It was Jan. 23, and Apple shareholders were dismayed with the company's forecast for the current quarter. Apple (AAPL) stock was having its biggest-ever one-day decline in dollar terms and Chief Executive Steve Jobs felt a need to reassure the troops. "Hang in there," Jobs wrote in an e-mail to employees. "Our stock is being buffeted around by factors a lot larger than ourselves."
He can say that again.
For the better part of last year, a bet on Apple stock was a sure thing. Propelled by seemingly unquenchable demand for iPods, iPhones, and Macs, Apple shares surged to a record 199.83 on Dec. 28, after starting the year at 83.80 on Jan. 3. Analysts nudged price targets ever skyward; Piper Jaffray's (PJC) Gene Munster said Apple stock could reach $250 a share in 2008. By the end of 2007, Apple's market value had swelled by $100 billion.
Hit by Sinking Consumer Confidence
But since the start of the new year, Apple's stock has hit an air pocket, spiraling $75 from its high point and giving back two-thirds of the gains it made in 2007. It closed Feb. 12 at 124.86. Part of the slide can be attributed to disappointment with products unveiled at the annual Macworld Expo in January. In the two days after Jobs announced the ultraslim MacBook Air, movie rentals through iTunes, and software upgrades to other products (BusinessWeek.com, 1/15/08), Apple stock fell more than $19. By contrast, the shares gained $11 in the two days after Jobs announced the iPhone a year earlier.
Much of the rest of the descent can be pinned on worsening consumer sentiment and questions over how big an impact the resulting decline in discretionary spending will have on Apple. Some investors are betting Apple will bear a bigger brunt than other tech bellwethers. The concern was fueled Jan. 22, when Apple issued a sales forecast for the current quarter that failed to match analysts' forecasts, and it's only been heightened by economic reports and surveys since then.
Fear that the economy is headed for recession, along with higher prices on items like groceries and gasoline, is causing consumers to rein in spending on nonessential items. A January survey by Discover Financial Services (DFS) found that 70% of consumers think the economy is in decline, and nearly half say they plan to make fewer discretionary purchases in February. "The first place they cut back is on entertainment purchases, and the second is on home improvements," says Discover's Margo Georgiadis. She says iPods and iPhones fit the first category and computers the second. A study released Feb. 8 by Royal Bank of Canada (RY) showed U.S. consumer confidence at its lowest level in the six years since the bank's yardstick was created.
Lagging Other Tech Stocks
Even those who want digital music players and other Apple products may not have the means to buy them. On Feb. 7, the Federal Reserve said consumer credit rose by $4.5 billion in December, compared with the $8 billion expected by Wall Street analysts, and down from an average monthly rate of $14.3 billion in the third quarter.
For Apple, this all may mean fewer gadgets sold. Apple is asking manufacturers to build fewer iPods and iPhones than would otherwise be expected in the current quarter, says FBR Capital Markets (FBCM) research analyst Craig Berger. Apple cut so-called build orders by 60% for the three months that end in March. Typically the orders would decline by 50%, according to Berger. The analysis is based on orders of chips and other components from companies such as Broadcom (BRCM) and Marvell (MRVL), and it implies that Apple is expecting a worse March quarter than usual, according to Berger.
Why single out Apple? The company is more heavily exposed to consumers than most other major U.S. tech companies. 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. It too is popular among consumers. "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 improving," says Charles Wolf, an analyst at Needham in New York. "None of Apple's products are immune to that."
And while 2008 hasn't been good for tech stocks generally, Apple stock has fallen further than that of Research In Motion (RIMM) and Hewlett-Packard (HPQ), which like Apple cater to both consumers and businesses. As of Feb. 12, Apple shares had dropped 36% since the beginning of the year. Research In Motion had lost less than 20%, despite a widespread service outage for its BlackBerry e-mail devices. HP has shed less than 14% this year. Shares of bellwethers Cisco Systems (CSCO), Intel (INTC), and Google (GOOG) have also held up better than Apple since the start of the year.
Some Are Still Bullish
Some analysts had hoped Apple would reverse its fortunes by releasing a new version of the iPhone. But that optimism was dashed at least for the near term, when on Feb. 5, Apple doubled the memory capacity of its existing model. For some, the move was a suggestion Apple won't soon unveil a second-generation iPhone. "There's no news that I can see coming that will reverse this until April when Apple reports earnings, and it could be a lousy earnings report," says Wolf.
Still, some experts point to Apple's solid gains in the market for computers (BusinessWeek.com, 1/22/08), where Apple has a lot more room to grow than in the market for iPods, as cause for optimism. Munster is sticking to his price target of $250, saying it's based on expectations that the stock will trade at about 26 times Apple's earnings for calendar 2009. Traditionally, Apple trades at about 28 times future earnings. "We think Apple can earn $9.50 a share in 2009 based on strong Mac sales, the iPhone, and the revenue share from wireless carriers," Munster says.
Other analysts aren't quite as bullish. Shaw Wu of American Technology Research recently lowered his target from $210 to $175. Marc Kandel of Goldman Sachs (GS) pared back his target to $175, from $220. Currently the average price target is $193.
Apple isn't saying much about the economy and its impact on performance. Pressed by analysts during a Jan. 22 conference call to discuss the impact of worsening consumer sentiment, CFO Peter Oppenheimer refused to take the bait. "We give you guidance that we have reasonable confidence in achieving," Oppenheimer said. "We'll leave the economic forecasting to others." But Jobs, in his e-mail to staff, did a little forecasting of his own: "Investors who stay with us will be rewarded as the market's confidence is restored over time."