As I suggested back in January on this website, I thought Apple (Nasdaq:AAPL) could have further to fall as growth investors and fan-boys dove off the bandwagon in the wake of less-than-perfect execution. In that short space of time, the shares dropped about 20%, leading to a huge loss of shareholder wealth (at least on paper).

Apple is a curious stock to me now. I do believe that the stock is too cheap relative to what I see as the probable trajectory of revenue and cash flow. By the same token, I've been at this too long to underestimate the headwinds that a stock can face when a large base of shareholders becomes disenchanted with a story and moves on for greener pastures. I do believe that patient investors will do better than just okay in Apple shares from these levels, but investors buying in today have to accept at least the risk of a further over-correction on the downside before the shares start to perform again.

SEE: 3 Ways To Indirectly Invest In Apple

A Give And Take Fiscal Second Quarter
Apple did alright relative to sell-side expectations for the quarter, but the absolute performance was not so scintillating. Couple that with guidance that disappointed the Street, and this isn't going to go down as a quarter that investors remember fondly.

Revenue rose 11% this quarter and did beat the average estimate by about 3% with broad (if shallow), across-the-board outperformance. iPhone revenue rose 3%, as Apple sold about 1 million more units than expected. iPad was much stronger, growing 40% from last year and beating the estimate by about 7%. Mac revenue was up a more sedate 7% on a 2% decline in unit volume (albeit still slightly ahead of expectation), while iTunes revenue was up 30%. Interestingly, only Apple's iTunes, software, and services segment showed any sequential growth this quarter.

Margin performance wasn't so good this quarter, though many consumer electronics companies would love to have even this lower level of profitability. Gross margin declined almost seven points from the year-ago period, missing the estimate by a full point largely on an iPhone mix shift. Operating income fell 18%, with Apple compounding the gross margin loss with both higher R&D and SG&A spending.

SEE: Buying Into Corporate Research & Development (R&D)

In Guidance Versus Cash, Guidance Will Probably Win
Apple's guidance for the fiscal third quarter came in soft, with revenue about 10% below the prior Street expectation and imputed EPS about 20% lower. Clearly that's not going to help a stock already racked with concerns about flagging high-end consumer demand, growing competition, and a lack of lower-market product price points.

That being the case, I don't think the company's new capital plans are going to do much good for the stock in the very short term. Apple will more than double its expected return of cash to shareholders by 2015, with the buyback jumping to $60 billion and the dividend growing about 15%. Because so much of Apple's cash is overseas, it sounds as though the company will look to borrow to generate the distributable cash it needs.

Are The Windows Of Opportunity Narrowing?
I don't think there will be much disagreement that Apple's iPhone 5 cycle has been weaker than past iPhone cycles. Moreover, Samsung continues to step up its game, while others including HTC and Google (Nasdaq:GOOG) look to reassert themselves. In fact, it's pretty much now just the tablet world where Apple still has its own way – Samsung and (Nasdaq:AMZN) may be relevant, but they're not proving to be major threats, yet.

The question is what Apple can, and is willing to, do about it. Some investors and analysts have been adamant that the company needs a lower-priced phone, particularly for markets like China and Brazil. I see their point here, and so long as Apple doesn't do so there's at least a theoretical chance that a company like Nokia (NYSE:NOK) could build a new lease on life. By the same token, and at the risk of making a tortured metaphor, companies like Porsche have done quite well for themselves by sticking to a very well-defined niche

I do think Apple will sort out its hardware issues, though I think the days of Apple dominating the space (financially or perceptually) are over. Where I do think Apple could still be quite interesting is in its services – whether its services like mobile payments, personal/mobile cloud, or what have you.

SEE: The Apple Ecosystem

The Bottom Line
I don't think Apple is likely to follow BlackBerry (Nasdaq:BBRY) or Nokia and see its relevance suddenly disappear. On the other hand, I don't expect massive growth from here. In fact, I'm looking for just mid single-digit long-term growth, with even less free cash flow (FCF) growth as I believe/expect margins will come under more pressure as time moves on.

The interesting thing is, though, that even with very modest free cash flow growth, it's not hard to generate a fair value of $600 or more on these shares (or nearly $480 completely excluding the cash). That tells me that the market is even more skeptical about Apple's ongoing growth prospects, and that's a bet where I think there can be money to be made on the other side.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.