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Apple's Sandbagging Strategy: Let Stock Suffer Now for Big Payoff Later

Posted Jul 22, 2008 12:11pm EDT by Aaron Task in Investing, Electronics

Apple shares tumbled Tuesday in the wake of its disappointing guidance. But this is one of those times where you need to separate the stock from the company, which appears primed for stellar long-term growth and market-share gains.

First, the numbers: The company's fiscal fourth-quarter guidance of $1.00 in EPS and revenue of $7.8 billion were well below expectations of $1.24 and $8.32 billion. Apple also forecast margins would fall to 31.5% in the fourth quarter vs. 34.8% in the third and would continue to fall toward 30% in fiscal 2009.

Declining margins are poison to Wall Street, especially short-term, to momentum traders who had previously been big believers in Apple's growth story. That crowd is bailing out -- as they are wont to do -- in reaction to Apple's strategy, which appears to be a willingness to sacrifice short-term margins in order to gain market share.

As Apple CFO Peter Oppenheimer said on the conference call, Apple plans to "deliver great value to our customers while making a reasonable margin, but not a margin so high as to leave an umbrella for our competitors."

As Henry and I discuss in the accompanying video, this is smart thinking on Apple's part from a long-term perspective, and poses a direct threat to PC makers, notably H-P and Dell.

"This would have been unthinkable just a few years ago, but now it seems like a great time to make a real run against Windows-running rivals," writes AlleyInsider's Dan Frommer. "Microsoft's Vista has a tiny fan club, PC manufacturers continue to churn out uninspiring machines, and as more software moves to the Web, companies (and individuals) have fewer reasons not to buy a Mac."

I agree, but, again, company fundamentals and its stock price often can (and do) diverge. That's especially true during a change in the makeup of its shareholders from short-term momentum traders to long-term investors, as is now underway.

47 Comments

you
Yahoo! Finance User - Tuesday July 22, 2008 12:25PM EDT

You knew the woman would hit herself in the head with the hammer sooner or later chasing dwindling dollars. Shame to see you go, Mac.

you
imurphit - Tuesday July 22, 2008 12:29PM EDT

Steve Said to "BUY" and be rewarded. Think iNvest!

you
shofet7@att.net - Tuesday July 22, 2008 12:29PM EDT

Go for it apple!!!! I am ready for another apple if prices decrease.

you
bob - Tuesday July 22, 2008 12:31PM EDT

aapl: I would agree with their long term outlook on market share. It is much wiser to get greater market share and decrease margin with overall profit going up.

you
denisjfitz - Tuesday July 22, 2008 12:36PM EDT

This is a great opportunity for long term investors to jump into a company that long term will see terrific upside, apple inc is setting itself up for taking more & more market share in wireless as well as computers.

G
G - Tuesday July 22, 2008 12:48PM EDT

I'VE BEEN WITH APPLE SINCE DAY 1, AND I CONTIINUE TO BUY! WOULD BE NICE IF THEY'D START PAYING DIVIDENDS.....

you
Yahoo! Finance User - Tuesday July 22, 2008 01:29PM EDT

i like these points better than the previous. What happened to fear you guys laid in about Steve Jobs health?

you
Yahoo! Finance User - Tuesday July 22, 2008 01:32PM EDT

To d-st - quit using your posts to promote your stupid sports blog! Very unethical!

you
msg241 - Tuesday July 22, 2008 01:35PM EDT

I believe Apple is adoptiong the right strategy. Long term investors will be rewarded handsomely here. Short term investors can destroy a company for their own personal short sighted gains. Invest in Apple and see your investments multiple over the next couple of years, NOT quarters.

appleshuttlemister
appleshuttlemister - Tuesday July 22, 2008 01:36PM EDT

First off, predicting decreasing margins is nothing new for Apple, they do it all the time and then beat their margins guidance over and over again. So anybody that sells based on that is stupid. Anybody that sells based on their earnings guidance, when the same lowballing has occurred nearly every quarter for years is also stupid. If you think Apple can sustain this growth in mac sales and iphones you should be buying like crazy as the stock sells for cheap for such strong growth. If you think it will slow down then sell. Because of the amortization accounting method, iphone earnings will start to be turbocharged starting this time next year...that's already in the bag.

you
dshel91361 - Tuesday July 22, 2008 01:39PM EDT

If the Momentum players have pulled out, Thank God! Apple "investors" would increase if this constant manipulation of Apple stock decreased. Apple should split their stock and stop giving guidance.

you
charlied512 - Tuesday July 22, 2008 01:57PM EDT

An Apple a day is one of my favorite addages! I love this company, their products and their strageties. I believe they will continue to gain market share in the P.C. and Cell Phone arenas and long-term investors will win big! Look out Dell, HP, Nokia and Motorola!!

you
Yahoo! Finance User - Tuesday July 22, 2008 02:04PM EDT

I think Apple has an inflated opinion of their product. PC's and PC operating systems are well established and substantial in number. Might be time for a "Reality Check" Apple.

wee willy 77
wee willy 77 - Tuesday July 22, 2008 02:07PM EDT

Not sure a strategy to let a stock suffer now is ever a good strategy. No one really knows what tomorrow brings and the Mac and iPhone can dwindle as fast as they grew. In the tech field, there is always going to be a new start up or hot product.

Jonathan D
Jonathan D - Tuesday July 22, 2008 02:21PM EDT

So the big question... where will it bottom out?

you
jamesadoherty - Tuesday July 22, 2008 02:29PM EDT

G, You can have dividends or growth. If you want dividends, buy Microsoft. It's going ex-growth.

twocentstospare
twocentstospare - Tuesday July 22, 2008 02:30PM EDT

Some of the haters will say ANYTHING to discredit a winner.

you
ram20002 - Tuesday July 22, 2008 02:32PM EDT

Not one company in the world today has a better product line and potential to dominate technology. The days of Apple being the "SONY" of the new millennium are here. Sony was the company to dominate and lead the consumer and pro electronics industry for decades. Apple took a lead and aim at that standard and now is - "IT". Anyone doubting that - make note of todays buying opportunity price and eat yourself in February of next year and in the next 4-5 years ahead for being blind and stupid in following market manipulation hype that feeds you with panic fear and doubt. Apple - Better than triple A bonds.

you
ashfordochs - Tuesday July 22, 2008 02:44PM EDT

Sooner or later Apple needs to do something for its shareholders. I've owned AAPL since the late 80's--one split (thank you), no dividends, and wild ups and downs. It takes true devotion to hold on to this stock!

you
bandido b - Tuesday July 22, 2008 02:45PM EDT

How much is the apple stock now?

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