Apple’s Morning-After iPhone Headache

19 Comments

Apple Inc. is having a bad day after a spectacular evening when it reported a blowout financial performance. Sold more iPods (21 million), and Macs, banked billions in cash and what not. However, like all of us who have had a bottle of wine (or two), they are waking up with a hangover. The outlook for the second quarter of fiscal 2007 isn’t so rosy, and as a result the stock is down almost 4 percent, and still heading south.

I think Apple is experiencing the down side of over-hyping. By announcing iPhone at the Macworld, the company has put purchasing decisions on hold for millions who were in the market for a high-end iPod. There might be little risk to the lower-end iPod Shuffles and Nanos, but the big profit-making high-end iPods might be at risk.

“We believe this [seasonal] risk is particularly pronounced given our concerns that some consumers may delay iPod purchases ahead of the iPhone lauch,” Bill Shope of J.P. Morgan wrote in a research note to his clients.

The iPhone could pose a bigger challenge to not just Apple but to other handset makers as well. A lot of non-geeks, non Mac fan-boys have emailed or called us, gushing about the iPhone and are willing to wait for the device before buying their next device — an Mp3 player or a mobile phone. Could it prove to be a collective “oops” for the tech business as the “Apple Shock” ripples through the entire ecosystem?

It is also interesting to note that Apple did not announce a single product at Macworld that was available instantly and could add some zip to the Apple revenue stream. Apple TV and Apple Airport are not available till next month. Both are expected to do well, but will they be the two “advils” you need to cure the hangover?

19 Comments

Jamie

“Om, they are selling AppleTV now so AppleTV does help them NOW.”

This is a technicality of accrual accounting. You book the revenue when you ship the product to the customer (or they buy it from your store), which may or may not be when you collect the cash. As a result they may be getting a working capital benefit, but no AppleTV revenues have hit the income statement.

mark

nope, don’t know what numbers you’re looking at. here’s the numbers for worldwide Mac unit sales for 1Q and 4Q over the last six years:

4Q01: 850 1Q02: 746 but since then…
4Q02: 734 1Q03: 743
4Q03: 787 1Q04: 829
4Q04: 836 1Q05: 1046
4Q05: 1236 1Q06: 1254 and then most recently
4Q06: 1610 1Q07: 1606

From 2002 until this past quarter, sales were always higher in the 1Q (Oct-Dec) than the previous 4Q.

tf

mark, my point is this: the sell-off is not surprising or cause for alarm, and it’s induced by the Wall Street investment community looking at Apple solely from the financial perspective, as if Apple were any other tech company. The investment community does not look at the iPhone features and see concern; they look at it is a potential risk, but even in the most dire of analyst’s views it adds to the bottom line.

People claiming an iPhone hangover or who feel a need to rip Apple apart post-RDF are misinterpreting Wall Street. Apple’s issues on Wall Street have historically been a result of Wall Street not looking at Apple the way people are attempting to do now.

Apple still has a 5-6% boost from the iPhone/AppleTV announcement. Investors aren’t concerned about buying in early to a future product announcement.

tf

mark, you are wrong. Q4 is their best quarter for Mac sales. I have checked the reports, I always do. I noted the y-o-y growth which was real without even accounting for the shorter period, though that is true as well.

mark

tf, you’ve totally misunderstood me.

but first, let me respond to your first post:
1. agree with your first reason
2. you have some errors in your second reason – Q4 is not the best quarter for mac sales. the last time Apple’s Q1 was less than the previous Q4 was in CY2001. since then, Q1 has exceeded Q4 by anywhere from 1 to 25%. if you don’t believe me, go check the Apple documents. So there was some Apple spin and some analyst error. nevertheless, investors are wrong to flee over this; last year’s Q1 had 14 weeks, so the y-o-y growth is even more impressive compared to other PC mfrs, even factoring in the pause due to the Intel transition.
3. the third reason is precisely my point. some people are taking profits from the iPhone induced run-up, but others are fleeing because the slew of critical articles have caused them to think the iPhone and AppleTV are really niche products, and unable to replicate the iPod success. the high sales of AppleTV at the online Apple Store are being painted as a early adopter/geek/Mac fanboy thing — niche. AppleTV is not even being sold at Amazon yet.

judging strictly from what has been announced about the two products, I find them to be really cool and the way of the future, but compared to the old way of doing things, the extra cost for the hardware ($499/599 or $299) and the software – cellular service for $60 or so, iTS content purchases at $9-15 a movie or $2 for a TV show that I could’ve recorded – does not make them compelling. the iPod was compelling because I could bring hundreds of CDs with me in a tiny form factor; that’s not the case here. if I was into fashion (making a statement) or an early adopter, then yes, but as a mainstream consumer, no.

but i think those people lack the ability to see where Apple is going. in analyzing the possibilities (what analysts are paid to do) and weighing the Apple possibilities against other companies’ plans (Netflix, SlingMedia, Microsoft), i think there are things that can be done to make both items far more compelling and life-altering to the mainstream consumer than Jobs has so far announced, so I continue to hold most, do some profit-taking, and buy more on dips.

DaveD

The stock price fell for two reasons. The first is obvious and was already pointed out… disappointing guidance. The second? Tomorrow is options deadline, and a ton of money will end up in different hands depending on if it closes above or below both 90 and 95. (Obviously, those holding Jan 95 calls are screwed.)

Om, you do yourself a big disservice when you choose to quote the one analyst who downgraded AAPL, while totally ignoring the several who upgraded them.

I understand your bias against AAPL, but when you choose to selectively quote like that you can’t defend those – lke me – who claim that bloggers are not professional journalists and should be accorded the rights that professional journalists have.

Peace.

Om Malik

tf,

your apple tv point i don’t understand. i said clearly that they will be available in february 2007, which is when they actually start helping the quarter. It is clearly and eagerly awaited product, and is getting good advance orders and will be do well. I am going to buy one – exclusively for research purposes.

On your other points, will draft another reply, but for now have to dash! thanks again for posting your thoughts.

tf

mark, Investors rarely, if ever, look very deeply into product gaps (and as noted, AppleTV is selling well), and your wishes are simply pie-in-the-sky dreams. Apple’s iTS is successful purely because of the lack of a subscription model.

Michael, everyone predicted an Osborne Effect to the Intel transition and that didn’t materialize.

Michael Markman

This is what we used to call the Osborne Effect. But who remembers the Osborne? Now we can call it the iPhone Effect and everyone will know what we’re talking about.

(Although, as a one-product company, Osborne’s early announcement of a radically improved product dried up all their revenue and actually killed the company. No chance of that happening to Apple.)

mark

The stock price has dropped because there are flaws with both products. If you study it closely, you’ll find there’s something else that hasn’t been announced yet that would complete each product.

I think that something else is content subscriptions. A content subscription of TV/movies including HD for the AppleTV; that’s a better reason for the 40GB hard drive and closed design (content protection).

And a content subscription for the iPhone; that’s a better reason for the small 4/8GB storage, just having EDGE (sufficient for low res video streaming), and closed design.

And it would reinvent the TV industry, which is something Apple would be interested in doing. And it would explain Google Eric Schmidt on Apple’s board, and Disney’s close ties, and Cingular’s long exclusivity period.

tf

Om, as per my post above, it’s important to note that although the AppleTV is not available, it is available to purchase/order. And it should be shipping in 6-8 weeks.

[This is another odd concern. All of a sudden a pre-announced product is vaporware because it is Apple. (I thought vaporware was a product that didn’t come to light or there was no clear indication when it would, that it’s ship date slipped… we know the AppleTV will be available shortly and that the iPhone will certainly come. This isn’t Duke Nukem…) All of a sudden, Apple doesn’t have products in the pipeline… (When the clear pattern is for quiet/small launches of Macs.) This is a strange reversal: it has only been the last 1.5-2 years that Apple began having products immediately available at launch… for many, many years, at least since Jobs’ return, this was commonplace — that products were not available for anywhere from 6-8 weeks to 2-4 months later.]

tf

I don’t see any connection to hype or the iPhone.

This is pretty standard sell-off for a number of reasons (discussed below) and profit taking.

The sell-off occurs for 3 reasons:

  1. Apple always provides very conservative estimates so they can guarantee matching them (it’s been many years since they missed expectations substantially, and anyone who is a long term investor in AAPL knows the much worse effects of not meeting expectations versus setting conservative ones that they blow out of the water.

  2. Q-to-Q Mac sales remained the same, despite large gains Y-to-Y. Despite the clear seasonality of Mac sales (Fiscal year Q4 is always Apple’s best because of high educational sales), people irrationally expected growth from the previous quarter. (In fact, it was the first time that Q1 Mac sales matched Q4 Mac sales.)

(How it is that investors can’t cope with these first two realities, I don’t understand.)

  1. Because the iPod market is maturing, the sales growth is slowing… so investors are looking for the next source in revenue/profit growth. (Clearly when the iPhone arrives, this will be a major source of new revenue– a new market much larger than any Apple has ever been in with a high-end product. But most surprisingly, the AppleTV appears to be a success. It is the top selling product at the AppleStore… This hasn’t been the case in well over two years… that spot has been dominated by some model of the iPod.)

However, the sell-off, to me as an investor, is a good thing. The market treats Apple with a great deal of volatility, always has. The sell-off brings the P/E somewhat in line (still high at around 40, but Apple is one of the few major tech’s delivering large growth, making it worthy of a high P/E…) And the sell-off still hasn’t erased the gains that the iPhone produced. The price prior to the launch was around 85, now we are floating at around 89-90.

What we will see is gradual gains throughout the quarter as the product pipeline becomes more apparent (expect Mac and iTS announcements over the coming weeks, months) and investors re-examine the financials, particularly in light of the competition.

In essence, the fickle investors who want to see immediate gains and/or overrespond to risk leave the stock while more committed investors slowly buy back into the stock.

Yuvamani

To answer Al:

Sure they are addressing different market segments, But the reality remains that you need a bigger screen to see movies and video. I am among those waiting for a 80 gig widescreen ipod. If they do not release one by june, I would need to get an iphone.

I would assume that people would put off ipod purchases till iphone’s media ui and features shows up in the big ipod.

The iphone is a convergence device and as such will cannibalize some nano sales.

Al

The iPhone has a 8 gig flash drive and holds software, photos and music and it’s primary purpose is to communicate via e-mail, messaging and phone calls.

High end iPods have 80 gig hard drives and hold your entire music collection plus your photos of the kids and a few TV shows and 4 or 5 movies.

I fail to see a conflict between the two products. The high end iPod is cheaper and serves a different purpose than the iPhone. Many will buy both items. One cannot replace the other.

Mike D.

Apple didn’t really have much of a choice in when they disclosed though. The public FCC filings would have revealed way too much and at least this way, Jobs was able to control the message. June is quite a ways out though… here’s to hoping they proactively release more details every month or two in order to keep everyone’s appetite strong.

Erick

This is an excellent point. I have been a Verizon Wireless customer for years and have been wanting to update my Blackberry 7250. But as an Apple fan, I have put that project on hold just to purchase the Iphone and even change to Cingular/AT&T. The irony is that I have convinced all my family members to join Verizon..

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