Apple bunkers down for the US recession

Stan Beer
Thursday, 24 April 2008 05:24

Opinion and Analysis

Apple is a great company as its latest set of quarterly financial results clearly show. However, the computer and gadgets maker has two major vulnerabilities, which is why its share price is still wavering and well off its highs of last year.

Unlike Gillette, Apple doesn't make products that people need to buy come hell or high water. Macs, iPods, iPhones, and Apple TVs are all either luxury purchases or at the premium end of the market. Therefore, Apple is particularly susceptible to economic conditions in its markets. And in the market that matters the most to Apple, the US, things are looking grim.

Most agree that the US has entered a recession and the dollar continues to sink faster than the Titanic. Coming off its spectacular Q1, Apple, always the conservative when it comes to financial forecasting, has provided less than comforting guidance for Q2 and Q3, which is why its stock dropped slightly on the results announcement.

iPod sales have reached a plateau and iPhone sales are going backwards with many potential buyers holding off for the release of the 3G version. The big growth engine for Apple in Q1 was the Macintosh computer. In a declining economy, however, the Macintosh is a relatively big ticket luxury purchase for consumers with maxed out credit cards.

If there is one bright spot in the US economy for Apple, then it's the fact that the weaker US dollar is boosting its export earnings. Products purchased in places like the EU, Canada and Australia, which have yet to feel the full effects of the US downturn, are bringing in more US dollars for the same amount of foreign currency spent purchasing an Apple product.

As far as the iPhone is concerned, Apple is still obsessively sticking to its target of 10 million sold by the end of 2008. Most observers believe that will be achieved, especially since Apple is expanding its availability into new markets and should be releasing a 3G version in the next couple of months. The question remains, however, can Apple grow 2 million iPhones sold a quarter to 10 million like it has with the iPod.

The good news for Apple shareholders is that the company has plenty of cash, a strong product line-up and, in the face of a US downturn, plenty of scope to increase its focus on overseas markets.