Wednesday, January 6, 2010, 10:36PM ET - U.S. Markets Closed.

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

foodie
foodie - Tuesday July 22, 2008 03:02PM EDT

ok apple give me that 10% margin 500 dollar macbook.

JackB
JackB - Tuesday July 22, 2008 03:08PM EDT

ITS TIME FOR A SPLIT

jin
jin - Tuesday July 22, 2008 03:19PM EDT

speaking from a pure consumer perspective; the new iPhone is going to dominate the smart phone arena. I have been compareing other products against the iPhone in the similar price ranges and there are nothing out there that can compare with the iPhone's design, chic and benefits. apple has been conservative in their outlooks in the past and they will continue to be conservative.

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 22, 2008 03:23PM EDT

apple stock is used to pay apple executives, not profits to shareholder investors. not uncommon in the tech industry, but not obvious to the lay investor and mutual fund owner.

Anitas M
Anitas M - Tuesday July 22, 2008 03:26PM EDT

why is this guy on the left mimicking Cramer? I can't take him seriously.

QuinnofBohemia
QuinnofBohemia - Tuesday July 22, 2008 03:28PM EDT

I like apples. But omlY the crunchy thems. Good job to sell. Will make lots of dollars.

Eric W
Eric W - Tuesday July 22, 2008 03:29PM EDT

Apple is gaining BIG market share. I'm a traditional PC guy, but work at a large university, have seen MANY more MACS in the hands of students and Faculty/Staff. The iMac is way ahead of any PC maker, and the Apple advantage now (which used to be a disadvantage) is that they are propietary and can tailor the O.S. to their hardware. Part of Microsoft's problem is they have to make XP, Vista, work with MILLIONS of pieces of hardware and software packages which causes problems. Not to mention that whoever has the greatest market share is the biggest target for hackers and ne'er do wells. If the iPod stays hip and they keep making slick all-in-one's like the iMac at competetive prices Apple will gain BIG market share in the next 3-5 years.

Reedersong
Reedersong - Tuesday July 22, 2008 03:31PM EDT

For the first time ever, I agree with MOST of you.... BUYER BEWARE

sportsmadness
sportsmadness - Tuesday July 22, 2008 04:53PM EDT

All I can say is that I have owned Microsoft IBM capatible PC's for many years, but with Microsofts blunder with Vista that may change my ownership. At least Apple still remains compatible with older software on older operating systems. Their virus protection record compared to Microsoft is also an eye awakening point. My next computer soon will be an Apple brand because Microsoft has gotten too big and greedy for the common good.

sportsmadness
sportsmadness - Tuesday July 22, 2008 05:04PM EDT

Anyone who dogs Apple over stocks and prices should note that Google is very high to own and is popular like Apple. Many stockholders of Google would like to see a split but that does not deter the company from producing a innovative business. Have you seen the article that explained why its a dream to work for them. Back to the Apple comments. Apple will eventually conquer the giants and be at its best soon. Vista unless its corrected will be Microsogft downfall. Its cheap stock but it has remained flat for years. Price does not always measure a companies success with the consumer.

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday July 22, 2008 05:25PM EDT

I have made tons of money with Apple over the last couple of years. I fully expect that trend to continue for the next five. Longer horizons than a quarter or two are what it's all about anyway. Buy and hold used to mean two or three years. Nowadays it's six to nine months. While increasing market share may scare off the short term momentum guys, it is actually a cold calculated strategy that will make Apple grow at a phenomenal rate six months to a year from now. The stock price will only begin to reflect that then. Apple, YOU ROCK!

E.Z. N
E.Z. N - Tuesday July 22, 2008 05:51PM EDT

I think this is a smart move by Apple. The PC users are older. The young people love Apple & all the toys that are compatiable. Now Apple is cutting price and margin for market share. So share price will go down temporarily but the whole market is down. Watch this stock when the market turns up.

Ashley
Ashley - Tuesday July 22, 2008 07:16PM EDT

Hmmm..I remember all the predictions that Apple would hit $200 by June. Did it? Then, there was the analyst who predicted just a couple of weeks ago that it would hit $245...let's see....

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 22, 2008 08:24PM EDT

Successful company with profit grow like Apple would cause a huge stock price fall like hell. Unsuccessful company like Freddie Mac and Fannie Mae will make stock price jump 30% and 20% in three days. What kind of investment philosophy?

JackB
JackB - Tuesday July 22, 2008 10:39PM EDT

TIME FOR A SPLIT

Joseph
Joseph - Wednesday July 23, 2008 12:39AM EDT

Last night on one of these commentaries I noted that the severe drop after the bell smelled suspiciously like orchestrated short selling. I predicted the signs of a classic short squeeze today, and it appears that I was correct. The fundamentals of the stock have not changed. It was good at $200. It was good at $180. It's been great from 120 to 160. I predict over the next few days that the upward pressure will dominate any fear-mongering and that the stock will reflect this by returning to between 180 and 185, mainly because the saner heads out there will realize that the potential for the company with its prudent, conservative policies and logical strategies that build upon its in creasing market momentum is almost unlimited. So if you have some funds on the sidelines, you will (depending on when you read this) immediately take advantage of the long-term outlook and purchase as many shares as you can reasonably absorb and sit on them. You will be extremely glad that you did!

Yahoo! Finance User
Yahoo! Finance User - Wednesday July 23, 2008 03:12PM EDT

@ashfordochs "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!" Apple split 2-1 June 87, June 00, Feb 05. And paid a dividend from June 87 to Dec. 95. You need to apply some of that "true devotion" to keeping better records.

gion@sbcglobal.net
gion@sbcglobal.net - Wednesday July 23, 2008 04:21AM EDT

WHAT IS THIS AFTER HOURS TRADING AND WHAT WAS THE READ ON THE NUMBER OF SHARES THAT WENT THROUGH TO BRING THE APPLE PRICE DOWN SO FAR . IT BLEW MY MIND AFTER WORRING OVER WHAT WAS GOING ON ALL DAY THAT DAY AND THEN ....BOOOM... BUT THEN IT SEEMS TO HAVE COME BACK PRETTY NICELY..WHAT HAPPENED?

James
James - Wednesday July 23, 2008 04:08PM EDT

I've been a Mac user and investor for years. For the long term, the product and the company can't be beat. I look at the stock and try to figure out where to get more money to buy with. I'm a believer in the company and in Steve.

THOMAS
THOMAS - Wednesday July 23, 2008 06:05PM EDT

Apple is a great company for the long haul. Be patient and hold long. As far as the comment from ashfordochs, not sure what you mean since Apple has split 3 times since 1987. More recently in 2000 and 2005, both 2/1 splits.

Yahoo! reserves the right to refuse, or remove any comment that does not comply with the Yahoo! Terms of Service. The submission of spam, hateful, or obscene messages may result in the termination of your Yahoo! ID.
About Tech Ticker - Send FeedbackDisclaimer. Copyright © 2007 Yahoo! Inc. All rights reserved.
Copyright/IP Policy - Terms of Service - Privacy Policy - Help
Quotes delayed, except where indicated otherwise. Delay times are 15 mins for NASDAQ, NYSE and Amex. See also delay times for other exchanges.

Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes for NASDAQ, NYSE and Amex. See also delay times for other exchanges. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. Fundamental company data provided by Capital IQ. Financials data provided by Edgar Online. Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data, daily updates, fund summary, fund performance, dividend data and Morningstar Index data provided by Morningstar, Inc. Analyst estimates data provided by Thomson Financial Network. All data provided by Thomson Financial Network is based solely upon research information provided by third party analysts. Yahoo! has not reviewed, and in no way endorses the validity of such data. Yahoo! and ThomsonFN shall not be liable for any actions taken in reliance thereon. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.