On Thursday the market took a walk on the wild side with the Dow Jones Industrial Average jumping 247.68 to 7,533.95. The S&P 500 Index leaped 27.15 to close at 803.92 and the NASDAQ Composite Index made an upside move of 49.26 to finish at 1,163.37. Apple joined the party with a gain of .52 to close at 14.12.
Yahoo! fueled the marketis forward thrust after reporting robust earnings growth and raising the companyis estimates for the current quarter. At the close Yahoo! jumped almost twenty three percent on more than five times average daily volume. The Internet services giant recorded a revenue gain of about fifty percent over the prior year period.
Wait And See
Thursdayis wild trading moved the major market indexes back to the vicinity of Mondayis opening levels. Although the strength of Yahoo!is quarterly performance pleasantly surprised investors, the quarterly reporting season has just begun. Many investors maintain a cautious wait and see attitude towards the market. While some optimistic observers see Thursdayis broad advance in prices as a positive sign the market has begun to turn, Fridayis trading will determine whether or not the market closes the week with its 7th straight weekly decline or reverses what has become an alarming two-month trek through the valleys of five and six year market lows.
Where The Beef?
Itis a question many analysts are asking as investors react to both positive and negative news in an exaggerated way. Thursdayis advance, though spectacular in terms of a one-day gain, still leaves the major indexes well below one-year agois depressed levels and brings the market back to about where it started the week. Until corporate earnings results begin to evidence a pattern of solid, sustainable growth, the market may continue to fall victim to large daily swings as traders react to both positive and negative news reports with little to no long-term direction.
Cash Rich, Earnings Poor
In the case of Apple, the company has net tangible assets of $4 billion. The companyis market capitalization is only US $5 billion, following todayis $.52 increase in share price. Although the Mac maker has about US$4 billion net in cash and equivalents on its books after subtracting long-term debt, the companyis earnings results have been mildly erratic. Analysts build stock price models based on anticipated earnings growth, taking into account the strength of a companyis balance sheet as a foundation for future growth.
Apple writes-down or amortizes its product development costs as quickly as possible. While this practice reduces earnings in the short-term, the companyis conservative accounting practices provides it with one of the healthiest balance sheets in the tech sector. Appleis biggest challenge isnit necessarily improving the quality of its earnings, the companyis challenge is growing its revenue base and the size of its earnings. In Appleis case, the company is cash rich, but earnings poor. Adding to its revenue and earnings will do more for the stock price at this time than additional cash in the bank or even the elimination of the companyis relatively small amount of long-term debt.
In an interesting change of stance, Microsoft has begun to push the merits of Mac and PC compatibility for users of its Mac OS X products. Perhaps realizing that Mac buyers offer the potential for sizeable profits from the sales of its software, Microsoft is publicly embracing Mac OS X and celebrating the cross-platform compatibility of its flagship productivity product. Microsoft makes perhaps US$45-US$50 on average from a Windows OS license. The Redmond-based company stands to reap much larger profits per unit from sales to Mac users of Microsoft Office for OS X.
This weekend Apple is opening another retail store. Its latest bricks and mortar outlet in Troy, Michigan will mark Appleis 42nd retail store opening and puts the company on track to open about 50 retail stores before the end of the calendar year.