Apple’s Financials: Finding a Way to Turn Good News to Bad

July 22nd, 2008

All right, so Apple can’t even sit back and celebrate its record 3rd fiscal quarter profits without seeing its stock price plummet again. As usual, the reasons are complicated, and probably only related in part to the company’s actual performance or their immediate expectations for the current financial quarter.

Although one press report erroneously stated that Apple missed Wall Street expectations for the past quarter, that just isn’t true. For the most part, they did better. Although analysts pegged Mac sales pretty close to the mark, iPod sales were expected to be flat or decline slightly not edge up in the low double digits. So that market isn’t quite dead yet.

So what’s bothering the Street? As usual Apple’s guidance for the current quarter is extremely conservative, so they can end up boasting how well they exceeded their predictions. But I guess the Street doesn’t like that sort of behavior, even though Apple and other companies almost always take this approach.

Anything else?

Well, Apple also says its profit margins will be lower this quarter. They are also making broad hints at some revolutionary new product transition, so that raises more than a few possibilities, but they shouldn’t sound any alarm bells. Certainly a new line of iPods or major revisions to the note-book line, for example, would mean upfront development and production ramp expenses. So they won’t make quite as much money early on, until the product has been out for a while. Nothing special about that.

But there is one more factor that might contribute to the jitters, and that’s the possibility that Apple is going to go in for more aggressive pricing to move more product, so as to take advantage of their recent growth when pitted against other PC makers. If this is the case, they might suffer somewhat in the short term, with the hope they’ll make it up on the long haul as larger quantities allow them to get better pricing on raw materials and benefit from other savings from higher production levels.

Of course, when it comes to cutting prices at Apple, you probably won’t see a $799 MacBook equipped in the same fashion as the current model. But a $999 price point during the remainder of the back to school season could definitely excite the cash registers. Putting the MacBook Pro at, say, $1,799 would also light some fires under the derrieres of people who claim Apple’s hardware is overpriced. Or maybe not. Some people still believe that a $599 note-book is all the need, and anything that carries a higher price tag is a luxury.

As I said, this should be really good news, although I may be totally wrong in attributing that transition to upgraded note-books or iPods. Maybe Apple is going to enter another product category, or refine their existing ones in a major fashion, perhaps by adding active touch screens to both note-books and the ever-popular iMac. Certainly they have already tested and proven such technology on the iPhone.

Also imagine the prospects of a major upgrade to the now languishing line of Apple displays with the same MultiTouch capability. Now we’re getting somewhere, because this would allow Mac Pro users to take advantage of this feature. Tempted yet?

Extending beyond the basics is Apple’s so far meager attempts at living room convergence. Despite the software upgrades and the lower price of admission, Apple TV still seems a non-starter. But what if Apple were to deliver an all-new flat panel TV, LCD, plasma or both, with built-in Apple TV and perhaps the full-blown Mac experience thrown in?

While the television set market may seem saturated already, there’s always room for a better idea. As I’ve said previously, the user interface of the typical TV, as exemplified by their onscreen menus, remind me of pathetic imitations of the Windows interface, and not all of the adjustments, aside from the basics, are clear or clearly explained in the usually bare bones user guides.

No doubt there is plenty of room for Apple to put some intelligence in a traditional product category and somehow revolutionize the industry. Of course, Apple would have to price aggressively here too, because there are tens of millions of flat panel TVs available at lower and lower prices. For example, a typical 50-inch plasma TV from a name-brand manufacturer can be had for less than $1,500. Add a few hundred dollars if you want true 1080p picture resolution, a difference that will be barely detectible unless you look real close.

Then there is that additional troubling factor that festers unabated, and that’s the state of the CEO’s health. Yes, I agree with Apple that much of that information is a private matter, except where it might impact on Apple’s performance. If Steve Jobs goes, just the psychological impact behind his departure, forced or otherwise, could have a major effect on Apple’s stock price. Whether it would hurt sales is another story, as many of his new product initiatives are probably well along in the development stage and they don’t require his presence to be successful.

Indeed, Steve Jobs could disappear tomorrow and it would take Apple several years to reach the point where his departure would have a significant impact, one way or the other. The rest depends, of course, on his successor, but that’s another story entirely.

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5 Responses to “Apple’s Financials: Finding a Way to Turn Good News to Bad”

  1. Looking forward to lower prices and aluminum-clad MacBooks.

  2. I think Apple is on the right track to introduce a low-price laptop. Remove the entry cost barrier to gain more market share. And it’s likely Apple will have a customer for life.

  3. Jim says:

    On Steve’s health: Steve Job’s health is a private matter. This position is in accords with a number of U.S. labor laws. Should Apple breach these laws, Steve would have adequate grounds to sue the board and Apple Inc. would soon be Jobs Inc.; a private concern (not that that would be a big difference).

    I still think the TV idea is a major non-starter. Too low of profit margins. Now true 3D TV would be cool, but I see little work being done in that area since we were working on it in the early ’80s. Ah, laser holography, good stuff. Keep in mind that Apple still considers AppleTV to be a “hobby.” I love mine by the way.

    Aggressive pricing: Apple is already practicing aggressive pricing, i.e. the Air price drop, for Apple. Apple doesn’t play in the bargain basement where Gene wants them to sell TVs. In memory of “54’40” or Fight,” Apples motto is “Profit margins: 30+% or forget about it!” 😉

    I still believe the answer lies elsewhere, I just haven’t had the time to do any in-depth analysis. I look forward to the revelation with great anticipation.

  4. To clarify: I don’t want them to sell TVs; I expect to keep my existing TV for another five or ten years (I hope). I only suggested it as a possible option, one that has been mentioned previously by others.


  5. Jim says:

    Sorry, Gene, I worded that poorly. English isn’t my first language, math is. 🙁

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