This iPad Sell-Off Makes No Sense

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So a perpetually bullish analyst aims too high with his iPad sales estimate for the quarter and you ... sell your shares of Apple (Nasdaq: AAPL  ) ? Really?

Please the court, let this be exhibit A for why I think the market, as represented by a cavalcade of manic traders, panicked investors, and micro-point-gain-by-the-microsecond institutions, is, using clinical terms, "certifiably nuts."

What really happened
Crazy iPad optimism may have precipitated the sell-off. According to data from Fortune, the average pro was calling for Apple to sell 4.79 million iPads in Q4. Bloggers were calling for 5.52 million. Instead, the Mac maker moved "just" 4.19 million units. Investors sold on the news.

Shares of Apple fell more than 7% in after-hours trading last night and are down another 2% as I write today. Never mind that:

  • Despite pressure from Motorola (NYSE: MOT  ) , HTC, and other manufacturers of handsets that use Google's (Nasdaq: GOOG  ) red-hot Android operating system, Apple managed to sell 14 million iPhones during the quarter.
  • Mac unit sales grew 27% over last year's Q4. Mac revenue improved 22%.
  • With more than $50 billion in cash (short- and long-term investments), Apple is now capable of funding its own stimulus package.

Bears will tell you that Apple fell because the stock has run too far, too fast and is now overpriced. I don't buy it. Shares of Apple have traded for more than 30 times earnings before interest and taxes during most of the reign of CEO Steve Jobs. Today, the stock trades for less than half that.

The iPad is bigger than you think
I'll grant that it's possible our Foolish analysis of the iPad may have been right all along, but can we at least consider the math? Over a 90-day quarter, Apple sold more than 46,500 iPads every day. Is that really so unimpressive?

Let's also remember this is a platform that both News Corp. (Nasdaq: NWS  ) and Netflix (Nasdaq: NFLX  ) are willing to bet on. They're presuming, correctly, I've come to believe, that the platform matters in media presentation.

Most investors know this, of course. That's why this morning's sell-off isn't as bad as last night's. Everyone's had a chance enjoy some coffee, read the report, and remember that Apple remains deliciously profitable and well-positioned.

Now it's your turn to weigh in. Do you like Apple at current prices? Please vote in the poll below and then leave a comment to explain your thinking.

Interested in more info on Apple? Add it to your watchlist by clicking here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Apple and Netflix are Motley Fool Stock Advisor selections. Both our Motley Fool Rule Breakers and Motley Fool Inside Value services have recommended that subscribers buy shares of Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple and Google and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy needs to get its pads. It'll meet you on the field.

Read/Post Comments (12) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2010, at 3:01 PM, PeyDaFool wrote:

    Great article, Tim. I wholeheartedly agree. I was a big advocate of buying more AAPL when they were "struggling" through their antenna issue and this is no exception. I think the stock is poised for growth with its current and future P/Es and the enormous potential for growth.

    Everyone needs to step back and realize Apple is extremely good at coming out with new products that everyone else will eventually begin to copy. Therefore, it stands to reason we can't just evaluate the company on their current products since there are certainly new products in production and they'll be the next "gotta have it" item in 12 months.

    AAPL has some room to grow.

  • Report this Comment On October 19, 2010, at 3:15 PM, StockPikr0 wrote:

    ...and to what sell-off are you referring? The stock has rallied over 30% over the last 6 weeks in anticipation of earnings. It's down a couple % now. That does not constitute a selloff in my book. Analysis that this is due to iPad sales is meaningless digging for a headline. The stock selling is purely technical after a huge runup. Besides, haven't you heard of the axiom "buy the rumor, sell the news"?

  • Report this Comment On October 19, 2010, at 3:21 PM, tgauchat wrote:

    Take a step back for a moment though.

    We're only off 3% today. AAPL is still > $300 while having living in a ~$250 trading range for a few months.

    If AAPL gets back to the mid $200's ... then I would (a) wonder what is going on, and (b) likely load up the truck.

    But for a 3% drop???

  • Report this Comment On October 19, 2010, at 3:42 PM, BioBat wrote:

    But Apple opened 6% lower and has clawed back though the day after having out of the park earnings, and the selling of Apple overall is almost double that of the overall market. It may not be a huge drop in % but it is a sell off.

    Additionally, a good chunk of the iPad sales numbers are lower than expected due to supply issues, not because demand was weak.

    This puppy's going to rebound nicely in the next quarter.

  • Report this Comment On October 19, 2010, at 6:46 PM, rufianno wrote:

    You guys are doing a great job by investing in individual stocks. Index funds investors thank you for the free ride.

  • Report this Comment On October 19, 2010, at 6:51 PM, MegaEurope wrote:

    I expect the Fool to look at the big picture, not obsess over a tiny drop when Apple is very close to an alltime high. Articles like this just feed people's short-term trading instinct, which is a failed idea compared to long-term investing.

  • Report this Comment On October 19, 2010, at 9:22 PM, meldrich wrote:

    I sold yesterday, without the news of the iPad projections and sales. I sold because I had gained a tidy profit and am a bit cautious about Apple should it be diluted in the market, run low on new products to introduce, or should Steve Jobs vanish from the earth (who is his understudy?). However, I can certainly see several scenarios whereby it could have plenty of healthy growth ahead.

  • Report this Comment On October 19, 2010, at 9:59 PM, EquityBull wrote:

    Apple must split if it wants to see a fair multiple placed on the stock. Right now it is at least 50% under valued. If this was a not a $300 stock but a $30 stock after a 10 for 1 split then all the pro's and retail investors would not think it was "expensive".

    It would have earnings this year of $2/share and traders would put a PE equal to the growth rate of 50x plus on it and trade it for 100/share (which would be $1000/share today). BUT because it is $300 it is "expensive". Pro's and amateurs don't understand price is what you pay, value is what you get. The only way to dumb it down is to split the stock.

    BIDU did it and now they trade at their market multiple and are $100/share. Apple could follow their lesson.

    Yes splitting has no material effect on a company. Same pie and more slices. But perception is reality and Joe Trader thinks $300 is expensive. Even if the stock was earning $100/share people would think $300 was alot to pay. They don't get it and never will.

    Do NOT think for a second hedge fund managers, analysts or pro's get this. Imbalances like this are all over the place. I watched for years as Chipotle B shares traded at 10% discount to A shares even though they had same claim on earnings and B shares had 10X more voting power then the A shares. It was too much for a pro to figure out CMG.B I guess and buy shares 10% off. Anyway I bought the B shares happily and recently Chipotle bought them out and all B share holders took an extra 10% pop! No pro, brokerage firm, analyst, etc ever mentioned it understood it. They don't understand value either.

    Split the stock apple and watch the rocket ride to $60 and beyond!

  • Report this Comment On October 20, 2010, at 6:28 AM, slickrik wrote:

    Yeah expectations were high,for the I pad but as they stated supply constraints were definetly a problem,as for the future if your an Apple hater you would be smart to get the hell out the way of this train.Have a nise day!!!

  • Report this Comment On October 20, 2010, at 8:43 AM, tomtrow44 wrote:

    Personally, I think the iPad is an expensive and delicate toy that has limited use in the scheme of things. My computers have to be workhorses. iPads might be fun but just like the iPhone it is too much up front and too much for the fancy services required to use them.

  • Report this Comment On October 20, 2010, at 10:28 AM, exeter17 wrote:

    I-things are fun toys..they are just toys...but the cult of Apple ensures everything they make will sell millions to brainwashed folks.

    Apple isn't really the underdog anymore

  • Report this Comment On October 20, 2010, at 12:19 PM, ragrillo wrote:

    Great article! The drive behind Apple's success goes beyond short-term sales volume. I made an extensive analysis in the following article:

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