Despite Record Earnings, Investors Trash Apple Stock

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Despite Record Earnings, Investors Trash Apple Stock

Despite a record-breaking first quarter, Apple stocks took a huge hit in after hours trading on Tuesday, falling 12 percent and currently hovering around $130 on Wednesday morning.

Ostensibly, the company's conservative outlook for the next quarter combined with ongoing fears of recession and a weak global market, seemed to spook investors, who feel that the $7 billion in revenue Apple is projecting for the next quarter (still a 29 percent year to year increase from 2007) is not sufficient.

But for all the hand wringing over the stock's dramatic after hours decline, some analysts don't see much cause for alarm and maintain a strong buy status for Apple.

Citi Investments Research in particular asserts that the $15+ decline in Apple shares in the aftermarket discounts a recession scenario and said in a Wednesday morning investor note that its valuation analysts still suggest a 12-month target of $212. That's close to double the current trading stock price, in case you were wondering.

"We are aggressive buyers on pre Wednesday-open weakness even though we recognize that potential year-over-year declines in iPod units during 1HCY08 may keep the shares range bound for several quarters," the investment firm said.

In addition to Apple's conservative guidance for Q2, that last point about stagnant iPods sales is supposedly the other major contributor to the ongoing investor freak-out. But while the five percent year-over-year unit growth for iPod holiday sales clearly signals a slow down for Apple, the company is actually making more money than ever on its iPods.

Last year, iPod revenue was up 18 percent over the previous year; this year, it was up 17 percent. Think about that: a year ago, iPod unit sales were up 50 percent but revenue was up just 18 percent; this year, unit sales are up just 5 percent but revenue is still up 17 percent.

Gruber concludes that the revenue jump comes from the increasing popularity of high-end iPods like the touch. Again, Citi Investments agrees. The firm reiterated that Apple's total revenue of $9.6 billion was above the consensus of $9.5 billion mainly due to the favorable shift in iPod sales away from shuffle and toward the higher-priced touch and nano. This dynamic is likely to recur for several more quarters, the firm said.

Apple executives even went so far as to describe the iPod touch as potentially the "first mainstream Wi-Fi mobile platform, running all kinds of mobile applications" during Tuesday's earnings call. This suggests that Apple still believes in the iPod's ability to generate both sales and profits for the company.

But that didn't stop some industry observers from claiming that the iPod's mojo had officially been depleted. Because analysts are in the habit of linking the health of the device to Apple's overall financial well being, we got assessments like Dan Frommer's from Silicon Alley Insider: "The iPod, which helped Apple revive its fortunes just five years ago, is on its way out," he said in a Tuesday post.

In the end, all of the hubbub over Apple stock and slower iPod sales shows just how much the market seems to expect from the Cupertino company these days, and, as Fortune's Philip Elmer-DeWitt observes, how obsessed traders are with Apple's forward-looking guidance.

Yet the market's reaction to Apple's best quarter ever still confuses regular Apple followers like Piper Jaffray's Gene Munster, who said he's never seen anything like yesterday's market reaction.

"I talked to one of our technical analysts before the (earnings) call and he told me that the stock was going down to 130 no matter what results Apple posted," Munster told Fortune. "Something bigger is going on in people's minds. There's a feeling that stocks need to go back to their 200 day averages as the market corrects itself. This is not a bullish sign for other tech stocks going forward," he said.

So if you're looking for a way to make sense of all the strangeness going on with Apple and other tech stocks today, perhaps the best advice comes for investment guru Warren Buffet: "Be fearful when others are greedy and greedy when others are fearful."

UPDATE: After trading at $129 at one point on Wednesday, Apple stocks shot back up and closed the day at $139. Sanity also return to the broader U.S. markets as a late day surge saw investors buying up beaten-down financial shares. The catalyst for the rally was a report that New York regulators and banks had met to discuss a plan for raising new capital for bond insurers.