NTT Docomo Inc (ADR) (DCM), China Mobile Ltd. (ADR) (CHL): Are Apple Inc. (AAPL) Investors Crazy?

Margin benefits
Thus, the apparently negative demand data that has trickled out over the last week is not so clear-cut. This is not the first time that Apple-watchers have predicted doom, and so far iPhone sales growth has continued. Therefore, I am inclined to give Apple the benefit of the doubt for now.

On the flip side, as I wrote last week, Apple’s new iPhone strategy should be very good for the company’s margins. The iPhone 5s maintains the iPhone 5 form factor, which should help Apple Inc. (NASDAQ:AAPL) avoid a repeat of the spike in production costs seen last fall. Moreover, the iPhone 5c is cheaper to produce than the now-retired iPhone 5, because it uses a plastic casing.

One potential hiccup is that yields for the iPhone 5s fingerprint sensor have been low so far. This could weigh on Apple’s gross margin, but more importantly could impose severe supply constraints for several months.

Foolish bottom line
If Apple can ramp production effectively this fall (which primarily means improving yields of the fingerprint sensors), the company should be able to return to solid earnings growth. Last year’s drop in margin creates relatively easy comparable earnings figures for Apple to beat.

The margin benefits of Apple’s current strategy — compared to the alternative of releasing a cheaper iPhone — give Apple the ability to grow EPS even without rapid sales growth. This fact seems to have been overlooked amid all of the panic-selling in the past week. (Moreover, iPhone 5s supply seems more likely to be a constraint on sales than tepid demand.)

Apple trades at around eight times expected fiscal year 2014 earnings, if you subtract its substantial cash reserves. This sort of valuation is only appropriate for a broken company. Savvy investors should therefore view Apple’s recent drop as a good buying opportunity.

The article Are Apple Investors Crazy? originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile.

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