Why Apple tanked

Apple Computer stock more than halved in value on Thursday in the wake of its announcement that third-quarter profits would be lower than expected. Is The Cube to blame?

          The numbers 53, 111, 26 and 51 tell the tale of Apple Computer's current woes. They refer to the closing price of Apple's stock on Thursday ($US53), to the number of shares that have been exchanged today (111 million), to the stock's price today ($26), and to the reduction in the stock's price (51%).

          Apple faces these numbers due to its announcement Thursday that its third-quarter profits would be lower than expected. Blaming poor sales, especially in its traditionally strong education market, and low demand for its new high-style PowerMac G4 Cube, Apple said that its expected third-quarter profits would be lower than previously forecast, and that its earnings per share would be between 30 and 33 cents, as opposed to the previous forecast of 45 cents per share.

          After the announcement, investment banks Bear, Stearns & Co. Inc, Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. Inc. all downgraded Apple's stock from "buy" to "neutral." And on after-hours trading on the Nasdaq, Apple's share price tumbled.

          Though Apple's Chief Executive Officer Steve Jobs described the announcement as merely a "speed bump," it seems that some bankers and some of Apple's legendary loyal customer base doesn't see this announcement as minor.

          Apple users have vented their frustrations on the message boards at Mac news site MacNN and have blamed the downturn on everything from the prices of Apple's computers to the speed of its processors.

          "The Cube is simply too expensive and should not be selling for more than $1,399 (it retails at $1,799). It's almost embarrassing that Apple doesn't have a complete system for under $2,000 that isn't an iMac, and they haven't for years," wrote a user identified as "eVo."

          Other users were quick to blame Motorola Inc., who, along with IBM Corp., manufactures the PowerPC chip, which is at the heart of every Mac.

          "Point the finger directly at Motorola. When Intel is announcing that they will ship 1.5GHz (Pentium 4s) next month ... and Motorola is still stuck at 500MHz for the foreseeable future ... it makes Macs a very, very hard sell," wrote MacNN user "shadowself."

          Tim Bajarin, the president of Creative Strategies Inc., a technology consulting firm, disagrees about the need for faster computers. Internet access, not processor speed, drives computer sales, he said.

          According to Bajarin, Apple's actual problem is that it misjudged consumer demand on two fronts: the PowerMac G4 Cube and the iMac. The Cube is too expensive and is stuck in between market segments, he said. Apple aimed the computer at the mid-range sector, that is, users who want a machine that offers more power and expandability than the iMac. But those customers are better served by the PowerMac G4 tower, not the Cube, he said.

          Also, Apple's consumer desktop, the iMac, is now three years old and hasn't changed substantially since its introduction, Bajarin said. Changing the colors of the case is not enough, he said. Apple will have to offer something equally radical as the iMac was at its introduction to entice new customers, he added.

          Roger Kay, research director at the International Data Corp. (IDC), agrees, calling the iMac "long in the tooth." (IDC and the IDG News Service are owned by the same parent company, International Data Group Inc.)

          Bajarin and Kay note that Apple's troubles may be related to a factor the company has no control over: the price of oil.

          Both analysts blame the current and possible future upturns in oil and gas prices for keeping some consumers from buying new PCs. When the price of oil starts to rise, people begin to feel pinched and stop buying, Kay said.

          But Kay is optimistic about Apple's future, provided that Steve Jobs stays interested and active in the company. Apple's future "depends on Steve" because Jobs "retains the vision" needed for Apple to create its next great product.

          "There's no question that you have to look at Apple with greater concern" than even at the beginning of the week, said Bajarin, who remains confident that the company has the ability to fix its problems over the next six months.

          One MacNN user, who signs messages with the name "gtabbott," perhaps summed up these feelings best when he wrote, "Hey, people, get over it. This is not time for Apple to shift directions; this blip does not even call for a reevaluation. While I think they should drop the price of the Cube, and would benefit from faster chips, Apple is just fine ... We call this a 'buying opportunity.'"

          Apple Computer, in Cupertino, California, can be reached at +1-408-996-1010 or at http://www.apple.com/. MacNN.com cn be reached at http://www.macnn.com/.

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