The Second Coming of Steve Jobs - Alan Deutschman [119]
Despite early hints about the Cube’s disappointing sales, Apple stock remained strong—at least until the company revealed the full extent of the bad news. On September 29, Apple issued a public warning that its profits for the July-to-September quarter would come in drastically below expectations. Wall Street analysts had projected that Apple would earn 45 cents a share in the period, but the company said its net income would be between 30 and 35 cents a share. Steve Jobs characterized the problems as merely a “speed bump,” but investors suddenly were overcome with doubt and paranoia, afraid that perhaps the Apple comeback story had been no more than a big lie all along. In their fear they punished the company with swift vengeance. Apple shares fell nearly 50 percent, from $53.50 to $28, a devastating blow. Steve Jobs had been worshipped by investors so blindly that now, when he was revealed to be a mortal—a fallible executive rather than a charmed miracle worker—they seemed shocked, angry, and betrayed, and reacted by exacting retribution. There was an emperor-has-no-clothes outcry among some onlookers in the press and Wall Street. Steve Fortuna, an analyst at Merrill Lynch, said: “We do not see this as a one-quarter phenomenon for Apple but rather as the beginning of many tough quarters ahead.”
Ironically, the very same day that Apple’s stock was collapsing, the main cause of the crisis—that damned Cube—received enviable acclaim from the most influential critic in the computer industry. In his high-profile weekly column in The Wall Street Journal, Walt Mossberg praised the Cube as “simply the most gorgeous personal computer I’ve ever seen or used.” He lauded its performance, its keyboard, and its innovative optical mouse, and recommended the Cube not only for experienced Macintosh users but also for Windows-Intel PC owners and even for the novice first-time PC buyers.
Mossberg’s column was especially authoritative since he had weighed in after thoroughly testing the machine rather than rushing to judgment based on a quick preview by the masterful Steve, as other reporters had done. But by the end of September, even Mossberg’s power wasn’t nearly enough. On October 18, Apple posted earnings of $108 million, or 30 cents a share. Steve had hit the low end of his revised profit target, but that wasn’t sufficient to calm the increasingly anxious Wall Street watchers. Apple’s stock fell from $20 to $17.
The terribly depressed stock price reflected an emotional overreaction by nervous investors rather than a cool logical assessment based on the most basic tenets of securities analysis. Apple’s market valuation, at around $6 billion, was ridiculously low. The stock traded at only eight times expected earnings while rivals such as Compaq and Dell sold at ratios of 30 to 40 times earnings. But Apple was dramatically cheaper than its p/e ratio implied because the company had plentiful reserves of $4 billion of cash (or more than $10 a share). That meant that investors were saying that the company’s ongoing business was worth only $2 billion, or around three times its annual profits. The shares were a screaming bargain. Pat Dorsey, the director of stock analysis at Morningstar, said: “If you believe that Steve Jobs can create another iMac, or even something half as successful, the stock looks mighty attractive way down here . . . This one’s almost in the ’no-brainer’ category.”
But with the stock price so low, key Apple executives began to leave. Without the probability of making big money from stock options, it became harder for managers to justify subjecting themselves to the intense scrutiny, fierce demands, and terrifying