The netbooks are coming and Apple (AAPL) should be scared. That was part of the message from Calyon Securities, which downgraded Apple shares on Feb. 24 to Underperform. The Calyon note claimed that Apple's premium PC pricing model would struggle in a tightwad spending environment and that the netbook market, in particularly, would be a tough nut to crack without cannibalizing current lower-end MacBooks.
This has been something of a recurrent theme among analyst who track Apple, and it's a valid topic to address. After all, Intel (INTC) shares have suffered in part due to fears that the lower-priced Atom processor used in netbooks will cannibalize sales of Intel's higher priced processors. And Dell (DELL) and HP (HPQ) have only reluctantly entered the netbook market after Taiwanese maker ASUS started posting serious numbers when it pioneered the simple, small and easy to use Web surfing and light computing appliances.
The particular concerns about Apple and its vulnerabilities are, to my mind, misplaced. Apple should see some diminution of sales revenues and product volumes, which is understandable in an economic slowdown of epic proportions. However, Apple has maintained the most price discipline of any company in the Consumer Electronics space. Go to any reseller store selling Apple products and discounts on offer are never more than a few bucks better than at the Apple branded stores themselves. This takes discipline and Apple has it. What has forged this discipline is the long-term commitment of pricing high and delivering a product people will pay more for. Sure, there will be downward pressure but Apple won't bite.
Regarding Apple cannibalizing its MacBook line with netbooks, I see the arrival of netbooks as a net add. Netbooks are relatively easy to use and operate. And they save on component costs by stripping out the most expensive items, namely, larger hard drives, expensive LCD glass, and memory. This is not a problem for Apple, which already gets among the best component costs in the industry and is legendary for figuring out ways to package cheaper hardware for premium prices. If anything, this hardware downshift plays to Apple's strong suit. Apple has always sold products based on charging a slight premium in exchange for better UI and design. There is no reason to believe Apple can't extend its touch here and still maintain respectable margins and slightly premium prices.
Consider, also, the iPod. When Apple released the device in 2001, no one would have imagined people buying or simultaneously owning two iPods, let alone four or five. Today, as a testament to the superiority of the UI and the stickiness of the product, millions of people own more than one. The case is not a clear analogy, as Apple did not risk cannibalizing any of its own products with the iPod. And some cannibalization will occur, most certainly. That said, from my own anecdotal evidence, Mac households tend to have multiple Macs lying around even at the higher pricepoints. I have no reason to believe an iPod effect won't take hold and people won't simply buy a single Apple netbook for each member of a household.
So while Apple shares continue to fall towards $80 per share, it's hard to argue with $31 per share in cash for Apple, even if FP/E is diminished by slowing sales. The option bulls are buying Apple calls at $90 and $100 price points.
