Analyst Downgrades Apple on Pricing Concerns…and Netbook Strategy?

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 Bryan Chaffin - The Back Page

Calyon Securities analyst Shebly Seyrafi downgraded AAPL Tuesday on twin concerns about the company's premium pricing strategy and what he (bizarrely) characterized as the company's failure to show how it would compete in the Netbook market without sacrificing its successful MacBook line.

I'm still scratching my head over that last bit, too, but let's look at what he said:

"Apple's premium-pricing model is vulnerable in today's recessionary environment," Mr. Seyrafi wrote, according to a Marketwatch report. He cited the example that Apple's average selling price (ASP) for a notebook is US$1,398, which is more than double that of HP's ASP of $663.

Mr. Seyrafi's point appears to be that Apple should compete on price, an issue that would have seemingly been settled by several years of a highly profitable business model of making sustainable profits (Apple calls them reasonable profits, for what that's worth) on what amount to high-end computer products.

Even more interestingly, however was his comment that Apple, "has not shown a convincing strategy of how it will play in the netbook market without cannibalizing [its] existing MacBooks."

What makes this so interesting is that Apple has actually said it is not interested in the netbook space, going so far as to denigrate existing products.

"We're watching that space," Mr. Cook said during Apple's Q1 conference call with analysts in January. "Right now from our point of view, the products in there are principally based on hardware that's much less powerful than we think customers want, software technology that is not good, cramped keyboards, small displays, etc."

"We don't think that people are going to be pleased with those type of products," he concluded, but he then hedged with a, "but we'll see. We are watching the space. About 3% of the PC industry last year was in this netbook kind of category. So it's a category we watch."

Mr. Cook added, "We've got some ideas here, [but] right now we think the products there are inferior and will not provide an experience to customers that they're happy with."

Going from those public words to the insinuation that Apple has a muddled netbook strategy that will cannibalize MacBook sales is...peculiar.

As I've said in the past about...peculiar...analyst analysis, understanding what Apple is doing is fairly simple (if hard to copy), and it starts with reading what Apple executives like Tim Cook say (Apple COO Says No to Apple Netbook, Denigrates Existing Models and Apple COO Tim Cook Lays Out Apple Manifesto, With or Without Steve for starters).

Peculiar or not, however, Mr. Seyrafi downgraded Apple to "Underperform," a rating that means he expects Apple to perform more poorly than its broader market competitors. He lowered estimates for the current quarter's Mac sales to $3 billion, down $300 million, and iPhone unit sales to three million units, down from 3.2 million units.

He also lowered his 2009 fiscal year earnings estimate on Apple to $5.51 a share, down from $5.66 a share, and he cut his price target on the stock to $90 per share from $95.

Apple investors reacted to the downgrade by boosting the stock by 3.8%. AAPL closed at $90.25 per share, a gain of $3.30 (+3.80%), on moderate volume.

*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.  

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Lee Dronick

“Apple investors reacted to the downgrade by boosting the stock by 3.8%. AAPL closed at $90.25 per share, a gain of $3.30 (+3.80%), on moderate volume.”

Sounds like the investors have a better clue than Shebly. Maybe the investors have been trying Safari 4 and are impressed with what Apple can do.


And what is so wrong in ignoring the Netbook market? Why should Apple lower their prices? Why should Apple change anything if they are experiencing the highest sales ever? Apple is not a follower, if they enter the Netbook market then with a device that will be revolutionary (as usual) and will certainly not harm the MacBook line (e.g. cloud computing only).


In related news Shebly Seyrafi also downgraded Ferrari for not showing a strategy for competing in the pickup truck market.


But then many of these same ‘analysts’ were saying Apple at $200/share about a year ago.


One advantage to having a “premium-pricing model” is that you can always come down in price. When you are already in the basement, there is nowhere left to go.

Lee Dronick

“One advantage to having a ?premium-pricing model? is that you can always come down in price. When you are already in the basement, there is nowhere left to go.”

That is an excellent point! People are now expecting big Black Friday discounts. Not from Apple who only offered, what was it 10%, but from other retailers.


There is a niche for apple in a “netbook” area:  Look at the Sony vaio approach.  Throw in the iPhone’s supurb multituch, and the lack of a trackpad looks even better. Premium price and small, light, computers are compatible.


Oddly, no one worries about Acer (or Apple’s) poor sales in the server market, which is hugely larger than the niche netbook market.

Which is not to say that I don’t WANT an Apple Netbook, and would certainly buy one in addition to my existing systems if one were available, but as Apple have shown with the MP3 player and mobile phone market, it’s not about being first, it’s about being ‘the first worth criticising’.


Forget the netbook. Give me OSX with TCP/IP connectivity and full-blown iChat on my iPhone and the netbook is useless. If I can connect back to my desktop from my iPhone with a VPN so that I can store and save files, I’ve got a portable terminal that’s 1/6th the size of a netbook at HALF the price.


In other news, Shebly downgraded Mercedes for not having a market in pickup trucks.



Maybe someone played a joke on him and told him he was writing for The Onion.

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