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Wednesday, October 22, 2008

The problem with Apple (AAPL)

Spectacular quarter relative to expectations that we all knew were too low. They threw out numbers when they guided last quarter that were far below what most analysts considered feasible. They claimed they had new innovative products that would create 300 bps of gross margin downside. Then they never shipped that product -- or it never existed in the first place -- it's unclear what happened exactly and Apple is terribly secretive about new products so who knows if we'll ever find out what it was.

For next quarter they threw out another terrible number relative to consensus. I have to tell you, the Apple data has weakened significantly over the last month (but its not unique to them). I've heard statistics like September foot traffic in the stores is down 15%. NPD data indicated iPods shrank 3% y/y in September even with a total refresh of the line. Macbooks, which accelerated to 30% y/y growth in July and August saw their y/y growth rate halved to 15%. The blowup in the credit market is clearly the culprit behind the slowdown. The company said this is a tough economy to game and they want to be conservative... and that's why their guidance is weak. I totally hear that and I think it's prudent.

I'm looking at the stock up 8 and wondering why they're not getting believed. It didn't blink last night before shooting up 10. The Apple cult is undeniably the strongest in the stock and consumer electronics market. There is an undying faith in their ability to innovate and deliver easy to use products that take the technology out of the picture and let the user access their content without having to be a programming geek. And that's great.

Apple products remain overpriced relative to other offerings. Apple stock price, while cheaper than it once was, is still at a premium to its peers (if you can call its competition peers). Apple, while always cautious when they guide, may actually be telling the truth this time. Their business (along with everyone else's) has lost a lot of momentum. iPod may be in a dangerous slide. iPhone is a great product but there's no next act for it near-term -- 3G is as far up the curve as they go for now. Admittedly, the stock has been pounded to its 2007 lows in the face of much success.

This is a market of broken faith. Kool aid drinkers die in this environment. I'm struck by the lack of pause from investors. They're great, don't get me wrong. And they're notoriously conservative about their outlook. However, the world has changed. I think they could have been even more conservative than they were in light of the September data. I don't like the stock here at all.

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