Apple: The angst vs. the reality

Apple: The angst vs. the reality

Summary: It's open season on Apple these days. The stock is in a tailspin.

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It's open season on Apple these days. The stock is in a tailspin. Worries abound. The iPod market is saturated. The consumer wallet is pinched. It all adds up to an ugly stock chart. But it's time for a reality check here. Is all this angst really warranted?

applchart.pngDespite the year to date stock chart (right) Apple's business isn't exactly limping along. Sure you can worry about the iPhone not selling 10 million units, or iPod profit margins and even whether the MacBook Air is that big of a deal. But what's the point? Until proven otherwise most of us would love to have Apple's business.

Here's a look at the angst and the reality check that goes with it:

The angst: Apple is cutting the price of the iPod shuffle to goose units because growth is slowing. Last week, Apple announced that the 1 GB iPod shuffle will retail for $49, down from $79. Apple will also launch a 2 GB version for $69.

J.P. Morgan analyst Bill Shope wrote in a research note:

With relatively slow unit growth in the holiday quarter and Apple's price drop, signs point to iPod saturation and some macro sensitivity. Interestingly, in our recent meeting with management the company cited shuffles as a particular weak spot in the December quarter. This price cut is likely intended to boost shuffle momentum and iPod units overall.

The reality: Of all the concerns about Apple, fears about market saturation and the iPod are the most on target. Everyone has an iPod and some folks have three. Meanwhile, the shuffle would be the most economically sensitive since the device caters to the lower end of the market.

However, folks are reading a lot into a price cut on the shuffle. With the $69 shuffle it's likely that Apple will help balance out its average selling prices on the music player with a bump in volume. Another thread to consider: What does it cost to make a shuffle? $10, $7, maybe even $5. The point: Apple isn't sacrificing margins here. Data point: Piper Jaffray analyst Gene Munster notes that Apple maintained the $79 price on the shuffle for 500 days, more than twice as long as other iPod price levels. That's not exactly a show of weakness. Munster is projecting that Apple will ship 11.3 million iPod units in the March quarter.

The angst: A slowdown in consumer spending will ding Apple. The worries about the iPod shuffle pricing illustrates a bigger concern: Apple could get whacked by a consumer spending downturn. Apple is heavily exposed to consumer spending as most of its business relies on them. Enterprise sales are a rounding error to Apple at best.

The reality: Apple's outlook for the March quarter left a little to be desired, but the company has a history of being conservative. Underpromise and overdeliver is the mantra. Meanwhile, HP delivered a strong quarter that included big gains in notebook PCs. That bodes well for Apple's refreshed MacBook line-up. Simply put, Mac momentum may be enough to offset any weakness elsewhere.

The angst: The iPhone isn't a huge hit. Unlocked phones are a disaster for Apple, which expects to sell 10 million iPhones in 2008. The iPhone still suffers from lofty expectations. The big question is whether the iPhone can hit the 10 million unit mark. Perhaps a larger concern is that a big chunk of iPhones are unlocked. Why is that important? Apple sells the device, but doesn't garner any carrier revenue for an unlocked iPhone. In addition, these unlocked phones take away Apple's leverage with carriers. Why would an international carrier share revenue with Apple when unlocked iPhones can land on its network anyway?

The reality: Handicapping whether Apple can hit the 10 million mark for iPhone units is a bit academic. Aside from a few Wall Street analysts, who have fancy spreadsheet models based on 10 million iPhones sold, no one cares if Apple sells 9 million or 10 million units. It's a successful launch by any metric you use. However, the unlocking issue could be worrisome because it erodes Apple's potential revenue stream. Then again, you shouldn't cry for Apple--the margins on the iPhone are still healthy. For now, iPhone worrywarts need to relax a bit.

The angst: The MacBook Air (see Jason O'Grady's diary) wasn't that Macworld headliner folks were hoping for. In addition, sales of the MacBook Air may not totally impress.

The reality: Let's face it, Macworld 2008 couldn't have lived up to the iPhone juiced 2007 version. But it would be foolish to fret about the MacBook Air's demand yet. Apple has a nice cycle going with its MacBooks. Apple dominates Amazon's best seller list, Best Buy is ramping up its Mac shelfspace and the MacBook Air has been well received. More importantly, the MacBook Air isn't cannibalizing Apple's other notebooks, according to Munster, who surveyed resellers.

However, Munster did note that customers were curious about the MacBook Air, but "less willing to buy the MacBook Air than they were with the original MacBook." Perhaps that reaction is due to pricing, smaller customer wallets or concerns about features. But we won't really know what's going on with MacBook Air demand for a few quarters. All we know is that the MacBook Air rounds out an impressive lineup for Apple (see Munster's chart below).

macbookairchart.png

Add it up and there are reasons to worry about Apple, but let's not get too overwrought about it. The next two quarters will tell the tale. Stay tuned.

Topics: Laptops, Apple, Hardware, iPhone, Mobility

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199 comments
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  • Typical ZDNet spin

    [i]Everyone has an iPod and some folks have three.[/i]

    Great for Apple, terrible for everybody else.
    A saturated market is bad for Apple's competitors even more because they've not
    sold gadgets even nearly as much.

    How's Zune doin' these days?
    Ah, right, Microsoft just has a tiny fraction of the business Apple has.

    I think the real angst is with you, living in the Microsoft IT echo system.
    Apple is simply too successful and it worries you like nothing else.
    Mikael_z
    • It's amazing to me

      How you can extract six words from a story and conclude that somehow I'm anti Apple. I think you're the one with the angst. Knowing someone with three iPods isn't exactly a revelation.
      Larry Dignan
      • Shining the light of truth

        The truth is that Apple dominates their markets except for computers, but even
        there they're growing at an impressive rate.

        To say or imply that they have huge problems is to misinform.
        It's their competitors who have reasons to worry, not the least with the event of the
        iPhone release, judging the interest is has received and how many who have bought
        it in spite of being released in just a few countries.

        Huge success are the proper words to describe it, but not here at ZDNet.
        Mikael_z
        • Shining the light of actually reading the article

          Did you read the article, Mikael_z? It was a response to investor concerns and actually pointed out that most folks worried about Apple's future should relax. Obviously, we'll see where this is headed in the next couple quarters, but the original article was both positive (for Apple) and realistic for investors.

          Loving my new MacBook,
          Chris Dawson
          mrdatahs
          • I admit that his article is unusually liberated from the usual ZDNet spin

            I've seen worse. :-)
            I stand by my opinion though, that reporting truthfully should be the obvious and
            default writing mode for any journalist or blogger, here too.

            Don't think that people are stupid. At the end, they'll go somewhere else if they can't
            find *real* news here.
            Mikael_z
          • The question is: what are YOU worried about?

            They way you jumped in feet first to totally defend the virtues and sales of Apple leads me to conclude one of two scenarios is playing out

            1) You are an Apple Apologist, ready to defend Apple against any and all who would speak ill or criticize the mighty company that is leading the world into a future via innovation and invention, blasting any and all who are too dim-witted to see Apple as the benevolent savior of the human race!

            2) You are an Apple investor worried about a story like this dropping the stock price a couple of dollars, which is bad for you.
            GuidingLight
          • Neither

            I understand that ZDNet's bloggers are often trolling to get more visitors and clicks on
            their ads but I see no value in it for me, the visitor. I want real news, the truth, even if
            it's unfavorable to Apple or any other now and then.

            It's an undeniable fact that the iPods and iPhones are smashing successes, why a
            negative spin on the current Apple business would have been untruthful, but I realize
            now that in this case wasn't the negativity from Mr. Dignan but from other sources.
            Mikael_z
          • It's the disease of fanboyism

            I've seen it many times over. Extreme defensiveness, jumping to conclusions, brainwashing that's devoid of reality. Even when all else is staring them in face.

            It's not just the Apple fanboys. Even the Ballmer acolytes go through this to some degree.
            hasta la Vista, bah-bie
          • You can't even tell a ....

            ... positive article about Apple when you read it! So how are you a judge of spin? By the way, there is far more positive articles about Apple on ZDnet then negative. I suspect it is heavily influenced by the large number of Apple users on the Staff, (Larry Dignan, Jason D. O'Grady, David Morgenstern, Dana Blankenhorn, Russell Shaw and Chris Dawson to name a few).
            ShadeTree
          • Don't forget

            Robin Harris. Although I'm not positive he does, his blogs are normally an Apple lovefest. <br> <br>
            I would challenge any of these people that think otherwise, to show where Apple gets all that much negative spin compared to other vendors. Dana B. comes right out and tells us "MICROSOFT IS LOSING OUR DATA" only to then find the blog points to all filesystems in use being bad and NTFS not the worst! <br>
            It's that kind of direct bashing that Apple never sees, but unless every article is a sparkling review filled with praise and admiration, the cult accuses it of being "anti" Apple.
            <br>
            Amazing.
            xuniL_z
          • It couldn't POSSIBLY be related to the fact that

            Apple returns a far better experience to its customers than
            other manufacturers do and that's because other
            manufacturers don't supply their own software.

            Apple is the most trusted technology manufacturing brand
            on the planet. Because you don't share that trust doesn't
            make you anymore of an expert although it does mean your
            judgement is suspect! LOL
            mlindl
          • Wild interpretation

            In reading the article all I could see was a story that refuted every piece of evidence that Apple was having problems, in fact it pretty much said that Apple was and still is doing quit well. Look at some of the quotes from the article:

            "Apple maintained the $79 price on the shuffle for 500 days, more than twice as long as other iPod price levels. That?s not exactly a show of weakness"

            "Aside from a few Wall Street analysts, who have fancy spreadsheet models based on 10 million iPhones sold, no one cares if Apple sells 9 million or 10 million units. It?s a successful launch by any metric you use"

            "Apple dominates Amazon?s best seller list, Best Buy is ramping up its Mac shelfspace and the MacBook Air has been well received"

            Just because the article points out that Apples business model isn't working to flawless perfection and there are some things the company should be concerned about hardly makes the article "anti-Apple".

            Its extraordinarily concerning when you see the Apple enthusiasts respond in wild apologist ways when even a pro Apple article is attacked because it does indicate that there is something sightly less then perfect with Apple. It starts getting scary when you think that if you ever said the wrong thing about an Apple product to a friend while your standing on a street corner, and unbeknownst to you one of these hopped up Apple Jacks" is standing behind you and hears what you said, it might be worth your life.
            Cayble
          • Here's where I could have gone...

            A consumer spending slowdown will hurt Apple and lower margins.

            Apple has a lot of pricey retail real estate that could become a headache if the economic dookie really hits the fan. Another store in NYC for instance.

            People are cutting back on wireless plans (see the price war of late) and that's going to hurt the Iphone.

            All of these points are up for rationale debate, but frankly the evidence is a bit thin at this juncture--especially if Apple blows out its low ball estimates for the current quarter.

            There's also stock multiple contraction across the board so Apple could just be suffering from that.
            Larry Dignan
          • Didn't you know?

            Apple is a religion, and Jobs is their prophet. How dare anyone imply he's not perfect. He's the Dalai Lama, Pope, and an ayatollah all wrapped into one.
            djchandler
          • Thou doth protest too much

            Aren't you reading some things that aren't there?

            Yup.
            mlindl
          • Then go somewhere else...this is far people

            who have a life...and don't have knee pads on for "hand" Jobs.
            ItsTheBottomLine
          • ...sorry this "for" peopel not "far"...

            ...
            ItsTheBottomLine
          • ... for people who actually can spell and dare to argue?

            If disagreeing with people is dangerous in your mind then perhaps it's you who
            should find a life.
            Mikael_z
          • That wasn't just a disagreement

            That was just plain knee-jerk reactionary...

            If your precious OS can't stand anything critical, then stick to places like MacWorld where a slavering fiefdom rules...
            hasta la Vista, bah-bie
          • "YOU who should find a life"

            He found it..... right here on ZDNet.....
            shilling for Microsoft!

            Hadn't you noticed?
            Ole Man