Apple Takes Hit as Investor Confidence Slips

Shares of Apple (Nasdaq: AAPL) were pummeled on Wall Street Monday due to investor concerns that sales growth of Mac computers, iPhones and iPods could slow as consumers spend less in the weakening economy.

Two brokerages covering the Cupertino, Calif.-based company -- Morgan Stanley and RBC Capital -- downgraded their ratings on Apple shares, pouring fuel on the fire. Apple stock was down more than 16 percent in late trading at about US$107 per share.

A Weak Economy

A failing real estate market, turmoil on Wall Street and a slowdown in overall economic growth have Americans refraining from big-ticket buys such as consumer electronics devices.

"The concern is that Apple is a premium-priced product -- and in an economic environment like this, one that consumers will shy away from," Andy Hargreaves, an equity analyst with Pacific Crest Securities, told MacNewsWorld. "We're in a progressively [weakening] economic cycle."

Apple shares also were affected by worries that the cost of producing the iPhone could cut into company profits.

However, Hargreaves dismissed that speculation on its face.

"I think that's flat-out wrong," he said. "The profitability will improve because of the iPhone. A significant portion of the profitability of the device comes from carrier subsidies, and it's likely the carriers are subsidizing the hottest products on the market -- not the less attractive products."

Though wildly popular with the masses, Apple's products do not come cheap. An iPod costs between $49 and $399. iMacs start at $1,199 -- far higher than the cheapest Windows-powered PCs, which can be had for as little as $500. And the iPhone, available in the U.S. only through AT&T (NYSE: T), costs between $200 and $300 and requires users to subscribe to data subscription plans, adding to the monthly cost.

Wall Street Overreacting?

The stock market might be overreacting to the idea that consumer spending will slow down.

"I think the other thing that spooked these analysts was that [Research In Motion], largely viewed as a similar tech growth company, had a slight disappointment last week, and the stock fell 30 percent," Tavis McCourt, an equity analyst at Morgan Keegan & Co., told MacNewsWorld. "I think that investors are not willing to put up with any disappointment at all and are penalizing companies for anything that isn't perfect. And the chance of any company having a perfect quarter in this environment is pretty low."

The market's reaction to the notion that the higher cost of producing the iPhone could cut into Apple's profit is a good illustration of Wall Street tunnel vision, he said.

"The iPhone is a very small percentage of [Apple's overall] revenue," said McCourt, who rates Apple's stock "market perform," up from a "sell" rating earlier this year.

Overall Mac Trends Good

The potential for Apple's computer business remains robust, at least compared to the market for Microsoft (Nasdaq: MSFT) Windows-powered PCs, said Pacific Crest's Hargreaves.

"Regardless of the consumer environment, there are drivers in place that could help Mac sales grow faster than the broader PC environment," he observed. "Mac sales are gaining share in the corporate sector, which is normally dominated by PCs. You're also seeing a generational shift in high school and college-age kids going form PCs to Macs."