Apple Poised To Double Market Share? An Analysis

by , 9:00 AM EDT, May 28th, 2002

Apple To Double Market Share?

In recent comments, Apple CEO Steve Jobs has revealed that his sights are set on a doubling of Apple's market share. The uncharacteristically specific statement about the company's objectives from Apple's sometimes larger-than-life top executive should cheer the spirits of AAPL investors.

The Markets

The financial markets were closed on Monday in observance of Memorial Day.

On Friday the markets finished decidedly lower in pre-holiday trading. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index all ended the week at levels below last Monday's opening numbers. Apple closed off US$1.03 at 24.15, down more than four percent on the day.

When the closing bell rang on Friday the Dow Jones Industrial Average stood at 10,104.26. The blue chip gauge has traversed the 10,000-point level several times since recovering from its 9/11-related lows. The average had just fallen below that important threshold in the days prior to the September terrorist attacks.

The S&P 500 index ended Friday trading at 1,083.82. This broader measure of market performance has underperformed the Dow average over the past 52 weeks. Investors have shown a bias in favor of the best-known stocks, many of which are Dow components.

The technology-heavy NASDAQ Composite Index continues to trail both the Dow and the S&P 500 over both the one-year and two-year periods of time. The index closed at 1,661.49, down more than two percent in Friday trading. The performance of stock prices has lagged the reported growth in the overall economy. Here are a few reasons why:

Gloomy Guidance

If there's one thing most large American publicly traded companies have in common this year, it's providing gloomy guidance to analysts and investors about anticipated revenues and earnings for the balance of calendar year 2002. Analysts build models for stock performance based not only on the most recent reported results, but also on corporate estimates of future performance. Absent accurate, upbeat forecasts, analysts and investors are left to work with their own assumptions.

Regulation Full Disclosure

Regulation Full Disclosure or "RegFD" requires management to make public any material information shared with analysts and favored investors. The regulation went into effect in 2000. Without specific guidelines about what constitutes "material information," executives have been more reluctant to talk as openly with analysts as in the past, concerned that the information that's shared must be made public within 24 hours.

Legal Liability

Last week Merrill Lynch agreed to pay $100 million to settle a landmark lawsuit concerning conflict of interests involving overly favorable analyst comments about companies the brokerage firm helped to bring public. Investigators are carefully tracking analyst comments. According to a report filed by the Dow Jones news service, The Merrill deal may be used as a template for settlements with other brokerage firms under scrutiny for similar abuses.

On Friday, Gateway announced that it had settled for $10.5 million a shareholder lawsuit stemming from allegedly overly optimistic statements by company executives. Gateway denies that the case had merit, but settled the case to avoid lengthy and expensive litigation. Apple and other technology companies are facing similar suits for optimistic forecasts given by executives prior to the sharp sell-off in the technology sector in the latter part of 2000 and early part of 2001.

Executives have become more cautious in their statements and analyst recommendations are under increasing scrutiny. Gloomy guidance, liability concerns and Regulation Full Disclosure have reduced the amount of information available to analysts and investors and contributed to the market's abandonment of its traditional role as a leading economic indicator during the current recovery.

Apple

Last week UBS Warburg and SoundView raised their earning estimates for Apple Computer for the current quarter and the fiscal year. Don Young at UBS Warburg cited falling components prices for his estimate increase while Mark Specker at SoundView referenced an end to Apple's iMac production problems.

The iMac Factor

In comments made during the April conference call with analysts, Apple executives forecast that the supply of the new iMacs would meet demand by the end of May. Apple has been paying an additional $35 per unit to air ship the new iMacs from the manufacturing facilities to its distribution centers. PowerBooks and iBooks are normally shipped by airfreight, but iMacs ordinarily would travel by cargo ship due to their weight and size. As Apple meets pent-up demand for the LCD-based iMac, the company will transport more of the PCs by cargo ship, reducing costs and increasing its margins on each unit sold.

After the new iMac's release Apple raised prices on the model by $100 due to rising component costs. Other PC makers such as NEC followed Apple's lead. However, analysts have cited recent reductions in some component costs following Dell's conference call with analysts earlier this month. Reductions in components costs after their early 2002 spike in prices may benefit Apple's current quarter earnings.

During the April conference call, an executive acknowledged that channel inventory of the new iMac was non-existent at the end of the March period. Apple usually carries about four weeks of channel inventory on its products. Bringing the iMac's channel supply inline with its other products may mean a one-time gain in reported sales and earnings equal to about one month's sales of the award-winning PC. When Apple chooses to record the additional sales as it fills channel inventory to normal levels may be revealed in the current quarter's results.

We will be back on Wednesday with a report on market activity in the holiday shorted trading week. In the meantime:

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