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Apple Will Disappoint Next Quarter, Again!

Apple’s (NASDAQ:AAPL) third quarter earnings announcement was a huge disappointment but the stock is down only 3% cumulatively. Overall iPhone sales went down 26%. The decline was more pronounced in Apple’s second biggest market, China. Chinese sales went down 28%. If you are a short-term trader I have bad news for you. Apple will disappoint again in its fourth quarter. We expect iPhone sales to decline by more than 50% in this quarter. You should keep in mind that global smartphone market is growing at a 42% annual rate. However, Apple’s market share declined by a couple of percentage points.

Apple Inc. (AAPL), Inc. (AMZN), Barnes & Noble Inc. (BKS)

This is bad news for the company but not the stock. Apple is priced ridiculously low for a high growth company. The company receives most of its revenue from iPhone sales and this industry is growing at a huge rate. Apple underperformed last quarter, and it will underperform this quarter but this is due to the anticipation of iPhone 5. Apple was in a similar position in 2008. In the first fiscal quarter of that year Apple sold 2.3 million iPhones (yes, I know who would have guessed that Apple will sell more than 10 times that amount in just 4 years). In the second fiscal quarter of 2008 iPhone sales declined by 26.5% which is very similar to the 26% decline in previous quarter. Apple released iPhone 3G at the beginning of fourth fiscal quarter of 2008. Guess what happened to its iPhone sales in Q3, 2008? It declined by a whopping 58%. This is what we are predicting will happen if Apple fails to release iPhone 5 in late September.

This isn’t bad news for Apple though. After this huge decline iPhone sales jumped by nearly 10-fold during the fourth fiscal quarter of 2008. That’s the same quarter when Lehman Brothers went bankrupt. Despite the huge economic uncertainty, Apple managed to sell more iPhones in that quarter than it sold in the previous 12 months. If the same pattern happens today, Apple will sell more than 100 million iPhones. We don’t think that is realistic but we believe the demand for iPhone 5 will be tremendous which will result in shortages and delays. Qualcomm (NASDAQ:QCOM) –which is the provider of 28-nanometer chips- indicated that it is ramping up its production and supply of the chips, we still think there will be temporary delays. We don’t think that is negative for the stock though. It will actually increase media coverage and will even make consumers act sooner.

We are convinced that Apple is extremely undervalued and it will become a trillion dollar company. It is the most admired smart phone company in an industry that is growing at more than 40%. Smartphone sales will probably double in less than 2 years and quadruple in 4 years. Facebook (NASDAQ:FB) is having trouble monetizing its mobile traffic. I don’t want to be a Facebook investor. I want to own companies that already figured out how to profit from mobile revolution. That’s why I own Apple, AT&T (NYSE:T), and Vodafone (NYSE:VOD).

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