Call it the “Dell curse.” On January 13, Apple’s stock-market value vaulted past Dell’s for the first time, and there was no shortage of gloating in the Apple camp. In fact, co-founder and chief executive officer Steve Jobs couldn’t resist sending out a congratulatory email to Apple employees. And who could blame him? In 1997, just after Mr. Jobs rejoined Apple, Dell founder Michael Dell had said the beleaguered company should wind up its business and give the money to shareholders. So a little gloating was probably not surprising.
Unfortunately for Apple, however, the fates don’t appear to look too kindly on gloating. The same day that Mr. Jobs sent that email, Apple’s share price turned around and started heading south, and it hasn’t stopped since. It closed at $85.59 (U.S.) that day, giving the company a market value of about $72-billion. On Tuesday, however, it was trading at $68, putting Apple’s market value at $57.6-billion. Dell’s market value, in case you’re keeping score at home, is just a hair under the $70-billion mark.
When it comes right down to it, Apple and Dell don’t really compete, so comparing the two based on their market value isn’t really that relevant (unless you work at Apple and like to hold a grudge). The larger point is that the company’s share price has been sinking for the past month or so, and has lost more than 20 per cent of its value. Has the market fallen out of love with the reborn consumer electronics superstar, or did expectations just get too high? Or is it simply a blip while the market adjusts to the new Macs that are coming — the ones with Intel chips inside?
A company that is growing as quickly as Apple has been lately, with revenue increases of 60 to 70 per cent in a quarter and profit growth as good or better — and Google would also fall into that category — poses a problem for the stock market. So-called “momentum traders” are happy to trade on the assumption that such growth will continue forever, and thereby keep pushing the shares higher and higher. But “value” investors know that such growth inevitably comes to an end, and therefore they are likely to get nervous when a company with sales of about $16-billion is selling for more than $75-billion. Any sign of weakness will tend to make the latter group sell.
In this case, the signs of weakness came in two forms. The first was when Apple released its quarterly results and its outlook for the rest of the year, which occurred about a week after the comment about the company’s market value surpassing Dell’s. The most recent quarter was a blockbuster: revenue rose by 64 per cent to $5.75-billion, net income almost doubled to more than half a billion dollars, and Apple sold more than 14 million iPods during the three-month period. As a sign of how big a role its iPod sales now play, as opposed to its original computer business, sales of Apple’s digital music and video players hit $2.9-billion in the quarter, eclipsing sales of Macintosh computers for the first time.
While those results were as good as or better than the market expected, the sheer size of the iPod business started some analysts thinking about how dependent the company has become on the iPod — and how selling low-priced consumer devices is a very different business than selling high-margin computer products. As one analyst put it, the pressure is now on Apple to keep one-upping itself with cooler and cooler gadgets, such as new iPod Nano the company announced Tuesday, in order to keep the pace of growth that the stock market has come to rely on. In a sense, Apple has to run faster and faster just to keep its stock in the same place. Although Apple appears to have plenty of tricks up its sleeve — including rumours about a home-theatre product — that is still a very risky game to play.
The second weakness involves the release of the new Intel-powered Macs, which Apple has already started to roll out. While the announcement that the company would be switching to Intel chips was cheered by many Apple users, it also created a bit of a problem for the company — the problem being that plenty of consumers who are in the market for a new computer are likely to delay (and have been delaying, according to Apple) their purchases because they want the new, faster machines. As a result, the company reduced its outlook for the current quarter, and that disappointed some fans of the stock.
Is the weakness in the share price a permanent thing? That’s hard to say. If sales of the new Intel Macs are as hot as fans expect, then the stock could very well look undervalued, particularly if iPod sales keep up at the same rate they have over the past few quarters. And there’s no question that at $68 a share, the stock is probably a lot less risky than it was when it was $85 a share. But in a sense, Apple is in a wait-and-see period, and many investors are likely to wait on the sidelines until it becomes clear which path the company is likely to take.