There’s No Worm in This Apple

It’s not too often that the market takes it as good news when a company announces that its revenues and profits are going to fall well short of expectations. And in the case of Apple Computer, which made precisely that announcement after the closing bell yesterday, the market in fact did not take it as good news. In the midst of a broad–if relatively mild–sell-off in technology stocks today, Apple was a notable loser, with its shares falling nine points, or better than 12 percent.

In the context of the past year, which has seen Apple’s stock soar because of all the buzz about the iMac, the iBook, and the new Power Mac G4, Tuesday’s tumble was unsurprising. But there were two interesting things about it, nonetheless. The first is that the stock fell sharply despite the fact that pretty much every serious analyst who covers the company said that if the stock sold off, investors should treat it as a buying opportunity. So we were greeted with odd headlines on the newswires today like, “Apple’s Stock Tumbles; Street Says It’s Time To Buy.” Considering the heavy volume in Apple, it’s clear that lots of people on the Street were in fact thinking it was time to sell. But this is one case where it wasn’t the brokerage houses that overreacted, even if a couple of analysts did trim their estimates for next year.

The more interesting thing about Apple’s announcement is that from one angle it really was good news, at least if you looked at things from the perspective of the longue durée. What Apple said was that its revenues and earnings were going to be down because Motorola, which is the sole manufacturer of the microprocessor for the G4, hadn’t been able to deliver enough chips to satisfy a much heavier than expected demand for the G4. Apple said it had already received 150,000 orders for the G4 in the three weeks since it went on sale, but that Motorola was not going to be able to produce anywhere near that many chips.

The obvious point here is that if you’re going to have a problem, it’s better to have one that’s the result of too much demand rather than too little. (Though there is something deeply ironic about Apple, which initially ran into trouble because its founder–and now interim CEO–Steve Jobs, wanted it to build everything that went into the machines, is now having problems because its sole supplier is struggling.) But there’s also something else, which is that Apple said its profits in this quarter would be 20 to 30 percent less than they were a year ago.

On the face of it, that’s strange. Even if the company were having trouble with the G4, which is a new product, why would that make it earn less money than it did a year ago, when the G4 didn’t even exist? But there’s actually a good reason for this, and it has to do with the way Apple has pared back its operations, concentrated on its best products, and placed a new premium on technological innovation.

A year ago, there were still Apple products in the pipeline and on store shelves that were older models or that served markets in which the company was never going to thrive. Today, that’s not true. The best thing that Apple has done in the past year and a half–actually, the best thing it’s done in more than a decade–is return to its core competence as a company that makes sharply designed, user-friendly, high-performance products for consumers who are willing to pay a premium for those characteristics. The best thing about the G4, in that sense, is that there are no sub-$999 G4s. As a result, Apple’s return on invested capital is improving, its profit margins are improving, and eventually, assuming Motorola gets its act together, its profits will improve as well. Apple will never be what it once was. But it has a chance to do a great job of being what it is.