Huh? Apple stock dips as revenues, earnings soar

Posted by Dennis Sellers Jan 23, 2008 at 8:31am

Apple reported its best quarterly revenues and earnings in the company’s history yesterday. However, after the company said earnings in the March quarter would come in 14 percent below analysts’ expectations, the share price fell more than 11 percent, to $137.93.

But Apple is well suited to deal with an economic contraction, especially with its Mac business, which the publication describes as “scorching—particularly the desktop iMac, whose sales grew 53 percent in a market that expanded just 10 percent.”

“The Mac is on fire,” Needham & Co. analyst Charles Wolf told BusinessWeek. He notes that Mac sales rose by 200,000 units in a quarter when Mac sales are usually flat.

What’s more, strength in the personal computer business is much more of a positive than slightly disappointing iPod sales are a negative. For starters, the profit on one $1,500 iMac (roughly $500) dwarfs the $140 profit on an iPod touch (assuming both products’ profitability is close to Apple’s overall 34.7 percent gross margin), notes BusinessWeek. And while Apple dominates the global $28 billion market for MP3 players, it still has less than five percent of the vast $258 billion computer market so still has plenty of room to grow, says IDC senior analyst Danielle Levitas.

What’s more, many analysts are still bullish on Apple. The decline in Apple shares was too large and reflects “a recession scenario,” Richard Gardner, an analyst at Citigroup, told Bloomberg. He reiterated his “buy’’ rating. The stock is cheap, given that free cash flow per share will increase 20 percent to 25 percent during the next two years, Gardner said in a note to clients.

“The iPod unit number for the knee-jerky types will disappoint,’’ Jim Grossman, who helps manage more than one million Apple shares at Thrivent Asset Management in Appleton, Wisconsin, told Bloomberg. He says he’ll probably add to his Apple holdings because of demand for the Mac.

Andy Hargreaves, an analyst with Pacific Crest Securities, told the SF Gate that Apple is still on target and is just engaging in its typical close-to-the vest behavior. He was impressed by last week’s announcements of an updated Apple TV with online movie rentals and the new MacBook Air.

Hargreaves said what has changed for Apple are the expectations, which have soared in the past year. But he said he doesn’t see why Apple can’t keep up its winning streak. “In terms of momentum, I don’t think it’s slowed at all,” Hargreaves told SF Gate.

Some analysts said fear about slowing consumer spending was overblown in response to Apple’s results and the company may have been a victim of its own past successes.

“I think it’s more of the whisper numbers on Apple just got incredibly high,” Jane Snorek, senior analyst of technology stocks for First American Funds, told the Associated Press. ”(There were rumors) of $10 billion in sales and $2 per share in earnings and that they might raise their guidance. And when they kind of report in line and guide down like they’re supposed to, like they should be doing, it’s a big letdown.”

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