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Ask Soup Something Stupid

By Soup, (soup@macedition.com), 6 October, 2000

Fudpuppy asks, "With the huge crash in their stock price, is Apple doomed?"

Dear Fudpuppy:

No.

Your pal,

Soup

P.S.: It’s a bad time for boxmakers. Gateway, Dell and Compaq are all taking a beating. So’s Intel. So’s Microsoft. Big Bad Bill’s Behemoth was at 70 the beginning of September, but now it’s at 55 and change, a 15-point loss. Dell, who just reported an earnings shortfall of their own, left August breaking over 41, but they’re at just over 28 now, 13 points down.

P.P.S.: Apple, however, does things in grand style. It was breaking well above 60 at the beginning of the month. Now it’s at 23 and holding. A 37-point drop. Why?

The obvious and wrong answer is the earnings shortfall. An earnings shortfall means that Apple didn’t make as much money as they thought they were going to. Not lose money, mind you. Apple is still solidly in the black. They just didn’t rake in the moolah as heavily as they had planned on.

OK, we at MacEdition have covered the reasons for the earnings shortfall (not a loss, may I remind), and they’re pretty clear cut. The Cube’s too much money, and people really want faster G4 towers, anyway. Apple’s education market is wobbling because Apple can’t handle the sales channel the way their resellers can (or used to). The euro sucks, and the personal computer market in general has hit a slowdown.

Now, let’s cover why the stock tanked so hard.

Apple’s infamous “cone of silence” is the culprit. Apple has been notoriously closed-mouth about their plans, preferring big surprises sprung on the buying public and investors at major trade shows or during Web-broadcast announcements. It’s a very dramatic and exciting way to do business – just not a very smart way. Apple refuses to comment on nearly anything relating to their future plans, and their internal security has been rabidly pursuing any and all potential leaks and squelching rumor reporting by the press with threats of legal action. Sensible precautions? Look at Apple’s stock price and decide for yourself.

An earnings shortfall could mean a slight hiccup because of the vagaries of the market, or it could mean Apple is teetering on the verge of collapse. Neither is true in this case, but the people who buy and sell Apple stock in huge quantities don’t know that. These people are called “institutional investors”. It’s their job to invest other people’s money, and they’ve been riding high on Apple ever since the turnaround. These investors rely on industry analysts to tell them what a company is up to, and to offer them information regarding the potential profits or pitfalls in a particular investment.

Because Apple is so tightlipped, the analysts who cover Apple didn’t know which way to jump. So everyone assumed the worst. It’s called a “panic”, folks. That’s why AAPL has tanked and will stay in the basement, even though it’s obvious to anyone running the numbers that they won’t be going out of business this year or the next, and probably not even the one after that.

The problem is, Apple has been exceeding the earnings estimates for so long that when a miss the other way came, no one could figure out an explanation apart from “... Steve Jobs’ magic-voodoo-sorcery doesn’t work anymore!” His mythical Reality Distortion Field hit a glitch, and everyone assumed Emperor Steve had no clothes. He’s really got some sensible slacks and a turtleneck on, but no one stopped to look. All the big investors cut and ran.

If the analysts and investors had a clear idea of Apple’s product strategy, targeted markets and plans for growth, an earnings shortfall would have knocked a couple of percentage points off the price, not trigger a panicked selloff – one of the biggest single-day trade volume of a single stock in history. Apple has made it impossible for their shareholders to make informed decisions, and people who make their money making other people money aren’t playing along with that anymore. Until Apple abandons the “cone of silence” for a more rational PR policy, the institutional investors aren’t going to touch Apple stock with a ten-foot pole. And since they were the ones who drove the price so low, it will be a long, hard march back to a more reasonable level.

Apple isn’t anywhere near doomed. Just their shareholders.

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