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  • Apple’s Financials #2: Don’t Worry, the Sky is Still Falling!

    July 16th, 2005

    Well, you can bet that investors were pleased with Apple's latest quarterly financials, witness the rapid 6% increase in the price of a share. Of course, the first day doesn't always count for a lot. If there's enough bad news that's real or imagined, you can see it dropping again. Just think what happened when the so-called analysts read their Tarot cards and decided that iPod sales had peaked and were headed down, that scores of unsold units were filling up the warehouses. Of course, the cards were wrong.

    What about the iPod killer du jour? Well, again Apple can't stay at the top forever, so something has to give. The stock takes a hit again, but begins a run up after people realize that the cards are wrong again.

    Subscription services? Surely those cheap prices from Yahoo will have some sort of impact, right? Of the various subscription music services, Yahoo seems to have a more polished interface, and at $4.99 a month if you opt for an annual subscription, it's chump change. Forget that none of these services work on Macs or on iPods, or that only part of their song libraries are available via subscription. People will be happy to ditch their iPods in favor of some no-name, nondescript player that costs less and offers more features to get that cheap subscription. Once again, it's not in the cards, but it can beat down the stock price for a spell.

    I guess the term "nervous nellie" is apt here. The mere whiff of potential failure ought to be sufficient to make you scurry to your stockbroker and beg off. Ah, the trials and tribulations and outright gullibility of Wall Street. Do you remember how they fell for all the smoke and mirrors of the dot.com boom? You'd gladly pay $50 or $100 a share for one crazy scheme after another. Venture capital was robust in those days, and you could get tens of millions of dollars by the mere act of having a business with a ".com" at the end of its name, even if the business plan was nonexistent. No wonder it was all poised for a great fall. Of course, some businesses, such as Amazon and even Priceline, managed to survive the shakeout. Well, I suppose you could say that William Shatner's "star power" was enough to save Priceline from certain death, and it did come close at one time.

    Perhaps it's the fact that Apple is unexpectedly in the driver's seat in one segment of its businesses. After years of sitting at the back of the bus, the iPod makes it dominant, and that's a tough pill to swallow. The bigger they are, and all that. So what if Apple went from a company with an estimated $8 billion annual revenue to one with an estimated $14 billion annual revenue in the space of a single year? Didn't Apple say it's hedging its bets for the current quarter, to gauge the potential impact in sales because there will be Intel processors inside beginning a year from now? Sounds just like smart planning to me. If sales do grow during the back-to-school system, Apple seems the hero, and if not, well, there are no surprises.

    More to the point, it's clear to me that Apple just doesn't know what the impact might really be. You can't take those instant surveys as proof of anything, because the sampling methodology is little or nonexistent, and opinions do change. A survey of that sort, with proper controls, might be interesting a month or two from now, once the flurry of excitement over the great processor migration dies down, as it will.

    For now, you can bet your last dollar that the Wall Street analysts will continue to pore over Apple's current financials and future guidance for evidence that bad times are in store for the company. Why be positive about such things? Why indeed!

    Now I really should mention the fact that certain analysts are apparently in bed with some of the companies they purport to analyze, which makes them more inclined to bad mouth the companies that don't send them paychecks. I suppose there are no checks and balances in that business, or not enough to stop the practice. But we do live in a world where so-called experts go on TV talk shows to deliver news about products they are actually paid to pitch. I suppose you can say it's all entertainment anyway, and nothing you should take seriously. That is until you are asked to invest your hard-earned money in businesses based on the recommendations of those self-same analysts. That is a horse of a different color.

    I don't need tea leaves, Tarot cards, crystal balls or any innate psychic ability to predict that you will continue to hear negative thoughts about Apple in abundance in the months and years to come. Sure, the company can screw up, and not all of its new products will post record sales, or come even close. At the same time, you will also hear that Steve Jobs can't wait to stop building Macs, that all the money and time invested in switching to Intel is just a smokescreen.

    Five years from now, they say, you'll be able to buy a shrinkwrapped copy of Mac OS X or whatever it is called by then that can run on any vanilla PC box. The iPod will be the hula hoop of the 21st century, and the electronics industry will have embraced some other marvel from a company the analysts are conditioned to favor. Or paid perhaps.

    Of course, Apple has long range plans, but I don't think the unlikely success of the iPod was ever anticipated. Products don't achieve iconic status every day, or every year for that matter. You can only hope that Apple is working hard on the iPod's successor, or on building new versions with even more compelling features. And, by they way, how about an iPod with voice recognition? "iPod play Ruby Tuesday by the Stones." "iPod play playlist number four." Yeah, that's the ticket!



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