper playbooks and instead giving players iPads. My guess is that the NFL alone could account for at least 5,000 iPads. That's nothing spectacular considering the company sold more than 11 million of them in the third quarter. But the opportunity is huge when you consider all professional and collegiate sport teams and universities using tablets in lieu of textbooks and, of course, corporations.

Despite the huge potential, let's not confuse good business with sound investing. Apple's golden goose, the iPhone, sold 17 million units vs. the expected 20 million. This could easily be a one-time blip. Management cited negative "rumors" causing iPhone purchase delays. My sister manages an AT&T Mobile store and she tells me more and more people are buying Android phones. That's very important information. After all, Research in Motion (RIMM) was the darling stock until people started buying more and more iPhones. Of course, Apple is vastly different business than RIMM thanks to Mac notebooks, iTunes, iPads and the like.

But at $400 a share or a market cap of $400 billion, the investment opportunity is likely gone. Even if Apple is a $600 stock in the next two years like some analysts are touting, that's a 50% gain. It's nothing to sneeze at, but at what cost? The Apple trade is so crowded today and many shareholders are sitting on enormous gains. When the enthusiasm is gone, $300 a share can happen in days. Technology is a very disruptive industry and the day will come when growth in iPhone sales plateaus. It's better to be early than hold for an extra 20% and realize you gave up 40%.

Investing is all about opportunity cost and the relationship between price and value. A couple of weeks ago, Citigroup (C) could have been bought for $22 a share, a price at which the upside potential was vastly superior to Apple. At $29 a share today, Citi is already up nearly 50%.

The future is indeed bright for Apple as a business, but foolish is the one who thinks the company is invincible.

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