NEW YORK (CNNfn) - Apple Computer's announced $600 million revenue shortfall in the December quarter should be a good indication of what to expect in the PC market next year, a Wall Street analyst said Wednesday.
Dan Niles, technology analyst at Lehman Brothers, said factors like a slowing economy and struggling market will also have an effect on PC makers like Apple.
"There could be a bloodbath in pricing in the first part of next year if they don't move inventories over the holidays," Niles said. "The magnitude of the miss gives you an idea of what's going to happen with the PC market next year."
In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.
CNNfn: Late yesterday Apple announced a $600 million shortfall for the December quarter - did that surprise you?
Dan Niles: The fact they missed didn't surprise me - the amount of the miss surprised me. We thought that Apple's product line is less attractive relative to other PC offerings - the speed of their processors is slower relative to Intel's and they don't have re-writeable drives which many PCs are carrying now.
They have a lot of issues related to their product lineup and their newest operating system is delayed - those are Apple-specific issues. In addition to that, everybody's dealing with the macro economic environment slowing. Consumers have less disposable income due to higher oil prices and the stock market has sold off, reducing the wealth effect. This will make this retailing Christmas season one of the poorest we've seen in some time.
So Apple's warning is due to a combination of things - half of them company specific and half driven by the macro economic environment. The key is that the hit is almost a 40 percent miss and that's alot. That's what people should look at. The magnitude of the miss gives you an idea of what's going to happen with the PC market next year.
If there's a lot of excess inventory there will have to be price cuts next year. There could be a bloodbath in pricing in the first part of next year if they don't move inventories over the holidays.
CNNfn: Apple is the second major PC maker to warn holiday sales were slow - Gateway warned last week - should investors be concerned?
Dan Niles: Obviously. The economy is slowing in the US and it's not doing all that well in Europe either. And there's some potential for Asian economies slowing down. That removes the ability to move excess inventory. Yesterday the Nasdaq rallied but if fundamentals are deteriorating and growth rates are slowing down, it will make earnings worse, not better, and it will be tough for stocks to perform in that environment.
People are expecting (Fed Chairman Alan) Greenspan to cut rates but the earliest that will happen is March, and then after that it will take a few quarters to speed up the economy.
CNNfn: This is Apple's first non-profitable quarter in three years, and Steve Jobs says he plans to return to sustained profitability next quarter - what would they need to do to achieve that?
Dan Niles: We'll have to wait and see. They've pre announced twice within a couple of months. I have some doubts that profitability can be achieved next quarter. Jobs can't control the macro environment, he can only control the product line, but that will take time. I remain cautious on Apple. The stock is close to trading at cash value so the downside risk is low but there's no catalyst to go out and buy the stock.
CNNfn: Apple will be rolling out new products and programs in 2001 - could that be what saves them?
Dan Niles: It'll take more than cool colors - you need hardware and software and features that consumers want. Dell (DELL: Research, Estimates) overtook Apple in the educational sector and that was Apple's strong point. It's hard for Apple to compete in the PC market. Losing their stranglehold in the educational market is not a good sign. Apple's always been known for innovation and they'll have to innovate their way out of this.
CNNfn: PC sales are Apple's core business, while competitors like Dell, Compaq and HP are also in the storage and server business - should Apple change its strategy?
Dan Niles: Few companies will buy a server from Apple, but diversifying the business model gives them a few different ways to win. Other companies are doing a little better because they have less reliance on the consumer and more on corporate America. Apple diversifying would be welcome because now they're at the whim of consumer, which is fickle.
CNNfn: Apple (AAPL: Research, Estimates) is down over 13% today, and at $14 1/2, it's way below the 52-week high of $75 1/8 - what's your outlook for the stock?
Dan Niles: We remain cautious on the stock. There's not alot more downside but we're not sure there are alot of reasons to rush out and buy the stock, other than the fact that it's close to cash value.
CNNfn: Some believe that the PC makers will get a shot in the arm as Internet access from handheld and other wireless devices improves, because the PC will become a central server for those devices - do you agree? what's your outlook for the group?
Dan Niles: Yes, I've said that alot, but it will take a while to develop. That's a positive but there's also a slowdown in economic growth, which is a huge negative. The bigger driver for growth will be Windows 2000, but that's taking longer than anticipated to roll out.
CNNfn: What are your favorite names in the PC group?
Dan Niles: I don't have any. We don't have "buy" ratings on PC related companies. It's too early to return to the group until the second half of next year. Hand held devices in terms of alternative computing platforms are our favorites: Handspring (HAND: Research, Estimates), Palm Computing (PALM: Research, Estimates), and Research in Motion (RIMM: Research, Estimates). They will do well in the 4th quarter because consumers are more willing to spend $300-400 as opposed to $1200 for PCs.
--reported by Carmina Perez