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Has the shine come off Apple?

It would be a brave person to bet against Apple’s long-term future.

It wasn’t all that long ago that shares of Apple (Nasdaq: AAPL) burst through the US$700 mark, and investors and commentators alike were wondering if Steve Jobs’ baby would be the first US$1 trillion company, measured by its market value.

Those days – though only four short months ago – seem like a lifetime ago, as Apple shares have fallen 37% to languish (at least in relative terms!) at US$450, and yesterday’s rooster is looking very much like today’s feather duster.

Failure never looked so good

Even at today’s prices however, the company is still valued at US$423 billion – nothing to sneeze at and still the largest US company, when measured by market capitalisation.

The question for investors is whether Apple has had its day, or whether the 37% share price fall gives bargain hunters an opportunity to snap up one of the best companies of our era while it’s on sale.

First, let’s look at the bear case.

Apple disappoints…

Investors were expecting another blowout quarter from Apple when it reported earnings on Wednesday night, our time.

In the US, numbers from mobile phone carriers had built iPhone growth expectations to very high levels, and the share price reflected that. In the event, the hoped-for growth wasn’t up to snuff. Apple has traditionally ‘managed’ expectations to ensure it beat analyst forecasts, so in the ‘cat and mouse’ game, a miss by Apple is a double-blow – they not only missed their ‘guidance’, but also the extra growth that analysts had been factoring in.

Added to that, Mac sales fell significantly, both compared to the previous quarter and the same quarter last year.

Lastly, and perhaps most concerning, Apple’s margins continued to drop, as it (presumably) sees costs rise and selling prices stagnate and fall.

With the iPad mini likely to be a lower margin product than its big brother and a cheaper iPhone being rumoured, investors are rightly concerned about the company’s ability to keep churning out such prodigious amounts of cash – especially with strong competition from Samsung and other (cheaper) handset manufacturers.

Those are some strong reasons to be cautious, but there are other, brighter spots for Apple investors.

…But continues to grow…

While growth might have underwhelmed investors, Apple still managed to ship 29% more iPhones and 48% more iPads than the same quarter in the previous year. I don’t know any CEO who’d turn down the opportunity to deliver that sort of growth.

In addition, Apple CEO Tim Cook cited shortages of both iPhone 4 and iPhone 5 during the quarter, as well as its iMac laptops, which constrained sales growth.

And while Apple may or may not regain its previously stratospheric growth levels, the company’s shares aren’t priced for that requirement. Those of us who have been investing for a while can remember when technology companies were trading at 100 times earnings (or even 100 times sales back at the height of the dot.com boom).

…And is priced as though it won’t

Don’t laugh – remember it was only in May last year that Facebook (Nasdaq: FB) listed with a triple-digit price/earnings ratio.

Compare that with Apple today. The company, with US$137 billion of cash on its books, is trading at just over 10 times trailing earnings.

Compare that with almost any major Australian- or US-listed company – you can start with Woolworths (ASX: WOW), BHP Billiton (ASX: BHP) or Commonwealth Bank (ASX: CBA) which all have price/earnings ratios in the teens – and Apple looks downright cheap… as long as it can maintain and grow its earnings, even mildly, into the future.

Foolish takeaway

The technology graveyard is a very full place – it’s the very nature of the industry that the latest and greatest can consign the then-reigning companies to the history books.

A quick list of (recent) names of companies that have soared only to be bought back to earth – and to either bankruptcy, a takeover or almost ‘walking dead’ status include PC makers Hewlett Packard (NYSE: HPQ) and Dell (Nasdaq: DELL), PDA pioneers Palm and Blackberry-maker Research in Motion (Nasdaq: RIMM) and once-king of mobile phones, Nokia (NYSE: NOK).

Even still-dominant companies like Microsoft (Nasdaq: MSFT) have struggled to deliver significant share price gains from their hype-fuelled levels of the past, despite strong earnings growth.

At 10 times earnings, and still posting sales growth of more than 20% in its core business lines, it would be a brave person to bet against Apple’s long-term future.

Yes, the share price will be volatile as traders jump in and out of the stock, seduced by the growth and scared by bad news, respectively, but this is a business that is built for the long term – and priced as if it’s not.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool Investment Analyst Scott Phillips owns shares in Woolworths and Microsoft.

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