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When Apple (AAPL
) CEO Steve Jobs told analysts in a Dec. 5 conference that the company was going to miss revenue expectations for its fiscal fourth quarter, many people wrote it off as yet another disappointment from a company that has produced so many of them. And while the stock dropped only 15.8%, this announcement is far more serious than a tech-stock hiccup.
Apple didn't just miss the bull's-eye for the quarter, it missed the whole dartboard. Instead of $1.6 billion in revenue and $100 million in profits, as Jobs had led the Street to believe would happen, the company now thinks it will sell only $1 billion worth of computers and will actually lose $250 million.
The revised expectations come less than two months after Jobs scaled back revenue and profit forecasts for the same quarter. On that go-round, the stock plunged 52%. At $15 a share, Apple is now 80% off the 52-week high of $75.18 it reached in March. No question about it: This latest disappointment's repercussions are far reaching.
LIMITED OPTIONS. Investors may be asking themselves what Apple can do to revive its fortunes. The likely answer, unfortunately, is that Steve Jobs has no white rabbits left in his hat. Apple appears to be facing a dead end in its business growth, the victim of mismanagement and unmitigated hubris. Apple lovers are a loyal bunch, and they'll probably stick with the company. But Jobs's dream of becoming the world's biggest computer-maker will likely remain just that -- a dream.
The good news for Apple investors who haven't yet unloaded their shares is that bankruptcy isn't a threat this time. That's only because, in the course of its most recent profitable run, management stockpiled a $4 billion cash hoard, which will come in handy as the company faces mounting operating losses. "Normally, I would like to see such a huge amount of cash generating higher returns," says S.G. Cowen Securities analyst Richard Chu. "But in this case, now is a good time to have a lot of cash, and I'm glad they have it."
Nevertheless, if the current quarter's $250 million repeats, $4 billion isn't as much as it seems. Continued losses at this rate would eat through that cash stash in only four more years. While that's a Methuselah-like time span for a dot-com, it's not heartening for a 23-year old computer hardware company.
TROUBLES CUBED. In the face of all this bad news, Jobs's explanations don't exactly inspire the market with a sense of confidence. While he admits that Apple's lower processor speeds have hurt sales, he puts most of the blame on an industrywide global sales slowdown. "I'm not proud of this," Jobs said in a company release. "But I do want to point out that much of this is due to our unwavering commitment to reduce our channel inventories to normal levels by the end of this quarter so we can enter calendar year 2001 clean."
What's contributing to Apple's woes? Plenty -- but let's start with an insane pricing policy. The most recent product launch under Jobs was the Cube, a gleaming box that looks more like a stainless-steel tissue dispenser than a computer. It's a beautiful piece of engineering, but no one at Apple thought to ask whether consumers would be prepared to pay $1,800 for a computer that, no matter how aesthetically pleasing, is now technologically run of the mill.
And it's not only the Cube that's priced wrong. I visited Apple's online store and compared its top-of-the-line G4 to a similar model offered by Gateway on its Web site. The 500-megahertz dual-processor G4 with 256 megabytes of memory costs $7,598 from Apple. A 700-MHz Gateway with a single processor boasting the same memory goes for $2,549. Take out the huge $4,000 Apple flat-panel monitor and the $700 Gateway monitor to make a better comparison, and there's still an $1,800 price differential.
SLOWPOKES. Which brings us to Apple's next biggest problem: Its hardware just can't compete with Intel's (AMD
) both offer chips running at over 1,000 MHz now. The reason isn't entirely Apple's fault. Its chips are made by IBM (IBM
), which has essentially stopped spending money on developing them. Meanwhile, Apple has refused to see the light and lower prices now that its offerings have fallen off the pace.
Even more frightening for Apple shareholders is that a familiar ghost has come back to haunt the company: inventory mismanagement. In years past, Apple was notorious for either being over- or understocked. Compare that to competitor Dell's legendary inventory management, which usually sees its shelves containing no more than a few days worth of computers.
Things seemed to be looking up the past few quarters thanks to a company plan to reduce inventory to a five-week supply. For a while, it seemed to be working. But another tidbit from Jobs's Dec. 5 announcement was that the company now has close to an 11-week stock of computers gathering dust. To clear that inventory, Apple will have to offer enormous price breaks, hence the $250 million loss.
BEYOND FANATICS. But probably the greatest brick wall that Apple has hit is its failure to extend the popularity of its computers beyond two relatively small niches: graphic design and education. After all, there are only so many New York-based graphic designers and public schools with budgets big enough to afford expensive Apples.
For years, Apple's base of customers has shown fanatic loyalty. But growth depends on being able to broaden that narrow band of users, which represents only about $6 billion in sales per year. "It appears that the reality for the company is that it's unable to break out of a $6 billion to $7 billion run rate," says Bear Stearns analyst Andrew Neff. In his words, this "implies that its installed base replenishes itself but does not grow." He has a neutral rating on the stock.
Apple's greatest hope lies in new product lines, according to Chase H&Q analyst Walter Winnitzki, who also has a neutral rating on the stock. "The beauty of the iMac was that they created an Internet-access device that made you forget you were using a different operating system than everyone else," he says. "That shows that Apple is less of a PC maker now and more of a consumer electronics manufacturer. They need to create new devices that work to that strength of their brand." Winnitzki thinks the handheld market is particularly open to an Apple product.
LONG SHOT. But whole lines of new products take many months, if not years, to create, and Wall Street has little patience. Of the 16 analysts who follow Apple, 11 rate the stock a hold, according to First Call. Of course, Apple loyalists will continue to buy Apples, perhaps at any price. And it's possible that the company can prove the skeptics wrong and come up with some snazzy new products that persuade non-Apple customers to jump on the bandwagon.
That scenario, however, is a long shot. For the time being, with so many disappointments, it's hard to see how the company might manage to turn its fortunes around.
Jaffe writes about the markets for Business Week Online in our daily Street Wise column
Questions or comments? Please visit our Ask Sam Jaffe interactive forum Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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