Wednesday, January 23, 2008

Apple: Playing Games is Hurting Shareholders

The recent slide in Apple (AAPL) shares can be attributed to one thing: Steve Job's playing games with expectations.

For too long Steve jobs has played games with the guidance he offers investors and analysts. Now it is coming back to haunt shareholders. Here is how it typically goes. Jobs give guidance that he knows is too low and then Apple blows it away and the stock surges. Analysts have relied on those expectations to make their estimates and have traditionally been too low.

Not being idiots, they caught on to the game and have ratcheted their expectations higher than they expect Jobs to "guide them".

A funny thing happened this week. Apple guided analysts lower than what they thought the "low ball" expectation would be. Now, Apple was trading at almost 50 times earnings on Jan. 1 and have lost over 20% in the 23 days since then and look to get slashed about another 10% at the open today. The problem is that people just do not believe what Jobs is telling them.

What if he is finally telling the truth and the guidance is right on? What if iPod sales which are basically flat, despite new products stay that way or decline? iPhone sales in both France and the UK have been disappointing, is there a larger issue? Is this the reason for the lower estimate? What if the analysts have over estimated the expected "beat" Apple will produce next quarter and earnings growth is indeed going to slow? Does Apple expect the consumer slowdown to take a bigger chunk out of sales?

In the current environment, indecision equates to fear and shareholders are suffering.

If you are going to give guidance, conservative is one thing but playing games like Jobs has with it is just wrong because eventually it comes back to bite you. No one can doubt his genius or showmanship, it was hubris that was his downfall once and is hurting him again now.

Does this mean Apple will not beat the lower expectations? No. It does mean that because of Jobs's actions shareholders are in for a real unnecessarily rocky ride..

Disclosure ("none" means no position): Sold July $280 2008 calls on Apple when shares were at $166

Todd Sullivan's- ValuePlays

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