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The Case for Buying Apple (AAPL) Into Earnings

Negative sentiment towards Apple Inc. (NASDAQ:AAPL) is at record highs, and the recent negative story from the Wall Street Journal has only exacerbated the fears surrounding the stock.  The consensus opinion clearly recommends staying away from the company for now, unless until we get more information about the state of its business from its earnings release next week.

I would never make an investment decision based solely on earnings expectations for a single quarter, but the risk and reward equation is looking increasingly attractive on the long side as Apple nc. (NASDAQ:AAPL) approaches its earnings release.

Apple Inc. (NASDAQ:AAPL)

Extra, Extra: More Old News!

Apple traded briefly below $500 per share on Monday after the stock got hammered again due to an article by the Wall Street Journal stating that the company had cut its component orders for the iPhone 5 from Asian suppliers. Even worse, the article states that the decision was likely based on lower than expected iPhone demand as lower cost Android smartphones are stealing market share away from Apple on a global scale.

It’s no secret at all that Google´s Android is the dominant smartphone platform outside the US, especially in emerging markets where the carrier subsidy model is not very popular and lower cost smartphones typically lead in terms of market share. But this still doesn’t explain why “lower than expected demand” is the reason for the order cut.

To begin with, Apple Inc. (NASDAQ:AAPL) typically cuts orders after the holiday quarter, this has been observed time and time again over the last years as the holiday period marks a record in sales for the year. This dynamic seems due to pure seasonality, and has nothing to do with overall demand trends.

Besides, there are some strong reasons to believe that Apple is shortening its product cycle for the iPhone as new models with different screen sizes and colors could be reaching the market by mid-year. This would be an extra reason for a component order cut, and not be precisely related to weaker than expected demand.

The numbers don’t make any sense either, according to the original report, Apple halved its orders from 65 million displays originally planned for the March quarter. A reasonable estimate for the March quarter is in the area of 30 to 40 million units, so why in the world would Apple order so many units for such a seasonally weak post-holiday period in the first place?

Latter versions of the Wall Street Journal article don’t mention the 65 million figure anymore, so it looks like they are trying to do some damage control without being up front about it. Besides, news over production cuts for iPhone 5 components have been going around for more than a month.

The Wall Street Journal article doesn’t even mention all those previous reports form media outlets and Wall Street analysts, so I think there is a big chance that they are just repeating outdated and widely distributed news. I don’t think this report deserves much attention from investors, and it may ultimately be detrimental for the Wall Street Journal’s reputation.

Demand Looks Strong

Apple Inc. (NASDAQ:AAPL) is cutting components orders, but that doesn’t necessarily mean that demand for the iPhone 5 is weaker than expected. In fact, based on recent sales data from AT&T (NYSE:T) and Verizon (NYSE:VZ), iPhone sales are probably doing much better than you would expect based on the Wall Street Journal article.