NEWS
036
WHAT'S
EATING APPLE?
The tech bellwether may be in for a rough ride as
disposable spending dips
By Arik Hesseldahl
It was Jan. 23, and Apple sharehold-
ers were dismayed by the company's
forecast for the current quarter.
Apple's stock was having its biggest -
ever one-day decline in dollar terms
and Chief Executive Steve Jobs felt a
need to make some reassuring noises.
"Hang in there," Jobs wrote in an e-
mail to employees. "Our stock is being
buffeted around by factors a lot larger
than ourselves."
Annihilated is more like it. For the
better part of last year, a bet on Apple's
stock performance seemed like a can't-
miss proposition. Propelled by seem-
ingly unquenchable demand for iPods,
iPhones, and Macs, Apple stock surged
to a record closing price of 199.83 on
Dec. 28, after starting the year at 83.80.
Analysts nudged price targets ever sky-
ward. In October, Piper Jaffray analyst
Gene Munster predicted Apple's stock
price could reach 250 in 2008. Instead,
Apple's stock has hit an air pocket. Its
share price is off an alarming 34% on
the year as of Feb. 13, to 129.40, afar
worse performance than the Nasdaq
index and technology stocks generally.
BUSINESSWEEK I FEBRUARY 25, 2008
Part of the slide can be attributed
to disenchantment among industry
analysts and pundits with products u n -
veiled at the annual Macworld Confer-
ence & Expo in January. Apple's stock
started to tumble just days after Jobs
announced the ultra- slim MacBook Air
laptop, movie rentals through iTunes,
and software upgrades.
Weaker consumer spending
in the U.S. is also obviously
a big negative. Some inves-
tors have dumped shares,
figuring Apple will end
up bearing a bigger brunt of a weaker
economy than other tech bellwethers.
On Jan. 22, Apple issued a softer sales
outlook than analysts had forecast for
the first quarter of 2008. "The first
place [consumers] cut back is on enter-
tainment purchases, and the second is
on home improvements," says Margaret
H. Georgiadis, chief marketing officer
at Discover Financial Services. She says
iPods and iPhones fit the first category
and computers the second. A study
released Feb. 8 by Royal Bank of Canada
showed U.S. consumer confidence at its
lowest level in the six years since
the bank's yardstick was created.
Jobs seems to recognize all this, and
there are signs he's tapping on the
brakes. Apple is asking'manufacturers
to build fewer iPods and iPhones, says
FBR Capital Markets senior research
analyst Craig Berger. He has examined
Apple's orders for chips and other
components from companies such as
Broadcom and Marvell, and Berger fig-
ures Apple has cut its orders 10% more
than it typically does in the seasonally
slow January-to-March quarter.
NO IMMUNITY
Apple's earnings rely more on consum-
er spending than most other major U.S.
tech companies. Digital devices such
as the iPod and iPhone accounted for
44% of Apple's sales in the most recent
quarter. The Mac accounted for 37%
of the total. "Apple sells
premium products, and
every data point we get on
the economy is a negative
one, and there's no sign
that anything is improv-
ing," says Charles Wolf,
an analyst at Needham
in New York. "None of
Apple's products are im-
mune to that."
Some analysts had
hoped Apple would
reverse its fortunes by releasing a new
version of the iPhone. But that opti-
mism was dashed at least for the near
term when on Feb. 5, Apple doubled
the memory capacity of its exist-
ing model. For some, the move was a
suggestion Apple won't soon unveil a
second-generation iPhone. An Apple
spokesman says the company does not
comment on unannounced products.
There's no denying that Apple's
long-term growth prospects look
robust. The fabled design innovator
continues to make solid gains in the
market for computers, where Apple
still has a lot more room to grow: Its
share of the North American market
stood at 6.2% at the end of last year,
according to IDC. Analysts on average
see Apple's stock price heading back
to 193. Jobs, in his e-mail to staff,
insisted that "investors who stay with
us will be rewarded as the market's
confidence is restored over time." 1BW1