48 Days Later: Apple's Valuation Drops 37%
New Analysis. Not since September 2000 has Apple fallen so hard from the tree. On Aug. 13, Apple's market capitalization topped Google's, at $158.84 billion. Now, 48 days later, its market cap is $100.69 billion. |
[Editor's Note: This is the first of two parts looking at Apple's share price sell-off. Part 2 explores the 2000 crisis and what it foreshadows for Apple and the larger PC market during the 2008 recession.]
Apple bore the brunt of Sept. 29's massive Wall Street bloodbath, with its share price down nearly 18 percent from market open the day before. Apple probably won't recover this value for some time, even with Sept. 30's gains.
What a way for Apple to close the quarter in which it released the iPhone 3G and where the future looked so bright that CEO Steve Jobs had to wear shades.
America's financial crisis has done to Apple what Microsoft and other competitors couldn't: shake confidence in one of the hottest tech consumer companies on the planet. Wobbly confidence isn't just about shares, but sales. Interestingly, parallels to Apple's last share crisis offer lessons for holiday 2008—and for competitors as much as the Mac maker.
Apple's problems loom larger, however. That's because so much of Apple's success is about perceptions: How the company manages them and how customers, investors and partners view Apple. One more time, I'll assert: In business, perception is everything.
But for Apple, perception matters even more because of the star-quality, image-matters-most face the company puts forth. Changes in perception can lead to drastic changes in fortune, as the last day and a half of trading show. Because perceptions are more emotive than factual, people's reactions to them are quicker.
Sept. 29, investors perceived Apple to be more exposed than most other high-tech companies because of two ill-timed and quite possibly misguided financial analyst reports. RBC Capital analyst Mike Abramsky downgraded Apple based on a 90-day purchase planning survey, and Morgan Stanley analyst Kathryn Huberty lowered her share targets based on subnotebook sales. For almost any other high-tech company, two analyst reports—particularly when disputed by other experts—wouldn't have so badly clobbered the stock, even on a day of enormous anxiety on Wall Street.
Fortune's Apple 2.0 blog has an amazingly insightful analysis about the RBC Capital report. RBC conducted its buying survey with ChangeWave, which issued its report on Sept. 23, or six days before Mike Abramsky sounded the alarm. I looked over Fortune blogger Philip Elmer-DeWitt's analysis and two versions of ChangeWave's report (the other here) posted online. RBC's interpretation doesn't jive with ChangeWave's. Philip writes:
"RBC's version of the survey showed that the percentage of technology consumers who plan to buy a Mac in the next 90 days had dropped from 34 percent in August to 29 percent in September, the biggest such decline in more than two years. ChangeWave's version ... focused on corporate purchase plans. ... The percentage of companies planning to buy Apple desktop or laptop computers over the next 90 days [declined] from 8 percent to 7 percent for laptops and from 6 percent to 5 percent for desktops."
These are not dramatic declines, particularly in context of other factors. As I blogged on Friday, one out of every three dollars spent on laptops at U.S. retail goes to a Mac laptop. With respect to businesses, ChangeWave's Paul Carton ends the blog version about the report: "Apple planned purchases are off 1-pt from their all-time highs, but our survey still shows big upside growth opportunities for Macs in the corporate market."
I'm convinced that RBC's Mike Abramsky created an unnecessary panic about Apple sales and shares. But it's a perception problem. Too much of how Wall Street views Apple is about image, not substance.
Mike's somewhat askew analysis is different from Morgan Stanley analyst Kathryn Huberty's thinking. She cut Apple based on strong sales of sub-$1,000 notebooks, a category in which Apple doesn't compete. Mea culpa. I made the same observation last week: Apple is pricing high in a market buying low. Long term, I think Apple will either need to introduce some notebook so cool consumers will pay more for it or cut prices.
That said, Apple's U.S. retail notebook share, as measured in dollars, is a shocking 35 percent. There's strength in those higher prices. Apple's strategy needs revision, however, given that notebooks account for the largest chunk of revenue. But I don't see how Apple's risk and higher sub-$1,000 notebook sales justify Kathryn's $63 reduction in her share target—$115 from $178.
On Sept. 30, Apple shares closed at $113.66, compared with the day before's close of $105.26. On Monday, the stock opened at $128.24. The questions for investors: Is Apple's stock a good buy or is Apple more susceptible to larger macroeconomic uncertainties? Remember: Apple is more subject to perception changes affecting the share price. When times are perceived to be good, they're really good. Negative perceptions can drive down the share price. Way down, as yesterday shows.
Lost market capitalization reveals what damage perception can do. Apple's valuation has fallen more than 40 percent since early August, but receded to a 37 percent decline during the day's trading. Apple lost about $16 billion in valuation during the first hour of trading Sept. 29, but only recovered about $3 billion Sept. 30.
In the second part of this analysis, I will look back eight years to the day—Sept. 29, 2000—when Apple shares last plummeted and to the recession that ruined the millennium holiday PC selling season. What do these intertwined events foreshadow for today? Read on to find out.
[Please send your tips or rumors to watchtips at gmail.com.]
Comments (2)
God knows, why Fundamentals don't prevail here. Do people realize that iPhone revs, the 3rd leg in Apple's three-legged chair has barely added to the bottom line since Apple is using deferred revenue accounting? That's booked cash-flow that is just waiting to be recognized. If anything, Apple will continue to beat estimates as iPhone sales ramp up, and more quarters are put into the deferred category. That huge increase will smooth any drop in growth in computers.
There are going to be winners and losers at any point in a market cycle. Apple is still fundamentally as strong as any company out there.
Back during the last recession, Apple innovated their way above the morass, as Steve Jobs said he would. There's no reason to doubt he won't do it again, and this time, he's starting from a position of strength, not weakness.
Posted by KenC | September 30, 2008 9:54 PM
Why so much flack heaped on Apple? just compared Apple's stock fluctuations with other tech stocks and they come off better than most and yet is there shouting from the roof tops that Rimm, HP, Dell are doomed - not a bit of it.
The bears are stalking and looking to Apple for a pay out in 6 months time is all. No other stock has that possibility.
The crisis is the market's problem - not Apple's which as far as I can see has more upside possibilities than all the other tech stocks put together. Apple's Q4 figures due soon will show the best possible tech sector outcome - all the rest will be downhill bigtime since they have no real 'product quality' value - only cheapness.
As Steve Jobs said before "We will increase R&D and innovate ourselves out of market problems when the fears lift"(paraphrased)
Posted by flint | October 1, 2008 6:40 AM