Apple Shares Rolling Downhill

Fearing recession, consumers rein in discretionary spending, and fewer iPods, iPhones, and Macs may be sold. Will Apple find its footing?

by Arik Hesseldahl

It was Jan. 23, and Apple shareholders were dismayed with the company's forecast for the current quarter. Apple (AAPL) stock was having its biggest-ever one-day decline in dollar terms and Chief Executive Steve Jobs felt a need to reassure the troops. "Hang in there," Jobs wrote in an e-mail to employees. "Our stock is being buffeted around by factors a lot larger than ourselves."

He can say that again.

For the better part of last year, a bet on Apple stock was a sure thing. Propelled by seemingly unquenchable demand for iPods, iPhones, and Macs, Apple shares surged to a record 199.83 on Dec. 28, after starting the year at 83.80 on Jan. 3. Analysts nudged price targets ever skyward; Piper Jaffray's (PJC) Gene Munster said Apple stock could reach $250 a share in 2008. By the end of 2007, Apple's market value had swelled by $100 billion.

Hit by Sinking Consumer Confidence

But since the start of the new year, Apple's stock has hit an air pocket, spiraling $75 from its high point and giving back two-thirds of the gains it made in 2007. It closed Feb. 12 at 124.86. Part of the slide can be attributed to disappointment with products unveiled at the annual Macworld Expo in January. In the two days after Jobs announced the ultraslim MacBook Air, movie rentals through iTunes, and software upgrades to other products (BusinessWeek.com, 1/15/08), Apple stock fell more than $19. By contrast, the shares gained $11 in the two days after Jobs announced the iPhone a year earlier.

Much of the rest of the descent can be pinned on worsening consumer sentiment and questions over how big an impact the resulting decline in discretionary spending will have on Apple. Some investors are betting Apple will bear a bigger brunt than other tech bellwethers. The concern was fueled Jan. 22, when Apple issued a sales forecast for the current quarter that failed to match analysts' forecasts, and it's only been heightened by economic reports and surveys since then.

Fear that the economy is headed for recession, along with higher prices on items like groceries and gasoline, is causing consumers to rein in spending on nonessential items. A January survey by Discover Financial Services (DFS) found that 70% of consumers think the economy is in decline, and nearly half say they plan to make fewer discretionary purchases in February. "The first place they cut back is on entertainment purchases, and the second is on home improvements," says Discover's Margo Georgiadis. She says iPods and iPhones fit the first category and computers the second. A study released Feb. 8 by Royal Bank of Canada (RY) showed U.S. consumer confidence at its lowest level in the six years since the bank's yardstick was created.

Lagging Other Tech Stocks

Even those who want digital music players and other Apple products may not have the means to buy them. On Feb. 7, the Federal Reserve said consumer credit rose by $4.5 billion in December, compared with the $8 billion expected by Wall Street analysts, and down from an average monthly rate of $14.3 billion in the third quarter.