You could say that Apple Computer ( AAPL) has been hit by an anxiety attack -- the market's. Since the beginning of the year, fears of one kind or another have been weighing on the company's stock. Investors have fretted about a lofty valuation, disappointing guidance, disruptions in the company's computer sales and slowing sales and potential delays in new releases of its iPod digital music players. The most recent worry is that Apple will get caught up in the stock options backdating scandal that's plaguing the tech industry. Accordingly, after two years of outsized returns, Apple's stock has taken a tumble. In the year to date, the shares are off 26%, but they've fallen 39% since hitting an all-time high in January. Industry analysts suggest that investors may have gotten a bit too pessimistic about the company's prospects. At least as far as Apple's operations go, the signs are still positive on the whole, they claim. "How many quarters has it been that everyone's been saying, 'This quarter there's a huge MP3 slowdown, and the iPod numbers are going to be way down,' then Apple announces, and lo and behold they're not?" says Chris Crotty, a senior analyst who covers the consumer electronics industry at market researcher iSuppli. "It's almost like people want to see Apple fail for some reason." Industry analysts insist that Apple is doing anything but that. The company is maintaining its dominance in the MP3 player market, they say. And, they add, Apple is poised to gain share in the market for notebook computers, the fastest-growing segment of the PC industry. Analysts and investors will get a clearer idea of how Apple is performing late Wednesday when the company reports its fiscal third-quarter earnings. For their part, Wall Street analysts have remained relatively bullish on the company. Despite the selloff, the average analyst has a buy recommendation on the stock and expects the company to continue posting strong earnings gains, according to Thomson First Call.
For the third quarter, analysts are expecting Apple's per-share earnings to jump 19% year over year to 44 cents with sales rising 25% to $4.4 billion. That's slightly better than Apple has forecast. In April, the company
predicted third-quarter earnings of 39 cents to 43 cents a share on sales ranging from $4.2 billion to $4.4 billion. In the same period last year, the company earned $320 million , or 37 cents a share, not including charges for stock options, on sales of $3.52 billion. Although analysts have trimmed their full-year forecasts by a few cents in recent months, they're still bullish on Apple's future, predicting full-year earnings of $2.07 a share on sales of $19.44 billion and fiscal 2007 earnings of $2.57 a share on sales of $23.38 billion. Apple earned $1.34 billion last year, or $1.56 a share without stock options costs, on sales of $13.93 billion. But financial analysts' bullishness hasn't been able to buoy the stock. Instead, Apple has been burdened by worries, such as last month's warning of "irregularities" in several of its past stock-option grants, including one to company CEO Steve Jobs. The company's stock tumbled 2.5% in after-hours trading on the news, which placed it among a growing number of tech companies whose options practices are under scrutiny. Many of these companies face regulatory penalties and shareholder lawsuits; some have even seen the ouster of executives and board members for alleged wrongdoing. risk is low for Apple. But that was only the latest market perturbation to hit the company. Its stock had long since been beaten up by fears about iPod sales and other operational concerns. Indeed, with the recent selloff, Apple's stock is now trading at less than 21 times next year's earnings. This looks somewhat cheap, considering the company was trading at more than 25 times next year's earnings as recently as April and well more than that earlier in the year. At least on the operational front, though, industry analysts believe that the fears are exaggerated.
In the digital music player arena, for instance, Apple's share of U.S. retail sales stood at 76.9% through the end of May, according to data from industry research firm NPD. In contrast, Apple's full-year market share last year was 72.7%. In other words, despite all the worries about slowing iPod sales, Apple's position in the U.S. market for MP3 players -- the world's biggest -- has actually improved. And that doesn't look like it will change anytime soon, analysts say. Overall, MP3 player sales do seem to be slowing, analysts point out. But that's to be expected, considering that the market has grown by more than 100% a year for each of the last three years. Growth is likely to be healthy for some time to come -- as is Apple's position in the market. "This is still Apple's market to basically control at this point," says Jon Erensen, a senior analyst at Gartner, an industry research firm. Apple did see a hiccup in computer sales earlier this year as it debuted new computers based on Intel ( INTC) processors. But that appears to have turned around recently, NPD analyst Steve Baker says. The company's share of U.S. retail sales of notebook computers in the year to date through May declined to 6.7% of the market from 8.4% in the same period last year, according to NPD. But in May alone -- when the company was finally shipping Intel-based notebooks for both professional and consumer customers -- its share of the market rose to 9.6% from 9.1% in May 2005, according to NPD. Additionally, the company appears poised to gain more share in coming months, Baker said. "In previous times,
Apple's share of the computer market was below where it should have been, because it didn't have the right product mix," says Baker. Averring that the Intel chips make Apple's much more competitive, Baker believes that the company "is going to have a much better share of the consumer market going forward." If so, maybe that will begin to alleviate some of the market's fears. That, and maybe some Valium.