Cantor Fitzgerald Equity Research analyst Brian J. White rates Apple Inc. (NASDAQ:AAPL) as a Buy as the stock is down but new product categories will unlock a lot of value in the future.

Apple

Last night, Apple Inc. (NASDAQ:AAPL) reported a strong EPS beat and upside in iPad unit sales but disappointing iPhone trends and a soft 2Q:FY14 outlook. In our view, it was more clear than ever that Apple needs to introduce a new product category to return to healthier growth trends, a step that we have previously forecasted to happen in 2014, and this was further supported by comments from Tim Cook (CEO) during last night’s earnings call. Given another soft outlook from Apple, the generation of $22.7 billion in operating cash flow and trading at an unassuming 8.2x (ex-cash) our CY:15 EPS estimate (and even lower given the after-market trading in the shares), we believe Carl Icahn’s push for a more aggressive share repurchase program could resonate with shareholders, and we expect his voice to become even louder in the coming weeks.

Better than expected EPS performance

Last night, Apple Inc. (NASDAQ:AAPL) reported 1Q:FY14 sales of $57.6 billion, which missed our revenue estimate of $58.6 billion but met the Street estimate (FactSet Consensus was at $57.5 billion), while pro forma EPS of $14.50 was above our $14.31 projection and the Street’s $14.09 estimate.

Apple executes well on margins with mix and component pricing

A bright spot in last night’s results was Apple Inc. (NASDAQ:AAPL)’s margin performance. Apple delivered operating margin of 30.3% versus our 29.6% projection. Additionally, Apple’s operating profit cycle improved to positive territory (albeit up just 1% YoY) in 1Q:FY14.

Upside in iPad, but iPhone disappoints

Apple Inc. (NASDAQ:AAPL) reported 1Q:FY14 iPhone unit sales of 51 million, which missed our estimate of 53.5 million, while iPad units reached 26 million units and beat our 24.5 million projection. Apple characterized the iPhone 5S as performing better than expected.

A soft 2Q:FY14 outlook and reining in our estimates

For 2Q:FY14, Apple Inc. (NASDAQ:AAPL) expects revenue of $42 billion to $44 billion. We are lowering our 2Q:FY14 revenue estimate to $43.8 billion from $47.2 billion (Consensus is at $46.1 billion), while cutting our EPS projection to $10.21 from $11.43 (Consensus is at $10.97). For FY:14, we are reducing our EPS projection to $42.45 from $44.67, while cutting our FY:15 EPS estimate to $47.85 from $52.18.

Apple’s valuation

Our $777 price target is based on nearly 13x our CY:15 pro forma EPS estimate (adjusted for interest income/expense), plus Apple Inc. (NASDAQ:AAPL)’s net cash per share of $157.39.