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Bracing for Disaster: How Bad Will Apple’s Earnings Be?

Over the past six months, Wall Street has gone from thinking that Apple can do no wrong to thinking that there's no way Apple will ever again do anything right. And, that said, Tim Cook's role as CEO has been brought into question.

As a result, the stock has collapsed from a high of $702 to a recent low of $390 last week.

And Wall Street is now bracing for what most people expect will be a terrible quarterly earnings report and outlook on Tuesday.

Apple's results in the December quarter disappointed many analysts, and the company's outlook for the first quarter was also meh. But now, after a steady flow of news reports suggesting that first-quarter sales have not gone well, as well as Apple's failure to release any new products so far this year, many on Wall Street think that Apple will miss even its low guidance for the quarter. Worse, many expect that Apple will provide an outlook for the June quarter that is far below what Wall Street is currently expecting.

In other words, Tuesday's earnings report is expected to be a disaster. That's one reason the stock has tanked over the last several weeks: No one wants to be the sucker left holding the bag.

But the silver lining is that, for the first time in forever, expectations for Apple's quarter are very low.

And, if Apple sets the bar for the rest of the year low enough, that will give Apple the opportunity to do something that it has not done in more than a year--surprise Wall Street on the upside.

In other words, provided the news and outlook isn't completely horrible, this quarter could (emphasis on could) mark an inflection point.

The other good news for Apple's clobbered shareholders is that, in the high $300s, the stock appears to be cheap.

At $390, Apple is trading at only 9-times trailing earnings, a low multiple for a high-quality company that still seems to have good growth prospects ahead of it. (Not this year, if Wall Street's estimates are accurate, but in future years).

Apple's profit margin will almost certainly drop over the next couple of years, as the company faces stiff competition from Samsung, Google, and other hardware manufacturers. But even if Apple's profitability drops, the company should still generate enough cash to make the stock's valuation look attractive.

To be sure, if Apple is in the early phase of a long-term decline, then today's stock price is not, in fact, "cheap." The stocks of companies like BlackBerry, Dell, and Hewlett-Packard looked very cheap in the early stages of their collapse...but then the companies' businesses collapsed, too. If Apple's product quality deteriorates, or the company clings too stubbornly to its current price points, Apple will be at risk of staging another complete collapse, following in the footsteps of the near-death experience it had in the 1990s.

But, for now, Apple is still an excellent company with excellent products that has just missed a couple of steps. If the company sets the bar low in Tuesday's earnings call, and then releases some exciting new products in the next few months, the stock may be nearing an inflection point.

Disclosure: Last week, when Apple's stock crashed to a new low of $390, I bought some. I think stock-picking is an idiotic strategy for individual investors, and I almost never do it. But, sometimes, for fun, I put my money where my mouth is. You can read about the logic behind my Apple purchase here.