Apple’s $8 Billion Haircut

Wondering what Apple execs were thinking when
they saw issue a modest earnings
warning yesterday and its shares subsequently were cut in half as a result?
Oh, to be a fly on the wall. This earnings season is quickly shaping up to
be an all out bloodbath, and grumpy investors are by no means
discriminating with which companies they’re choosing to take behind the

Apple Computer was the latest, but not likely the last, company to issue a
profit warning. The company sees its upcoming quarterly results in the
neighborhood of $110 million, or roughly 35% below consensus expectations.
Head honcho Steve Jobs, calling the revenue shortfall a speed bump,
cited a general slowdown in September sales and weaker-than-expected
numbers in the company’s bread and butter back-to-school education sales.

The 35% shortfall hardly felt like a speed bump to long-term investors who
watched as shares took a bath in after-hours trade, falling nearly 50%.
Apple’s stock has been recently bouncing around near its 52-week high,
spurred on by an impressive comeback led by then interim-CEO Steve Jobs.
And despite the earnings warning that fanned the flames of rampant selling,
the bad news is nowhere near the magnitude that justifies an $8 billion
haircut off the company’s market cap in a single afternoon.

There’s little question that investors are overreacting to the news, but no
one can really blame them. Already spooked by last week’s high-profile
earnings warning from bellwether chipmaker Intel , Wall Street looks wary of mounting signs that more big name
companies may have additional bad news to deliver. The markets have
responded with wild volatility of late, setting the jittery tone for
investors who already have a nasty case of vertigo.

In the coming weeks, it’ll be hard not to draw some conclusions that PC
demand may be softening over the short-term. Although, the high tech
industry’s big three have all refuted that sentiment, with made-to-order PC
manufacturer Dell saying that business is
humming right along just last week. Compaq and
Hewlett-Packard echoed that sentiment. It certainly
could be that Apple’s woes aren’t necessarily indicative of an
across-the-board slowdown in the PC sales, since the company competes
mainly in niche markets.

Unlike name-your-own-price e-tailer, investors should
anticipate a healthy snap-back in shares of Apple fairly quickly. In all
likelihood, Steve Jobs is right on the money. Despite an overnight 50%
slide in Apple’s stock, this may indeed be just another speed bump
for a graybeard that’s weathered eroding market share and cutthroat
competition for nearly two decades.

Any questions or comments, love letters or hate mail? As always, feel
free to forward them to [email protected].

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