So why have Apple shares dropped?

By Stan Beer
Thursday, 24 January 2008 15:58

Opinion and Analysis

It's no longer news that Apple had yet another spectacular quarter - the company's best quarter ever! So why are AAPL shares more than $20 lower than they were last week, $40 lower than two weeks ago and $60 lower than a month ago? The answer is probably more obvious than many may think.

When a company reports 47% growth in its computer revenues, 17% growth in music player revenues and 27% growth in its downloads revenues, it's hard to find fault with any aspect of the business. I'm not a financial analyst but my years of following and writing about tech stocks at the Australian Financial Review did teach me that with a company like Apple the market is often ahead of the game.

In this particular case, the market was already expecting great financial results and had previously factored it into the share price of AAPL. What the market is reacting to, however, are three things: a lack of any new killer products or announcements at Macworld 2008, a lack of belief that Apple can sustain its breakneck growth rate, and last but not least a very real fear that Apple, being a luxury consumer goods provider at the premium end of its market, will be hit by what is now believed to be an inevitable economic downturn in the US.

Looking back at 2007, the market was expecting big things from Apple and the company delivered in spades. Its new range of Intel computers - desktop and notebook - had proven to be a hit in 2006. Then at Macworld 2007 Steve Jobs announced the iPhone that everyone had been waiting for and the market loved it. Apple had entered the smartphone space with an innovative product and opened up a whole new line of business. Later in the year came the iPod Touch and the long awaited Leopard, which didn't disappoint. Apple TV was a bit of a let down but nobody really cared - the market could see where growth was going to come from.

Comparing Macworld 2008 to Macworld 2007 was like comparing chalk and cheese. Like the iPhone, the ultra slim MacBook Air was predicted months in advance but few cared. Everyone knew it was going to be a premium priced product that would have no great growth effect on Apple's business. Perusing Apple watching blogs, many consumers had been asking for a smaller form factor sub-notebook with a 12-inch screen or less. They had also been expecting an announcement of a release date for a 3G iPhone. Both of these products could potentially provide growth avenues that the market is looking for.

Of course the market is still expecting a 3G iPhone to be announced this year. However, with a US recession around the corner, the market is obviously worried that US and European consumers will greet the announcement with relative indifference. Back in 2007, the iPhone was a must have novel product. While sales should still bubble along in 2008, it is not clear whether the gloss has started to wear off and sales growth will plateau. As UK-based telecoms analyst Ovum says: "The iPhone may not be on the stellar path that many predict." The release of a 3G version will certainly make things a bit more clear.

Returning to the original question, AAPL shares have dropped because at their present level of around $139 with a PE of more than 35, investors want earnings growth to continue at the breakneck speed of 2007 if they're going to pay a premium for the stock and they're uncertain as to whether Apple can achieve that in the coming year.