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Irrational Reaction to Apple's Outlook


The troubling thing about the market's reaction to Apple's results is what it says about earnings expectations for 2008.

Rational observers would expect 'irrational exuberance' to have no place in the financial markets of 2008. Yet, whisper numbers and fantastic growth expectations still have a home in a market teetering dangerously on the edge of bear territory.

By most accounts, Apple (AAPL) had an outstanding quarter, capping off a highly successful 2007.

  • Net Income for fiscal 1Q rose to $1.6 billion or $1.76 per share, up 58% from a year ago
  • Revenue grew to $9.6 billion from $7.1 billion a year ago, better than analysts' estimates of $9.5 billion
  • Mac revenue grew 47% to $3.5 billion on a 44% increase in unit sales to 2.3 million
  • iPod revenue grew 17% to $4.0 billion on a 5% increase in unit sales to 22.1 million

Caught in the broader market sell-off, Apple shares have fallen precipitously since hitting their battleground-high of 200 less than a month ago. Even the legendary MacWord generated little interest in Apple's stock. Minyanville's Cory Bortnicker noted that although the company released no new 'iProducts,' the MacBook Air and other strategic initiatives position the company well for the future.

Apple has a history of sandbagging guidance, but what spooked Wall Street and is pushing shares down more than 10% in morning trading was the company's 2Q EPS guidance of around $0.94 per share, compared to the $1.09 consensus.

The troubling thing about the market's reaction to Apple's results is what it says about earnings expectations for 2008. That analysts have not ratcheted back expectations for near-term growth is indicative of a market unwilling to give up hope that consumers will find some way spend their way back to prosperity.

Despite being popular and innovative products, iPods and Macs are consumer discretionary items and Americans in the near future may have to discover the lost art of exactly that, discretion.

As we noted when Intel (INTC) offered conservative guidance last week, this treatment of companies that acknowledge the reality of a slower growth environment does not bode well for bulls hoping we have put in more than a trading bottom.

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