Is the turnaround over at Apple Computer?

Andrea Orr

PALO ALTO: Is the comeback over? Apple Computer Inc.'s warning that upcoming

earnings would fall short of forecasts set off fear among investors who

responded with deep concerns that that the company had lost its winning vision

or its fiscal discipline. As a result, half the company's market value

evaporated overnight.

To the astonishment of many market watchers, who are accustomed to seeing

stocks nosedive on bad news in thin after-hours trading only to regain ground

the next day, Apple shares didn't have the slightest bounce on the day after.

After tumbling from a Thursday close of $53-1/2 to around $29 when the earnings

warning came out, Apple shares continued to move lower on Friday, closing the

regular session down $27-3/4 a share to $25-3/4.

Analyst with Gerard Klauer Mattison Dave Bailey said the stock price appeared

especially vulnerable to any signs of trouble at Apple, because "there have

always been a lot of doubters in the Apple story." As recently as two

months ago one industry analyst had described Apple's relationship with

investors as akin to a reformed alcoholic, always just one step away from the

gutter.

Ironically, the company’s warning that its fourth quarter earnings would be

as much as 33 per cent below forecasts came at a time when the Apple doubters

were finally quieting down. After more than two years of strong results, the

launch of several innovative designs and the triumphant return of Steve Jobs as

chief executive, it was beginning to look like Apple's winning streak would

last.

But the doubters came back in force on Friday. "Apple's miss really

points to one of two things: Apple's comeback is over; or there was a worldwide

softening in consumer PC demand in September for all PC vendors," Salomon

Smith Barney analyst Richard Garner wrote in a research report. "We are

casting our vote that this problem is unique to Apple." Kurtis King of

Montgomery Securities was equally concerned, writing, "To the extent

there's a Mac demand problem, there's likely not a quick fix."

Industry analysts were reduced to this sort of vague speculation because of

the lack of information from Apple, which said it would not comment further on

its outlook until October 18, when it reports earnings. But they said it did not

help that Apple advised it would reduce growth targets into next year, and that

its sales softness was spread across every geographic area and some core

products like its brand new Power Mac G4 Cube computer.

"I think the biggest surprise at this point is that it appears demand is

down in all market segments and all products," said Bailey. "We've

been seeing some weakness in buying in the corporate space, the government and

in Europe. It now appears this weakness extended to computer sales to schools,

where Apple is a major player."

Whether the soft sales reflect a shift in consumer tastes away from its

colorful and unusually shaped machines remains unclear. At least one analyst

said that to the contrary, Apple appeared to have stumbled in the manufacturing

progress, and failed to keep up with the brisk demand.

"It appears that their new products just aren't getting to the

stores," said Allison Boswell, a market researcher who surveys retailers

for The Boswell Report. "I don't think people have stopped wanting Apple

products," said Boswell. "I think this is a screw-up that Apple

made."

Boswell said that several stores she tracks have limited Apple inventory and

that retail inventory across the board had been declining for the last five

months, falling to "particularly alarming levels" in the past two

months.

Because of the limited supply, Apple's performance had deteriorated in key

retail outlets like Sears and CompUSA, in some cases falling even behind IBM,

which has only limited product offerings in the consumer PC market.

Asked about possible supply problems, an Apple spokeswoman said Friday,

"I'm not going to speculate on what other people are saying."

Regardless of the source of Apple's problems, not everyone was ready to

dismiss the company. Boswell said she thought the supply problems were "a

glitch," and Bailey of Gerard Klauer Mattison did not downgrade the stock.

Bailey kept a "buy" recommendation on Apple shares, saying they

probably represented a value at less than $26 a share. But he added that all

forecasts were difficult until more was known about what had gone wrong in the

first place.

"We're clearly still cautious," he said.

(C) Reuters Limited 2000.