Demand Drag Gnaws on Apple

"The market has definitely slowed down," says Shyam Nagrani, principal analyst with industry research firm iSuppli. "I have a feeling that [Apple's] results won't be as good as they were in the first [calendar] quarter."

Nagrani and other analysts chalk up the slowdown largely to seasonal demand. In general, retail purchases tend to slow in late spring and not pick up until late summer, when back-to-school season starts.

But in fast-growing markets, seasonality tends to be much more muted, suggesting that when a seasonal slowdown appears, it can be an indicator that the days of breakneck growth are coming to an end. Analysts who think iPod sales will resume their previous growth rates in coming quarters and into next year are "totally in denial" of what's happening in the overall market, says Shaw Wu, who covers Apple for American Technology Research, which doesn't do investment banking.

"Apple's warned of it, that they're not going to grow like they did last year," says Wu. "I agree with [the company]."

Even though Apple's stock is down about 20% from the 52-week high set in February, it's still trading at what might be an unsustainable premium, Wu says.

"That's why we're not recommending the stock," says Wu, who has a hold rating on Apple shares but doesn't personally have a stake in the company's stock. "Why pay a high multiple when growth is clearly slowing down?"

Apple representatives declined to comment.

However, even with the possible slowdown in the MP3 player market, Wu doesn't expect Apple to miss the Street's estimates for its just-completed quarter.

And not everyone is convinced that the digital player market actually slowed significantly in the second quarter. NPD analyst Stephen Baker argues that the problems at SigmaTel and Creative are likely company-specific and don't reflect a broader market problem. Apple's move to cut prices and build inventory may simply be a strategic effort to maintain its dominance of the digital player market, he says.

"I would warn people that making judgments off of the second quarter ... tends to be fool's gold," says Baker, adding that he "didn't see anything that would tell me that there's some kind of demand saturation in the market right now."

And most observers would concede that the market for digital music players is still growing overall; it's just the rate of that growth that likely decelerated in the second calendar quarter. Indeed, analysts generally agree that market growth will rebound later this year, boosted by back-to-school and holiday sales.

"It's possible that vendors in the MP3 player market may have overestimated demand for the first half of 2005," says Susan Kevorkian, a senior analyst at IDC, an industry research firm. "I still expect this market will fare well in the second half."

If it doesn't, what may be a sour taste in the mouth of Apple investors next week could turn bitter.

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