Apple Shares Nosedive on Limp Outlook

Apple stock quickly plunged more than 11 percent in after-hours trading Tuesday, in the wake of the earnings release. In morning trading Wednesday, it was down about US$25, or 16 percent, to $130.25, just weeks after the stock topped out above $200 for the first time in its history. The drop wiped out more than $15 billion worth of market capitalization.

The investor reaction came despite a strong fiscal first quarter that saw Apple post revenue of $9.6 billion, up 35 percent from $7.1 billion a year ago, and record quarterly profit of $1.58 billion, up from $1 billion in the year-ago time frame. Apple beat Wall Street consensus outlooks on both profit and revenue.

'Confident in the Business'

Though there was strength across the board, the Macintosh computer led the way, with 2.319 million units shipped, 44 percent more than the year before.

Apple starts 2008 with "an incredibly strong new product pipeline," CEO Steve Jobs said, citing iTunes Movie Rentals and the MacBook Air, debuted at the Macworld expo last week.

Chief Financial Officer Peter Oppenheimer projected second-quarter revenue of $6.8 billion, which would represent a 29 percent year-over year gain. Analysts had been projecting revenue of $6.99 billion, on average, and profit of $1.09 per share, well ahead of the 94 cents that Apple now says it will make in the second quarter.

Apple has long been known for issuing conservative forecasts and then handily beating lowered targets the following quarter, but the amount by which it lowered the bar for the second quarter alarmed analysts and investors. Oppenheimer spent much of a conference call with analysts defending and explaining the outlook.

"We provide guidance that we have reasonable confidence in achieving," he said. "We remain very confident in our business and our products and our strategy. Macs just had a terrific quarter and we announced some exciting things at Macworld. We remain very confident in the business."

iPods and the 'R' Word

Oppenheimer tried to steer clear of the question of whether the U.S. is entering or is already in a recession and what impact that might have on sales of Mac products, many of which are considered discretionary items or higher-cost alternatives to others in the market.

"In terms of the economy, we'll leave the economic forecasting to others, and we are focused on managing our business," he noted.

In the first quarter, Mac sales remained a major driver of growth for Apple, with the personal computers enjoying some of their strong sales ever.

The launch of the Leopard operating system also boosted Apple's results, with revenue from the OS coming in at $170 million, compared with $100 million in revenue during the first quarter of the Tiger release's availability. The company's retail stores also performed well, generating $1.7 billion in revenue, up 53 percent. The stores sold 64 percent more Macs than the previous year.

iPod sales remained robust but showed signs of slowing growth, with 22.1 million units sold, an increase of 5 percent over the previous year. Revenue from iPod sales, however, rose 17 percent, boosted by the introduction of the iPod touch, Oppenheimer said. The touch's higher price point drove the average iPod selling price to $181, he added.

Reaching Market Saturation?

Apple's position at the higher end of the consumer market could expose it to a slowdown if a recession forces consumers to retrench, said Piper Jaffray analyst Gene Munster.

iPod sales growth has been declining for some time, Munster told MacNewsWorld, possibly suggesting market saturation will be reached. With music and related devices and online music and video sales combined making up half of Apple's revenue, further slowdown could be significant.

"People looking for things to worry about were able to find things in the iPod numbers and the outlook," Munster said.

iPhone on Track

Apple sold 2.3 million iPhones during the quarter,and has now sold 4 million iPhones. The company remains on track to meet its prelaunch goal of selling 10 million of the handsets by the end of this year, it said. The device debuted in several key European markets in the first quarter.

The fact that the iPhone could perform so well but that Apple's overall results be at issue is a reminder that the device is just a small part of the company's business, telecom industry analyst Jeff Kagan told MacNewsWorld.

"The iPhone is a huge success, the likes of which the telecom industry hasn't seen in some time," Kagan said. The device is already impacting other handset makers, such as Motorola (NYSE: MOT) , and the pace of 20,000 phones sold per day that Apple reported will likely prove difficult to sustain. "We have to remember, all the news to come from Apple is not around the iPhone."

The early sales may represent significant pent-up demand, he added, since the device went on sale six months after Jobs debuted it last January. "You have to wonder about whether this growth is sustainable and for how long," he added.