THE DAY AHEAD: Is Apple's fairy tale over?

Larry Dignan
3 min read

COMMENTARY -- Apple Computer CEO Steve Jobs finally understated something. "We've clearly hit a speedbump," he said following Apple's fiscal fourth quarter profit warning.

Speedbump? It's more like a mountain. When you miss earnings targets by 12 cents to 15 cents a share, it's more than a speedbump. Revenue for the fourth quarter will be between $1.85 billion to $1.9 billion, just slightly better than $1.83 billion reported in the third quarter. Apple missed sales targets in the third quarter too.

Apple's (Nasdaq: AAPL) shocker is bound to make investors wonder if the fairy tale turnaround is history. The news was grim for September, a month that apparently stunk for a lot of tech companies. Apple shares fell 45 percent in afterhours trading.

Apple said demand was down across all geographies, its core education sales weren't up to snuff, and its snazzy, margin-boosting G4 Cube got off to a slow start. Apple also indicated it would talk down revenue estimates for the seasonally strong first quarter and fiscal 2001.

"We are currently re-evaluating our plans going forward, and will provide lower growth targets for next quarter and the next fiscal year when we announce our final results on Oct. 18," said CFO Fred Anderson.

Let's give Apple credit for being relatively upfront about the quarter. It didn't cop out and pin all the blame on Europe and its shaky currency. But it still doesn't look good.

Time to hop off the bandwagon?

The big worry about Apple's fourth quarter warning is that the demand simply wasn't there.

"They've turned a lot of replacement demand in the past few quarters. The industry average, in terms of replacement and upgrade sales, is about 60 percent. Apple is quite a bit higher," said Sanford Bernstein analyst Vadim Zlotnikov. "Other companies like Dell and Compaq can't be happy just satisfying their installed base. If Apple's going to continue growing, it's going to have to go beyond that installed base and attract new customers."

Apple's education sales were weak during the key back-to-school season. Meanwhile, Apple's G4 Cube may be too pricey. There are also concerns about alleged cracks in the G4 Cube.

Those trouble spots raise the following questions:

  • Are Apple's September problems an indicator of overall PC demand, or are consumers growing weary of Apple? "Overall consumer demand doesn't appear to be as low as Apple's numbers indicate," said Zlotnikov.

  • Did the G4 Cube stall because it's too pricey starting at $1,799?

  • Has the iMac euphoria subsided?

  • What does the slower demand mean for Apple's inventory?

  • Has Apple lost market share momentum?

    All those questions will have to be answered when Apple reports earnings. In the meantime, Wall Street analysts will be handing out the downgrades. Many analysts reluctantly hopped on the Apple bandwagon and could use the company's profit warning as an excuse to jump off.

    Apple's supporters

    Apple has never been short on supporters even in its darkest days. Apple, which has delivered quarter after quarter since Jobs took over in 1997, deserves some slack.

    Here's what the bulls will say: Apple issued a profit warning in the fourth quarter last year and rebounded to make investors lots of money. The company even issued a rare stock split.

    But 1999's profit warning had a built-in excuse -- Motorola couldn't deliver G4 chips. Based on the "blame it on Motorola" story, analysts were forgiving and called Apple's 1999 retreat "a buying opportunity."

    There are no excuses this year -- the demand fell short. The big question is whether Apple's profit warning warrants a 45 percent afterhours plunge.

    Some industry analysts and bargain-hunting investors will give Apple the benefit of the doubt.

    Tim Bajarin, industry analyst with Creative Strategies in San Jose, Calif., told ZDNet News that Apple will rebound during the holiday season due to strong sales of the iMac. He wasn't so sure about momentum for the Cube, but attributed Apple's woes to a product transition. To Bajarin, Apple's quarter was "a bit of a blip."

    We'll see.

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