Apple (NASDAQ: AAPL ) reports tomorrow afternoon, and it's easy to be concerned.
The stock has lost nearly 40% of its value since peaking the morning that the iPhone 5 came out, and the report isn't going to be pretty. Wall Street sees flat revenue growth, providing a stark contrast to the years of growth that investors have been relishing. Analysts also see a 21% plunge in profitability, another cruel reminder that margins continue to contract at the iEverything company.
However, there are more than a few reasons to be encouraged -- or at least less discouraged -- here. Let's check them out.
1. Apple has been cheaper, but it's still pretty darn cheap.
It's not fair to argue that Apple has never cheaper. If analysts are right, Apple's trailing earnings per share over the past four quarters will go from $41.89 now to $39.88 tomorrow night. Based on Friday's close of $424.95, we're talking a trailing earnings multiple that will expand from 10.1 to 10.7 after tomorrow's projected 21% slide in net income per share.
However, Apple is still trading at a huge discount to the S&P 500's trailing multiple of 19.3. Apple's multiple also drops to the single digits if you astutely back out its gobs of cash and investments.
Does Apple really deserve to be trading at a discount to the market? As bad as things may be now, do you really think that Apple will stay down forever? Have you not seen what the iPod, iPhone, and more recently iPad has done for the company on this side of the millennium alone?
2. It's not just Apple suffering from consumers gravitating to cheaper smartphones.
One of the things that knocked Apple earlier this year was the sharp decline in average selling prices for its iPhone and iPad devices. In a nutshell, more shoppers are going for the cheaper iPad Mini, iPhone 4, and iPhone 4S that Apple sells for $100 to $200 less than the current generation of devices.
Verizon (NYSE: VZ ) -- this country's largest carrier -- shocked the market back in April by revealing that just half of the iPhones that it activated during the first three months of this year were iPhone 5 models.
Some feared that it was an Apple problem, but clearly it's not.
Investors were shocked to learn that BlackBerry shipped just 2.7 million phones running its updated BB10 mobile operating system in its latest quarter. The number was brutal, but lost in the math is that it shipped 6.8 million total BlackBerry smartphones. In other words, the vast majority of devices it shipped weren't the latest Z10 and Q10 devices.
Even the mighty Samsung has reportedly struggled to move the 3-month-old Galaxy S4, with Android fans perfectly fine taking advantage of the cheaper prices on older devices.
Average selling prices should head lower at Apple on Tuesday, and that's perfectly in line with the industry as a whole.
3. Apple could surprise investors on the upside.
As bad as things have been, Apple has actually beaten Wall Street's bottom-line projections in the past two quarters after coming up short in the two prior periods.
It's hard to argue that momentum is in Apple's favor -- especially after the weak guidance it provided after its fiscal second quarter report in April -- but there's already at least one encouraging sign for Apple's prospects.
Verizon reported last week, and it had some good news for Apple. A healthy 3.9 million of the 7.5 million smartphones it activated were iPhones. Verizon didn't reveal how many of those were iPhone 5 units, but it's still a good omen to see more than half of its activations come from Apple phones. Yes, 52% of the total isn't as strong as the 56% tally during the prior quarter, but this was also the same period that Samsung's Galaxy S4 was supposed to eat Apple's lunch.
There may also be some incremental magic from new carriers. T-Mobile (NYSE: TMUS ) announced that it would finally begin stocking the iPhone in March. T-Mobile is doing things a bit differently. It doesn't subsidize the price of the device, but sells the iPhone on monthly installment plans combined with wireless plans that add up to less than what most of the larger carriers charge for their subsidized devices.
This is the country's fourth-largest carrier, but if reports of the iPhone making up roughly 30% of T-Mobile's activations hold up, we're talking about a healthy incremental boost.
Could there be another surprise in the works? Apple isn't the type to tip its hand, so investors aren't likely to get any clear indications on iWatch, full-blown Apple HDTVs, or any potential new offerings during the call. However, with the stock lagging the market since late last year, it wouldn't be a surprise if Apple is more forthcoming about its growth catalysts.
In short, you probably don't want to be betting against Apple tomorrow afternoon.
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