CNN Questions iTunes Music Store's Contribution To Apple's Bottom Line

by , 4:15 PM EDT, May 28th, 2003

CNNMoney has published an editorial that questions the wisdom of recent run up of Apple's stock. The article, penned by Eric Hellweg, says that the euphoria over Apple's iTunes Music Store (iMS) is overblown, doesn't justify the US$1.5 billion in market cap that the stock has gained since the iMS was announced, and that sales at the iMS won't last.

Apple's stock has gained some 25% in value since Apple announced the iMS on April 28th. The stock is currently trading at 18.35, down 0.53 (-2.81%).

When the company issued a press release on May 5 announcing that 1 million songs had been downloaded in one week, the stock shot up 11 percent in a single day, on trading levels five times what they were the day before.

It's a compelling story and, to some extent, a compelling product. But investors who are buying into the idea that iTunes will continue to sell at its current rate and become a real growth engine for the company are misguided.

I'm betting that this sales clip won't last, and I predict that, aside from a brief future blip when a Windows version is introduced, sales will eventually slow to a steady trickle. A respectable trickle, perhaps, but hardly a revenue stream worth the stock gains the service recently brought the company.

Mr. Hellweg goes on to offer his estimate of the number of customers using the iMS, and says that he thinks the initial burst of activity at the iMS is due only to pent up demand. Since most of the online music services eschew Mac offerings, reasons the author, frustrated Mac users were downloading songs in an unsustainable rush.

Read more in the full article at CNNMoney.

The Mac Observer Spin:

It's curious that Mr. Hellweg is so quick to dismiss the effect that Apple's new iPod line has had on Apple's stock price. At the same time the company announced that 1 million songs had been downloaded, Apple also announced it had received orders for 110,000 iPods, and directly sold another 20,000 in the same week. That's real money. As our forum members are discussing in the Apple Finance Board, Apple's real aim with the iMS may well be to spur iPod sales, a strategy that seems to be working.

Another point that Mr. Hellweg didn't address is the fact that Apple's stock had fallen in recent weeks before the iPod and iTunes announcement. The stock was trading in the US$13-US$14 range, which is not more than a dollar or so above the value of the company's cash holdings and other assets. In other words, some of the 25% gain in the price of the stock could well be a rebound from what were arguably artificially low levels.

All that said, we agree with Mr. Hellweg that it is not likely that Apple can sustain the initial sales volume achieved by the iMS. While we are much more sanguine about the potential from the Windows side of the market than he is, the iMS is not going to make or break Apple all on its own. As a piece of the puzzle, however, the iMS certainly helps bolster Apple's approach to the market, and that's what Mr. Hellweg doesn't seem to get.

CNNMoney Article