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Analysts bite on Apple's future

The company's strong quarter, lead by iMac sales, has many analysts saying they'll bite on rosy predictions.

After suffering a drought for many years, Apple Computer yesterday announced its first profitable year since 1995, bolstering analysts' outlook that the company is in a strong position to continue to grow earnings.

Influential Salomon Smith Barney analyst Richard Gardner today released a report maintaining a "buy" rating on Apple, raising earnings expectations for fiscal 1999 to $2.48 from $2.11 to reflect his optimism.

The iMac will continue to drive revenues higher, said many analysts. Gardner also notes that the explosion of Internet use is likely to help elevate Apple as a player again.

"The single most important driver of consumer PC purchases today is the Internet," he wrote. Gardner pointed out that the disadvantage Apple faced because of its relatively low-volume Macintosh operating platform is nearly wiped out because of the Net.

"As more consumers buy a PC to access the Internet, it becomes less important which operating platform carries them there, as long as that platform is stable and reliable," Gardner wrote in his report.

He also attributed his positive outlook to a higher gross margin estimate for the entire year, citing Apple's improvements in manufacturing and fulfillment, and a slight reduction in operating expenses as a percent of sales.

But is this assessment, especially with the Asian economic crisis now looming off of U.S. shores, overly rosy considering the company's overall revenues actually fell for the latest quarter and full year when compared to the year-ago numbers?

Perhaps not, considering what the iMac has accomplished in Japan, which is in the throes of a seemingly endless recession. iMacs have been flying out of shops in Japan and the company said that it has sold about 40,000 iMacs since the launch on August 29.

Apple said it sold 278,000 iMac units in North America, Europe, and the United States.

"Apple is fairly shielded for a while [from the economic turmoil], because their user base is hungry to upgrade and it will take time to satisfy that demand," said Jimmy Johnson, an analyst at A.G. Edwards. "The company has come back up from very depressed levels this fiscal year, and is going into a new fiscal year with a completely refreshed product line."

Analysts stress that Apple's new product lines are vital in erasing the memory of its old, stagnant goods and spurring growth.

"Mac had lost quite a bit of market share with their old products," said Anthony Ianiro, an analyst at Olde Discount. "If they continue to put out new iMac products, new ideas, there's still a good opportunity to gain more market share."

Apple basically cut off products that didn't make any money, analysts said. The company cut its Newton Message Pads, its Performa line, and many low-end printers. At this point, Apple is left with its high-end G3 computers and servers, iMacs, and its PowerBooks.

Despite the fresher product lines, Apple saw its overall revenues slide. The company posted revenues of $1.56 billion for the fourth quarter of 1998 compared $1.61 billion for the year-ago quarter. Apple also saw its year over year sales decline by 3.1 percent.

Gardner notes that total revenue declined 4 percent year this year but notes that it was due to a 47 percent decline in revenue from monitor, printer, and other peripheral lines.

"This decline reflects conscious decisions by Apple management to exit unprofitable and non-core business," he added.

Analysts are also quick to point out that these numbers reflect the fact that iMacs were not selling for the entire fourth quarter, only for six weeks of the quarter.

"This line has replaced quite a few old products, and if they had put out the iMac at the beginning of the quarter, you would not have seen the decline," said Ianiro. "And still the decline is very slight compared with last year when they had 12 product lines instead of three."

Added Richard Chu, an analyst at Cowen & Company: "Everyone could see that the iMacs were selling aggressively everywhere, and although revenues were expected to be lower, they wound up being better than expected.

"In fact the rate of decline narrowed dramatically," said Chu.

But with all the media attention on iMac sales, is the "cute" computer actually lowering chances of long-term revenue growth by cannibalizing sales of Apple's higher-end products?

Most analysts doubt falling average selling prices will impact Apple's bottom line.

"There is a good segmentation between consumer iMacs and professional G3s, and I doubt their professional markets are going to want to buy an iMac," said Johnson.

There is a strong demand for upper-end computers and servers, and if Apple can keep up with the demand, this will only help their bottom line, analysts said.

Still others say that ASPs may have a negative impact on the company.

"Its certainly one of the issues looking forward," said Chu. "People are conscious of the fact that the iMac mix will build even more dramatically in the next quarter which will have the impact of pulling back margins."

One industry analyst said that when you have a $1,100 box moving into the mix, it will, of course, cause a substantial deterioration in the bottom line. But he went on to say that investors should not focus on this, given that Apple has been successful at holding down costs and expenses.

"They are going to see huge gains in December because of iMacs in terms of revenues," he said. "Because there hasn't been much deterioration in average selling price among the G3s and Powerbooks, that will also help."

Despite blowing away Wall Street's earnings expectations for the company, shares of Apple continued to fall in afternoon trading. The stock was down 2.01 percent or 75 cents, to $36.625. The stock, which initially traded higher after the news, closed down $1.375, or 4 percent, to $37.375 on the Nasdaq Stock Market yesterday.

Analysts attribute the stock's decline to the old philosophy of buy on rumor and sell on news, or good-old profit-taking.

"I feel very positive that the company is moving in the right direction," concluded Ianiro.