Is the turnaround over at Apple Computer?

By : |September 30, 2000 0

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.

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