Icahn is Right: AAPL Dip is a Buying Opportunity

I'm no fan of Carl Icahn, but looking at what happened after Apple announced record profit, record revenue, record iPhone sales and record iPad sales looks like a complete over-correction.

The market correction on AAPL seems to subscribe to the philosophy that there can be only one winner in the mobile space and everybody else is going out of business. Investors are apparently trying to pick that winner and assuming everybody else is going bankrupt.

Let's examine.....

Apple exceeded consensus revenue estimates from analysts with record revenue.

Apple exceeded consensus profit estimates from analysts with record profit.

Apple exceeded iPad sales estimates from analysts with record iPad sales.

Apple exceeded margin estimates from analysts.

Apple exceeded Mac sales estimates from analysts (not sure if record).

Apple fell short of iPhone sales estimates from analysts with record iPhone sales.

So how much did Apple fall short on iPhones? The answer is 3M iPhones. The average selling price (ASP) of iPhone is $640. Doing the math, Apple missed out on about $2B of revenue from iPhone (though they still exceeded revenue expectations because of a greater mix of their products being sold) and, at 38% margin, about $730M in profit (even though AAPL exceeded EPS and profit estimates) as well.

Let's be clear, Apple did not make less money than anybody projected, they just made the money with a different mix (a little more iPad and Mac and a little less iPhone).

How much did AAPL market cap decline because of missing less than $1B in iPhone profit for the quarter? The answer is 50 times that number. The market cap fell by about $50B because AAPL did $730M less in iPhone sales than analysts projected. They still sold more in iPad and Mac to make up for it, so its not like the revenue or profit were off. All that was off was iPhone sales being about 5% less than expected and the market cap dropped by $50B.

This smells of investor panic more than it smells of a sensible correction to the stock price. Investor expectations were not missed to the tune $50B in market cap. In fact, most analysts expectations were met and exceeded. What happened after AAPL earnings report was like a mad rush in after-hours trading to get the jump on selling before somebody else did creating a panicked frenzy.

Carl Icahn walked in the next day and bought another million shares of AAPL to take advantage of the situation. When you have loads of money you get to take advantage of situations where people panic for no good reason and that is exactly what he did. The stupid money is selling AAPL right now and somehow believing that a $50B decrease in the valuation of the company makes sense when their assets just increased by over $13B and they made more money in the mobile space than anybody. Considering Apple's assets increased by $13B the net dip is more like a decrease of $63B in valuation as the gap closes between Apple's market cap and Apple's assets.

Apparently those 3M iPhones were the deal breaker in the race for the mobile phone market and Apple is now doomed. I have heard the chorus of "Apple's share of the smartphone market is decreasing". Of course it is. It is idiotic to think it would not. Apple only makes smartphones. Tesla's share of the electric car market is going to decrease one day too because they only make electric cars and eventually others will as well. Apple decreased share of the smartphone market has validated their strategy of only doing touch-screen smartphones. Meanwhile, Apple's share of the total mobile phone market actually increased last quarter -- they are gaining ground. Every other manufacturer that had an increase in smartphone sales last quarter also experienced a bigger decrease in the sale of their feature phones. Apple had no decrease in feature phones because they don't make one. That is why Apple's share of the total mobile phone market actually increased. Apple was an early mover in the smartphone revolution. Early movers often experience gigantic growth up-front and less growth (but still growth) as the tail end of the market finally follows the revolution.

Unless you are stupid enough to think Apple is doomed to go bankrupt then there is really no other way of viewing the dip in AAPL shares as a buying opportunity. If I had more cash assets then I would be taking advantage of it. As it is, I am already long AAPL for over two years now. If I could predict these intermittent valleys in stock price and act on them, then I would be a very rich man. I play the long term because I am bad at predicting stupidity and don't have the kind of money Carl Icahn has to capitalize on stupidity when the opportunity arises.