Apple Shares Fall 5.58% Despite New, Positive Advice

Despite two new glowing recommendations from stock analysts, Apple Computeris stock price fell more than five-and-a-half percent Thursday on investor concerns that Power Mac sales fell 15,000 units and Appleis overall profit margins slipped almost a full percentage point in the calendar fourth quarter of last year. Appleis share price closed down US$1.35, to US$22.85 on volume of 18.1 million shares.

The biggest concern, according to analysts interviewed by The Mac Observer Thursday, is that sales of professional Power Mac G5 systems waned in the previous quarter, and that Apple could not give more positive guidance that the situation will improve in the current quarter. Apple sold 206,000 Power Mac systems in the calendar fourth quarter of 2003 on revenue of US$398 million. Despite that being a 30 percent jump in units sales from a year earlier, it was a seven percent decline from the previous quarter.

"The Power Mac numbers were below what (Apple CFO) Fred Anderson forecasted, and that has some concerned," Steven Fortuna of Prudential Securities told The Mac Observer. "Gross margins were also down almost a full point to 26.7 percent, and that was somewhat of a surprise when component prices for displays and memory were not that high for other PC makers in the quarter."

"I think todayis decline in Appleis stock price was a quick, knee-jerk reaction to some slight concerns about professional system sales that make up a large part of Appleis business," said Charles Wolf, a long-time Apple analyst with Needham & Company. "I think Apple is right on the cusp of a major upgrade cycle of its G5 Power Mac. With some more advertising spending and a newfound interest from the academic and research communities, the G5 upgrade cycle has the potential to be a surprise moving forward."

On Wednesday, Apple reported its biggest quarterly revenue gain in four years of US$63 million, or 17 cents a share, compared to a loss a year earlier of US$8 million. Going forward, Anderson said Apple expects to earn between 8 cents and 10 cents a share on revenue of US$1.8 billion for its current, second quarter. Analysts previously estimated Apple would earn 7 cents a share on sales of US$1.7 billion.

Fortuna acknowledged Apple did predict in its analysts conference call Wednesday that gross profit margins for the current quarter would be around 27.5 percent based on LCD prices being flat and memory prices trending down. If that prediction holds true, that would return profit margins back to previous levels.

"Profit margins were not as much of a concern to analysts and investors as the poor professional systems sales," Fortuna said.

Analysts Still Positive About Future

But despite Thursdayis stock decline, two stock analysts remain upbeat about Appleis stock price and future with recommendations to buy the stock.

Analyst Ben Reitzes at UBS upgraded Apple to "buy" vs. "neutral" and said Thursdayis decline in the stock price is a buying opportunity with a target price of US$28. "While some may focus on lower than expected Power Mac sales," Reitzes wrote clients, "we believe positives abound for Apple," including, "upside potential from sales of iPods and portables, 2) new products in i04 with new iPod mini and potential PowerBook G5, 3) valuation now looks compelling, 4) the shift to partnering is encouraging, and 5) retail profitability and sales momentum is encouraging."

UBS is raising its second-quarter estimates to 9 cents from 8 cents, factoring in 20 percent sales growth to about US$1.8 billion.

Reitzes also mentioned that despite investor concern about Power Mac sales, "inventories are very low and we believe that the creative professional market will continue to improve." He also predicted a new version of the iMac will come soon, but would not give a time frame. "A new iMac could help mitigate the declines the segment has been experiencing the last four quarters," he wrote. iMac sales were down 24 percent in unit sales and 29 percent in revenue last quarter compared to a year ago.

Another analyst remaining positive on Appleis future is Charles Wolf of Needham & Company who is targeting Appleis stock price in the US$27 range for the next 12 to 18 months with a buy" recommendation. Wolf wrote clients that despite sagging iMac and Power Mac sales, he remains very upbeat about the future.

"Apple is in the process of reinventing itself from a pure PC company into one that should be able to ride the digital revolution in the consumer electronics arena," he wrote clients, in a report obtained by The Mac Observer. "As sales of the iPod and the iTunes Music Store accelerate, Apple should emerge as a solid growth story going forward."

Wolfis report was focused on the impact the Apple iPod and its associated deal with Hewlett-Packard (HP) to sell the portable player will have on Appleis future. Wolf called Appleis move to port iTunes to the Windows platform "the most strategically significant (decision) the company made since Steve Jobsi return in 1997." In addition, Wolf said the HP deal "should dramatically increase the iPodis addressable market."

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