Goldman Takes Shine Off Apple

Goldman Sachs analysts have downgraded Apple (Nasdaq: AAPL) to "neutral" from "buy," citing concerns about a consumer slowdown in spending and overall recessionary forces.

The report, released Sunday evening, sent Apple stock down by almost 4 percent by Monday mid-morning. The downgrade appears to be largely a pre-emptive move on the part of analysts David Bailey and Min Park, who noted that their checks for the December quarter were better for Apple than other PC and smartphone vendors.

However, "some nicks have started to emerge," they wrote. "Specifically, shipments of MacBooks, iPod nanos, and iPhone were all slightly lower than what was expected going into the quarter, and Apple should face a tougher environment in the March and June quarters as consumer demand takes another leg down."

The analysts have also concluded that Apple will not be launching a new product category at Macworld next January, despite rumors of a Mac netbook.

Goldman Sachs' conclusions make sense, said Peter Cohan, principal with Peter Cohan & Associates.

"It is intuitive reasoning actually," he told MacNewsWorld. "When you are struggling to pay your mortgage every month, are you going to drop (US)$300 on a new device that you don't need?"

Economic Forces

Still, Apple has never been known as a brand that caters to price-sensitive consumers. Its fans are deeply loyal and have traditionally coughed up the cash for its premium-priced Macbook and iPod product lines. For the most part, this strategy has worked, but there are signs -- as Goldman Sachs pointed out -- that suggest this recession may be different.

With the jobless rate rising and consumers hit by the one-two punch of falling home prices and sliding stock portfolios, there is a lot of concern about the outlook for discretionary spending in the U.S. and abroad, Frederic Ruffy, the senior options strategist at WhatsTrading.com, told MacNewsWorld. "The net result is likely slower overall growth and more modest earnings expectations for Apple and other sellers of electronics."

Indeed, Apple shares have been trending down for the better part of the year, he also noted -- by 52.4 percent year-to-date.

New Price Strategy

Apple is going to have to reconsider its approach to pricing as the recession gets even deeper, Scott Testa, a marketing professor at St. Joseph's University, told MacNewsWorld.

"Apple, in order to justify premium prices for their products, must continue to innovate as they have in the past," he said, "while cutting prices of products as they mature."

The company has done that to a certain extent, Testa noted. For example, Apple lowered prices relatively quickly on the iPhone after its original release two summers ago.

Also, the iPhone is not the most expensive smartphone on the market. One contender for the iPhone-killer category, RIM's new Storm smartphone, is priced at $299, whereas iPhone prices bottom out at $199.

Different POV

Despite the cutback in consumer spending, gloom about Apple's prospects is not universal.

"Goldman, like so many others, is looking at the wrong end of the telescope," said Rob Frankel, author of The Revenge of Brand X: How to Build a Big Time Brand on the Web or Anywhere Else.

"In a recession, it's the poorly branded that suffer most," he told MacNewsWorld. "The strongly branded survive -- and Apple, while not good at articulating their brand, enjoys strong brand value among prospects."

Also, consumer behavior has changed in the last few years in a way that analysts are not taking into account, observed Frankel. Before, "if people didn't have money, they simply did without or bought a cheaper brand. That is no longer the case. Today, if people don't have money, they cut back on nonbranded items to afford the brands they want."