After Apple announced it’s earnings for first quarter of 2008, it’s shares tumbled, around 14% over the past two days. Part of which can be accounted for by the panic trading over a US recession, NASDAQ dropped around 6%. Reading over several publications, majority of them cited reasons as iPod sales were flat and or Apple’s forecast for the next quarter was too conservative, almost a low balling tactic by Apple.
From Smart Money:
At Caris & Co., analyst Shebly Seyrafi cut his rating on Apple’s stock to above average from buy, and also shaved his target price to $165 a share from $225. Among the reasons Seyrafi gave for his actions were what he called “disappointing” iPod sales in the company’s first quarter.
and NY Times:
What is worrisome, Mr. Sacconaghi said, is whether the flat domestic iPod sales are a harbinger of things to come for other Apple products.
“That’s the big question,†he said. “If they feel it here, could they feel it in other products and other parts of the world?â€
Flat and disappointing are inaccurate words to use. Stating the iPod unit sales have slowed down would be more accurate. On top of that, Apple’s revenue on iPods still grew 5%, thanks to the iPod Touch. It’s likely that iPod Touch sales are going to continue to increase, taking away from iPod Nano and iPod Classic sales, most of which has to do with consumer’s desire for an iPhone like interface and widescreen display. If Apple’s continues to profit and increase revenue, should this be considered a bad thing? I wouldn’t normally think so.
Another aspect to consider is market saturation. Apple dominates the portable media player market putting consumers in a position to choose amongst iPod products, which almost all play both music and videos now. If you already own an iPod, which you upgrade your iPod every year then? Likely not, which will force Apple’s unit sales to approach a limit. Closer it gets to the limit, the slower the overall growth in unit sales. Apple will still gain new customers, get customers to upgrade, generate revenue, just not at the same pace as the last few years.
Analyst’s forecasts seem to overshadow Apple’s own forecast to the point where they become the market expectation.
From Marketwatch:
“The company is lowballing the Street on the March quarter, but this is not a good environment to lowball the market,” said Romeo Dator, who manages U.S. Global Investors All-American Equity Fund (GBTFX:
25.16, +0.05, +0.2%) and owns Apple stock as part of the fund. “The future stock price will depend on continued strong sales of products and what new products they will be releasing this year.”“IPods were surprisingly light despite fairly radical [product] refreshes,” said Shaw Wu, of American Technology Research. “Macs were strong, but I think investors were looking for more.”
So whose responsibility is it to forecast Apple’s earnings? Isn’t it Apple’s? Apple is the one responsible for building the product, selling the product, accounting for all the operating expenses to generate the revenue in the first place. Why can’t they be conservative? Are they stating a loss? No. Could they make a greater profit than they expected, maybe, and that would be great. The factors that need to be included in the forecast are post-holiday revenue dips for consumer product companies as well as potential iPod market saturation. Its fair for an analyst to form their own forecast, but the forecast should be based their own outlook and advice for the market, not to ding Apple when they didn’t achieve something they never agreed to in the first place.
Looking at Apple’s revenue since 2002, the 2nd quarter is equal to or less than the 1st quarter. Starting in 2005, the gap between the quarters started to expand. Maybe Apple’s forecast is indeed plausible.
Maybe I’m just being a naive here in thinking that a growth slowdown shouldn’t be considered a failure.
If you want to read a solid breakdown of Apple’s recent result, you can check them out at Daring Fireball.