Apple Crashed Before—and Survived

[Editor's Note: This is the second of two parts looking at Apple's share price sell-off. Part 1 looks at perceptions about Apple that led to a 37 percent decline in valuation since mid-August.]

Perception is the problem, about Apple and the broader economy. There, lessons learned from Apple's last stock crisis, during an earlier recession, foreshadow the future.

First a recap: Sept. 29's failed $700 billion bailout, which Congress rejected, sent the U.S. stock market free falling. Two negative analyst reports exacerbated Apple's losses. Shares fell nearly 18 percent, for the company's greatest share catastrophe in eight years.

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Now for a look back: On April 19, 2000, Apple brought forth an early and bountiful harvest. The company reported a profit of $233 million and beat analysts' earnings-per-share forecast by 8 cents. Apple announced a 2-for-1 stock split, with its shares closing at $121.75.

Exactly three months later, Apple announced the trendy, but pricey Power Mac G4 Cube. But Apple brought out Cube at the wrong time and for too high a price. The seemingly recession-proof PC market was about the take a major sales hit. Here's an irony: Apple's last stock crisis came on Sept. 29, 2000, exactly eight years to Monday's share free-fall. On Sept. 28, 2000, Apple issued a profit warning because of slow sales, particularly the G4 Cube. The next day, its shares plummeted nearly 50 percent, from $53.50 to around $28 in early trading.

On Dec. 6, 2000, Apple acknowledged 11 weeks of inventory in the channel. What's normal: three to four weeks. Apple shares fell 16 percent to $14.31, their lowest closing since June 1998. On Feb. 9, 2001, Apple shares plunged another 14 percent, following the second straight quarterly profit warning.

Apple's earlier stock malaise and negative Wall Street perceptions persisted for years. For example, on Jan. 7, 2003, Merrill Lynch analyst Michael Hillmeyer advised investors to sell Apple shares. The stock closed at $14.85. It would be 2004 before Wall Street started loving Apple again, bolstered by confidence in the iPod.

I don't yet expect this kind of malaise to hang over Apple shares. Already, the stock is up considerably, closing Tuesday at $113.66 compared with Monday's close of $105.26. On Monday, the stock opened at $128.24. But this also is a stock with a $200-per-share target and at a time of increasing economic concerns. Lost market capitalization reveals the extent of damage. Apple lost about $16 billion in valuation during the first hour of trading Monday, but only recovered about $3 billion Tuesday. Apple has a crisis for which the company must help manage perceptions. Should Wall Street believe Apple has worms, even if there are none, the stock could languish again, even if not as severely.

Parallels in Recession History
There are some surprising market similarities with Apple's 2000 crisis and the one going on today. PC sales were generally off during holiday 2000 for all manufacturers. Compaq, Gateway and other OEMs also saw steep computer sales declines, and most PC makers selling through retail saw their inventories pile up. According to NPD, for the week of Oct. 22, 2000, U.S. retail PC unit sales plunged 27.9 percent year over year. Double-digit declines pushed into the holidays.

During autumn 2000, the U.S. recession hit consumer spending. Eight years later, regardless of the failed $700 billion bailout and financial institution shakeup, another recession is here. The question to ask: What will be the impact on consumer spending? Related: How will perceptions about Apple and consumer spending affect not just the Mac maker but all tech companies? Will this be the year that Santa leaves all the gadgets on the Island of Misfit Toys?

Another parallel is eerie. For second quarter 2000, industry analysts reported 16 percent year-over-year PC shipment growth—and forecasts for the second half showed solid, though slowing, growth. Two weeks ago, IDC raised its forecast for worldwide PC shipment growth to 15.7 percent. Sales forecasts are again rosy from industry analysts, but not necessarily their financial counterparts.

Monday, RBC Capital raised concerns for both business, and consumer spending for the next 90 days. A survey showed a decline in buying intentions among both groups. RBC raised the alarm, and Apple fell. But those buying intentions led Wall Street to make some wrong assumptions about Apple, methinks.

There is a big difference between 2000 and 2008: where people are buying. In 2000, North America was the major market for most computer companies—and this was particularly true for Apple—with Europe as the secondary market. Something else: Product portfolios weren't much diversified from the PC.

Today, biggest PC sales growth comes from international markets, and more computer manufacturers—Apple among them—sell products outside the United States. IDC expects U.S. PC shipments to grow about 5.7 percent this year, compared with 19.1 percent for international markets. International growth for laptops is expected to be 44.1 percent.

International sales accounted for 42 percent of Apple's fiscal 2008 third-quarter sales, which seemingly insulates the company from some of the U.S. economic woes. That said, Apple sales declined in most major international markets during the third quarter. Apple's fourth quarter ends Sept. 30.

I believe that Apple's resilience is much stronger today than during the last recession. International sales are but one reason. Diversification is the other. In 2000, Apple sold Macs. Today's product portfolio includes cell phones, computers, music players, servers, set-top boxes and lots of software. That said, Apple sells pricey products that likely will lose some appeal during tough times.

If the U.S. economy really does go to hell, tech companies with wide international reach, particularly emerging markets, have the least to worry about. Among U.S. computer manufacturers, HP is perhaps best positioned to weather any economic storm, because of its deep business and consumer reach, large percentage of international sales, and broadly diversified product portfolio. Among software companies, Microsoft is largely insulated, too. As for Apple, it's still wait-and-see. But Monday's massive sell-off was over reactionary.

Go back inside Chicken Little. The sky isn't falling.

[Please send your tips or rumors to watchtips at gmail.com.]

Posted by Joe Wilcox on September 30, 2008 4:56 PM