Will Apple turn tech stocks sour?
Apple reported earnings that beat analyst estimates on strong sales of iMacs, laptops and iPhones. But its cautious outlook led investors to slam the stock Wednesday morning, and take much of the Nasdaq down with it.
Why?
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| Apple stock took a deep dive in early trading Wednesday. |
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| Among the troubling signs in Apple's earnings were indications that U.S. iPod sales slowed an unusual amount in December. Courtesy: Apple |
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To some extent, it’s a case of one bad Apple (AAPL) spoiling the bunch. Steve Jobs & Co. is seen as the most innovative, growth-producing group in tech. And if the U.S. consumer’s economic troubles are starting to rattle mighty Apple, high fliers like Research In Motion (RIMM) and Google (GOOG) might not be immune, either.
Indeed, Apple’s holiday performance showed signs that the company’s not unstoppable in 2008. In particular, Apple’s cautious outlook, weakness in U.S. iPod growth and the unpredictability of iPhone sales left Wall Street’s pessimists plenty of reason to doubt. And in this jittery market, those pessimists have a lot of power.
First, a recap of Apple’s good news — and there was plenty of it. Apple turned in revenue of $9.6 billion and profit of $1.6 billion for the holiday quarter, blowing past the average analyst estimate. The company shipped a record 2.3 million Intel (INTC)-based Macs during the period, and actually sold as many iPhones as computers. In the process Apple generated $2.7 billion in cash, bringing its war chest to $18.4 billion.
But there was troubling news, too. On the conference call with analysts, Chief Financial Officer Peter Oppenheimer admitted that iPod sales merely met the company’s expectations, rather than exceeding them. Part of the reason, he said, was that U.S. iPod sales weakened in December — it took overseas sales to make up the difference. “In the U.S., in the gift-buying season, we saw a slightly different curve,” he said. “That was made up for in our very, very good growth internationally.”
There was more. It was clear that Apple executives weren’t sure what to make of the iPod slowdown. Maybe it’s the U.S. economy. Maybe the presence of the higher-priced iPod touch convinced people to save up and buy one iPod instead of two, they suggested. And then there’s the possibility that the iPhone is starting to eat into iPod sales. “In the U.S., where iPod unit sales were flat year over year, it could have been one of the factors, but other factors played into that as well, so it is very difficult to say with any precision whether there was cannibalization or not,” said Chief Operating Officer Tim Cook. Cannibalization would be a bad thing. It would mean that iPhone growth doesn't purely add to Apple's results — it also takes away from the iPod.
Add in the fact that iPhone sales are so hard to predict (this is Apple’s first time selling them in a March quarter), and Apple’s outlook made Wall Street nervous. For this current quarter that will end in March, executives promised revenue of $6.8 billion and earnings of about $850 million. And while ordinarily analysts would take that number with a wink and expect Apple to easily beat it, this year they’re not so sure Apple can.
So what does this mean for the rest of the tech industry?
It means Thursday will be a particularly important day, as number-one phonemaker Nokia (NOK) and software giant Microsoft (MSFT) report earnings. Unlike Apple, Nokia’s phone empire is weak in the United States and strong in Europe and Asia; so an encouraging report and a solid outlook from Nokia could reassure investors that Apple’s international iPhone plans can work. Microsoft meanwhile can give an overview of consumer and business spending patterns. If businesses continue their trend of planning to upgrade to Windows Vista in large numbers, it may signal that the economic environment isn’t horribly bad.
But until then, tech stocks seem likely to be driven by the sour news from Apple and Motorola (MOT), and whatever signals come out of eBay (EBAY), Qualcomm (QCOM) and Symantec (SYMC).
It’s a little ugly out there.
You need to get your head out of the sand. Let see, iPhone and Mac sales are cranking, so we will only focus on the iPod and how it is flat and not selling a billion units a month and base all your decisions on that. Give me a break. Are you the one that complains about a free meal too??
Apple has got to bring the iPhone to Asian countries. In Bangkok alone I have a lot of friends who actually buy one from the US, have them hacked for 500 Thai Bhat, and risk losing the iPhone warranty just so they can use them–all for the price of an iPhone plus B500 (US$15.50). I'll buy one my self when the memory is up more than a mere 8GB so I don't have to lug around my 80GB iPod plus my Nokia phone.
I don’t know whether I can agree with those who believe that Apple will be just a computer company again. We cannot simply assume that the iPhone has little potential for growth, since, if the rumors are true, it can enter the business market by offering various applications, like spreadsheets. That’s just one possibility for growth.
When you look at AAPL there is a need to look at other stocks, like Google, to see it's not just AAPL getting hit. Also remember that Bush came out with a $145 Billion stimulus package before the results were presented AND agreed to work with Congress to get it out fast. That's scary in itself.
Overall Apple's results are very positive, especially when compared to companies like Motorola.
Margins were excellent because of the increases in software sales, but when they drop they won't go to the level of PC companies. Low gross margins are in the high 20% range.
iPods may well be shifting part of their market to the Touch/iPhone lines, which will result in slowing of unit sales a bit, but increased revenues. Considering that Apple enjoyed record profit increases while deferring $1.44 Billion in revenues speaks well of this up scale market.
Other positive indicators include the SDK arriving next month. The SDK has the potential of matching the Palm frenzy back when a very large number of developers jumped on the bandwagon. A hidden (for now) factor in potential growth for 2008 & beyond.
Stores are also a strong indicator for grown. Another discounted factor is that stores continue to sell over half of their Macs to customers new to the platform. Throw in Best Buy having strong results and moving from 286 to 600 Apple Stores in 2008 and the retail side looks very good.
And finally there is the $18.4 Billion in cash. I consider that amazing for Apple and believe it will keep Apple going full speed in terms of R&D and new products during a recession. Critical for surviving a recession and for coming out of one strong.
Considering the current factors, how many companies are in Apple's position in terms of sales, products and underlying strength?
Hmmm, Apple does not invent anti-gravity. Therefore, the company is falling apart! ????????
Apple just had a banner quarter and a great year and 2008 has every indication of being BETTER. So of course the stock price should fall.?????
Wall Street is full of people playing off general fears so that they can make money. PERIOD. Unless the US economy totally crashes and burns, I am expecting Apple to really soar in 2008. Want to make a ton of money??
BUY Apple stock NOW. Hurry before they come to their senses. 
JMHO.
"having mastered the iTouch…"
Wim – get an Etch-A-Sketch. That's about all you're technically ready for…
I wonder how much money Apple is going to lose over the MacBook Air. When that gets reported next quarter the stock is gonna drop even lower.
Shipping 22 million units to consumers of anything is an amazing number under any circumstances. Is there any product that can compare? And as far as cannibalization of iPod vs IPhone is concerned: having mastered the iTouch is giving me the confidence that I could probably fully utilize the iPhone, so that is next on my list.
By the selloff you would think Apple was going out of business. At this rate the stock will be down to $1 a share in about about two weeks. And to think Apple just finished it's best quarter in it's history.
Apple is predicting a second quarter of sales not as strong as the Christmas season. Duh!
Apple is predicting a slow down in iPod sales. 75% of the planet has an iPod already so, Duh!
Apple has tons of room for growth in the computer sector and is making strides on that department and ditto for iPhone too.
I guess I can see a slight letdown for the second quarter, but this is a fire sale that doesn't make a whole lot of sense except for everybody getting paranoid over recession fears and deciding to sell off all their stocks so they don't get burned by a full blown market crash.
If that is the case I guess it's time to prepare for the worst. I remember Al Queda saying they weren't trying to defeat America by winning the war militarily, their goal was to bankrupt America by making them spend so much on the war effort. Maybe this is totally unrelated or maybe this is all part of a bigger picture.
In another story in Fortune this week ("Will the cure be worse than the disease?"), the phrase "flight to safety" is used.
You've got to wonder whether the downturn has far more to do with a general bearishness, than any specifics about Apple.
Inevitably, with so much bearish sentiment around ANY news from Apple was going to be interpreted by many as a problem.
"Increases profits by 57% and the street is disappointed…"
Day-to-day behavior on wall street rarely makes sense, but when everybody and their grandmother thinks AAPL is the second coming, isn't it slightly possible the share price might've been inflated?
Isn't it possible that the $200/share buyers were pricing in a *157%* increase in profits? I'm not saying it makes sense, but in this case, I don't think one should be shocked.
Jon, AAPL's higher profit margin (22%) in the quarter vs historical margins of 17% was an important factor in the call. Do you think this signals a structural change in their mix, moving to more software and license fees, like MSFT? I believe their forecast assumed the historical margins instead of the higher ones.
From Jon Fortt: Good question, Jim. It's hard to tell. Apple attributed the higher profit margins to a solid introduction for the iPod touch, plus strong sales of the highly profitable Leopard update; 19 percent of the OS X installed base is on Leopard now. It's safe to say that Apple can't be expected to maintain those margin levels, especially since software introductions tend to give a boost for limited periods of time. So I wouldn't count on those higher margins continuing.
I think a big reason why Apple is getting hit is that there's a lot of uncertainty right now. No one knows what happens to iPod sales from here on in. Will they be just 5 percent over last year in every quarter? And what about Apple TV — will it catch on this time? Add in the iPhone, and the way Apple accounts for it by spreading the revenue over two years, plus the upcoming launch of the iPhone/iPod touch SDK, and it's not at all clear what to expect from Apple's revenue and profits. Will Apple figure out a way to directly profit from the flood of software that will come out for the iPhone and iPod touch? If so, will that boost earnings?
There could be a lot of upside in Apple because of the new stuff the company has going. But there's just no way to know, yet.
Amazing that a company increases profits by 57% and the "street" is disappointed. There must be some insanity somewhere.
Apple's fiscal 2nd is always a low spot in their year, no holiday sales or education sales. Not to mention that they historically give very conservative guidance. During the October 22 conference call they gave what was then considered a very high outlook for the fiscal 1st and analysts were shocked that they would guide so high.
Also take into account that the iPhone is also an iPod, just in a different accounting column. So I wouldn't necessarily call the news sour, it's the same news every year, just different economic conditions.
Did you not ever hear the confrence call? List to it…or read the transcript. Aple was 100% clear the iPod sale were a result of the higher ASP for the iPod Touch. Y-O-Y their ASP INCREASE from $165 to $180. It is VERY clear that Apple sold more costly iPods. Last time I study Econ, the supply and Demand curve would indicate reduced demand at Higher Prices.
To be good business reporters, you should try hard to get your Facts right, especially in a time of Near Market Panic.
From Jon Fortt: You should listen to the call again. You don't have the facts right. Apple said U.S. December sales trailed off more than usual, but international sales made up for it. So there were a number of factors that played into the iPod results, besides just higher ASPs for the touch.
I bought Mac at 199, 188 and I am going to buy alot tommorow at 133.
I didn't think it was going to go below 200 but i was wrong. I will keep buying it as the iphone is going to be released in Japan, the kids want Macs when you replace your old pc and Apple TV is going to be hugh. Remember they only have 5 percent of the home pc market. I wish I had bought now but I think it will be a 600 dollar stock in the next 10 years and I will be a millionaire!!!!!!!!!!