Apple Surges to Reclaim $500. Can It Hold?

Let's talk about Apple (AAPL 0.52%) and its terrible, horrible, no good, very bad week.

The iPhone maker started off on Monday with a brutal sell-off of over $18 (down 3.6%) on a weekend report from The Wall Street Journal that the company was reducing iPhone 5 component orders, presumably (a big presumption) due to weak demand, even though it was actually old news and hardly indicative of soft demand. Tuesday brought with it another drop of almost $16, or 3.1%, mostly on continued iPhone fears.

That put shares down almost 7% over two days, representing a market cap loss of over $32 billion, to prices not seen in 11 months. Shares reached as low as $483.38 yesterday, but today they're coming back with a vengeance with gains of more than $19, or 4%, reclaiming the $500 threshold.

Can it hold?

The longest week
We're now exactly one week away from Apple's fiscal first quarter (calendar fourth quarter) earnings report. What investors already know is that this should be a record quarter in terms of revenue. Apple's notoriously lowball guidance calls for sales of $52 billion, topping the current revenue record set a year prior of $46.3 billion.

Due to a wide range of redesigned products, Apple is guiding gross margins to 36% and earnings per share of $11.75. That bottom line would be a decline from the $13.87 per share in profit posted a year ago. Fortunately, Apple has a good habit of destroying its guidance and only recently have the Street's estimates been catching up.

Analysts are expecting close to $55 billion in sales and $13.46 per share in profit, although they constantly tweak their estimates heading into the report. Numerous analysts have defended the stock this week, noting that the reports on component cuts are actually old news and aren't indicative of end-user demand.

Data, schmata
The "weaker-than-expected" demand segment of the WSJ's report was easily the scariest part, but also the most speculative and wasn't backed up by any actual data. For investors looking for actual data (i.e., all investors), signs point to strong demand.

A week ago, AT&T said it sold a record 10 million smartphones in the fourth quarter, specifically mentioning the "best-ever quarterly sales of Android and Apple smartphones." Verizon followed up with its own announcement that it activated 9.8 million smartphones thanks in part to "a higher mix of Apple smartphones." Those are the two biggest domestic carriers, and they're each selling tons of iPhones.

Market researcher Kantar Worldpanel Comtech said iOS has topped the 50% threshold in domestic smartphone sales for the first time ever, largely at the expense of Google (GOOGL -1.97%) Android. The figures also show iOS gaining traction on Verizon's network, notable because Big Red has historically been an Android-centric carrier. Those estimates covered the 12 weeks ending Nov. 25, but what about December?

Flurry Analytics measures iOS and Android activations combined, and it said that more of devices on those platforms were activated on Christmas Day 2012 than any other day in history. We're talking about 17.4 million iOS and Android gadgets springing to life that day -- two and half times the previous record of 6.8 million set on Christmas Day 2011.

Flurry doesn't break down the mix between iOS and Android, but it did notice a huge spike in tablets. The iPad is still the de facto standard in the tablet market, so most of those tablet activations were probably iPads or iPad Minis.

One of these is not like the other
Apple's unique in many ways, but the stock in particular is rather curious when it comes to valuation. The underlying business makes small-cap growth stocks blush with envy, yet its traditional valuation metrics put it in the ballpark of other large-cap value plays like tech peers Microsoft and Intel.

Source: Reuters. TTM = trailing 12 months. MRQ = most recent quarter.

Microsoft and Intel remain largely reliant on the struggling PC market, which saw worldwide shipments fall 6.4% in the fourth quarter largely due to the smartphone and tablet adoption that Apple is riding.

Apple's monstrous pullback is unwarranted. The good news is that investors are looking at the perfect entry point ahead of what will be a record quarter.