How Apple's $50M iPhone decision cost it $11 Billion

Apple (AAPL) cut the price of the iPhone by $200 yesterday, from $599 to $399. Predictably, people who ran out and bought the iPhone over the past few months were outraged. So, Apple is now offering a $100 Apple in store coupon. Pretty clever.

The stock market is not happy. Eric Savitz at Barron's says "Apple shares are down again today, extending the slide into a third day. The stock is down another $3.83 this morning, or 2.8%, to $131.18. That brings the three-day slide to about 9%, trimming the company’s market cap by $11 billion."

Is the stock market crazy? But wait, the whole rebate, even if everyone uses their coupon, would only amount to about $50M...$100M worst case. There have been somewhere between 500,000 and 1 million iPhones sold. Multiply that by $100 and you get $50M to $100M. How could the stock market penalize Apple $11 Billion dollars?

Hidden signals - Henry Blodget says that the quick price reduction means that Apple is not selling as many iPhones as they originally predicted...and that future projections should be discounted. This could explain some of the stock market reaction.

Stock market P/Es work in both directions. - If the stock market is paying 50 times earnings for good news, they will penalize 50 times, or more, for bad news. In this case the stock market reacted with a 110 times penalty for the $100M mistake.

Two lessons learned - First, public relations is really important. Mess it up and it will cost you millions...even billions. Second, this is one more object lesson that the stock market is driven by fear and greed...and lots of emotion.

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Comments

[Kyle S]

Don,
It's been said before, but IMHO the $11b hit to market cap has less to do with PR and more to do with perceived weakness in iPhone sales - if they were going gangbusters, why the need to cut the price so drastically? Still, I believe your "fear and greed" explanation carries some water as well.

[Andy Freeman]

More likely, Apple was running out of people who would pay $600 and decided to sell to people who would pay $400. If they had started out at $400, they wouldn't have the extra $200 from folks who were willing to pay it.

They now know the size of the $600 phone market - we'll see if they go for it again.

[Christian]

At the current price of $131 AAPL is already priced for perfection. It's up more than 50% for the year and trades at a P/E of 37 - any "not fantastic" news will have to drive this one down.

[Aaron Wormus]

They brought the iphone down so that they could sell the ipod touch at a reasonable rate.

Everyone who I knew who owned AAPL got out of it before the announcement, for the very reason that christian specified in the above comment.

I think issuing in store coupons will just drive the people who apple knows are willing to spend a LOT of money to spend more money on Apple products. I don't think the stock drop had anything to do with the coupons.

[Don Jones]

I think the biggest problem with this is in the future, when Apple rolls out the next big thing, people will remember and will want to wait.

Jobs trained everyone to wait, just like Detroit trained all the car buyers to wait until a big sale...bad move.

[Don Dodge]

I think all of you are right, and that each one of your points added to the reaction by the stock market.

Will this have an effect on future product releases from Apple? Will the stock market continue to discount future projections?

Maybe, but my experience is that traders have very short memories. It all plays onto the Fear vs. Greed thinking. Remember my favorite cliche' "Fear is temporary, greed is permanent".

The other thing to remember is that the stock reacts in a magnified way...in both directions, good and bad. If they are paying 50 times earnings for good news, they will penalize you 50 times the bad news too.In the AAPL case it was 110 times the $100M bad news.

[kayvaan]

a) Markets are people. People are emotional.
b) It's a volatile issue in a volatile market. So it's really not surprising to see price swings.

I do believe that the market is intelligent in the long-run. But I think you're all attributing a rational, decision-making agency to what's fundamentally only partially rational in the short-term.

[Lloyd Budd]

And then "Apple said it had sold its one-millionth iPhone yesterday, putting it about three weeks ahead of its own internal forecasts." ...
http://digitaldaily.allthingsd.com/20070910/iphone-1million/

[Don Dodge]

Puleeeez...do you think Apple didn't know this before they announced the price cut on Thursday?

Steve Jobs is all about PR. He is a master. Thursday he announces the price cut. Friday he announces the $100 rebate coupon. And Monday he announces the 1 millionth sold. Coincidence? I don't think so.

The stock market is pretty good at sniffing out a trend. There is a "wisdom of the crowds" at work in the stock market that we don't often see in the press.

[Jim Kollegger]

Don--also be aware that although iphone's sales rate may be in question, the smart money may also be reacting to some clouds on the horizon for Apple's content strategy. I'm referring to the loss of NBC as a video provider to ipod, and continued rumblings by other providers.

ipod, and to some degree iphone, rely heavily on content availability to drive hardware sales. If those clouds become a storm with the publishers/producers, that's much more serious.

But count on Jobs to be Jove, just like he did with the Pixar/Disney feud.
--jgk

[Lloyd Budd]

Of course he knew, and you knew, but you were having fun us by sharing Henry Blodget's assertions with us.

[Don Dodge]

Lloyd, I shared Henry Blodget's thinking with you because he is a Wall Street pro and reflects the way they think. These guys look at things from a very different perspective than we do.

Here is another Wall Street guy, Dan Frommer from Silicon Alley Insider. Look at what he said today

"So is 1 million a good number or not?

It's not -- not even by Apple's own low-ball public sales goals. Jobs has announced plans to sell 10 million iPhones by the end of 2008 -- a year and a half after launch. But a million iPhones in 74 days works out to a little less than 5 million iPhones per year -- if you're selling them at a consistent rate. Apple sold 270,000 machines in the first two frenzied days it was on sale, which means it took 72 more days to sell another 700,000 phones. That's a 3.6 million annual run rate, which would give Jobs a total of 5.8 million by the end of 2008..."

[Kaila Colbin]

A huge overreaction by the market drives cap down by $11B... sales are three weeks ahead of forecast... sounds to me like it's a good time to buy shares!