Investors Sour on Apple After Tepid Forecast

The Cupertino, Calif., consumer-electronics dynamo projected fiscal fourth-quarter earnings of $1 a share, well below analysts' consensus expectations of $1.24 a share for the three months ending Sept. 30. The guidance overshadowed solid results for the fiscal third quarter, when profits rose 31%, coming in at $1.19 a share, up from 92 cents a year ago and ahead of the Thomson Reuters consensus estimate of $1.08 a share. Revenue rose 38% from the year-ago quarter to $7.46 billion. Analysts expected sales of $7.37 billion.

Apple's finance chief, Peter Oppenheimer, said on a Monday evening conference call that growth was driven by the highest quarterly Mac shipments ever, and higher revenue from iPod, iTunes and iPhone, the letter of which turned a year old on June 29. The newest version of the iPhone, the 3G, launched last month.

"We expect revenues in fiscal 2008 to be about $32.4 billion, an increase of 35% year-over-year," Oppenheimer said. "We also remain very excited about our product pipeline, and look forward to delivering more great new products later this year."

Fourth-quarter gross margin would be about 31.5%, said the CFO, down from 34.8% in the June quarter. That includes $23 million in stock option expenses. He attributed the sequential decline to the impact of the back-to-school promotion; a future product transition, "which I can't discuss today"; and one-time adjustment of the deferred margin of Apple's contract manufacturer from the June quarter.

Morgan Keegan analyst Tavis McCourt wonders why, since the company's been providing plenty of visibility. "Remember the 30% Gross Margin Days? They're Coming Back," he wrote in a Tuesday research report.

"Apple has stated countless times in 10-Q filings that gross margins will come down in future periods, yet investors have paid little heed to these warnings," he says. "We suspect the investment community will take these claims more seriously after management guided for gross margin of 31.5% in fiscal Q4 and added 'We would anticipate gross margins being about 30% in fiscal 2009.'"

That could mean lower prices for some products and lower prices on new products, he said.

Vijay Rakesh, at ThinkPanmure, wrote that the sales of Apple products aren't stopping — the company is now tied for No. 3 in domestic personal computer sales, and the 2.5 million units it shipped represent a 41% growth rate from the year-ago quarter.

"With the stock off 10% in after hours, we recommend that investors take advantage of the price weakness to build core positions in Apple," he wrote Tuesday. "We believe AAPL [is] lowering Street expectations, while building a global Mac and handset franchise, bodes well in the long term for the stock, concerns of CEO Steve Jobs' health aside."

Jobs' recent gaunt appearance has generated considerable rumor-mongering in the blogging and investment communities, and Oppenheimer made the company's first statement on the matter during the Monday call.

"Steve loves Apple. He serves as the CEO at the pleasure of Apple's board and has no plans to leave Apple. Steve's health is a private matter."

Keith Bachman, at BMO Capital Markets, wrote Tuesday that while Apple can assert privacy concerns, "Apple is a public company and Steve Jobs is the clear leader. We believe that questions about Steve's health will weigh on the stock until he, at some point, looks better, in a public forum."

Whether investors and the public have their curiosity satisfied remains unclear. But what remains dominant is Apple's ability to produce electronics and computing products the public loves, even if there's less predictability or rosy forecasting now than the stock has benefited from at other times.

Investors who see a pattern in Apple's low-ball estimates should be able to use Tuesday's weakness to their advantage, even if the rewards are a little less robust in future.

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