September 24, 2008

As Apple Shares Slide, What About Sales?

Apple Inc. tends to prove unstoppable even when other computer makers falter. In the most recent quarter, shipments of Macs surged 41%. That's nearly three times the 15% global growth rate for PCs in general.

But in the current quarter, as markets slide, banks go belly-up, and consumer confidence plunges, even the Apple (AAPL) growth engine may hit speed bumps, say some analysts who are revisiting their estimates just a month before Apple is due to report quarterly earnings for the period that ends Sept. 30. Concerns, including slumping demand for laptops and a strengthening dollar, helped drive down Apple's shares more than 29%, to 126.84, on Sept. 23 from 179.32 on Aug. 14.

One of the bright spots of Apple's last several quarters has been its MacBook and MacBook Pro lines of notebooks, which in the quarter ended June 28 accounted for more than $2.2 billion, or almost 30% of sales. In a Sept. 22 research note, Samuel Wilson of JMP Securities in San Francisco pointed to potential weakness in notebook sales.

Stealth Survey Wilson called 20 Apple stores and 10 Best Buy (BBY) stores and concluded that demand might soon weaken for the higher-priced MacBook Pro, which starts at $1,999, vs. the less expensive MacBook, which starts at $1,099. "When asked whether we should consider a MacBook or a MacBook Pro, we were repeatedly told that the Pro is designed for the design community, with a high-end video card and a large screen, and that we would be better off with a MacBook for the cost," he wrote. Employees at Apple stores proved 40% more likely to push the MacBook Pro than their counterparts at Best Buy, he found.

Chip suppliers in Asia report that Apple has been canceling orders for computer memory chips, according to Wilson. "The reasons for the cancellations might be entirely benign but could also indicate that demand isn't meeting forecasts," he says.

Morgan Stanley (MS) analyst Kathryn Huberty sounded a similar note in a report issued on Sept. 22. The investment bank cut its price targets on several tech companies, including Apple, citing a strengthening U.S. dollar, which can reduce the value of overseas sales, and other signs that demand for computers and other info tech hardware is slackening. Morgan Stanley also cut targets on Dell (DELL), Hewlett-Packard (HPQ) and IBM (IBM). The bank expects "less-than-normal seasonal growth for global PC and handset shipments in the second half of 2008 and 2009," Huberty wrote. "We expect companies to guide to worse-than-normal revenue growth for the December quarter."

Huberty trimmed her 2009 revenue estimates for 21 tech hardware companies by 3% and earnings estimates by nearly 6%. "We also see additional earnings-per-share downside if the current state of capital markets further limits the ability to finance share repurchases, invest for growth, and finance customer purchases," Huberty wrote.

Mixed Signals The casualties of the soft PC sales environment are already piling up. In a presentation at a Bank of America (BAC) conference on Sept. 16, Dell Chief Financial Officer Brian Gladden bluntly complained of a "very weak August" with sales that were "weaker than usual" and that sales hadn't snapped back in September.

Will Apple be one of those casualties? Gene Munster at Piper Jaffray (PJC) thinks not. In a note issued on Sept. 22, he said the latest data on retail sales from research firm NPD suggests that Apple may be holding its own despite the weaker economy.

Munster raised his estimate for Apple's per-share earnings to $1.17 from $1.11 and boosted his revenue forecast to $8.37 billion from $8.07 billion, mostly because he thinks sales of Macs, iPods, and iPhones will be higher than previously expected. Citing NPD, he says Mac sales were up 32% in July and August. "Even if we assume continued year-on-year growth of 23% in September -- which we believe is conservative -- the overall year-on-year growth rate for the full quarter would come in at 29%, implying 2.8 million Macs in the September quarter," Munster wrote, which would represent a boost above prior estimates by 300,000 units.

Additionally, Munster wrote, for the first time the iPhone will account for a meaningful percentage -- he thinks 21% -- of booked revenue. Apple records revenue from the sale of iPhones over 24 months, so as more iPhones are sold, a more predictable stream of revenue emerges in succeeding quarters. He says booked revenue could total more than $10 billion for the quarter.

Saved by Demographics? Shaw Wu of American Technology Research in San Francisco shares the upbeat view. "In two of its three big franchises, Mac and iPhone, penetration is very low and starting in the higher-income demographics," Wu wrote on Sept. 22. "The disturbance in the macroeconomic environment is within lower-income demographics. We believe AAPL's business will remain strong in the near- to medium term. Enough high-end consumers are still buying tech."

Asked during a July 21 earnings conference call about the state of the economy and any visible effect on Apple's sales, CFO Peter Oppenheimer dodged the question, saying he'd "leave the economic commentary to others" and that he saw no "obvious impact to our business." The question may be harder to dodge next month.