Wall Street Takes a Bite Out of Apple

Everyone’s looking for the bellwether for what will happen with the telecom and tech sectors, searching for readable tea leaves amidst the market free-fall on Monday in the wake of the failed bailout bill. One of those bellwethers might just be Apple Inc., which thanks to downgrades from Morgan Stanley and RBC Capital Markets, saw its stock fall to a 52-week low on Monday. But the iPhone stayed in analysts’ good graces.

Conventional wisdom has said that consumer electronics companies like Apple tend to weather economic storms a little better than others because of the wide appeal to a variety of customer segments, which spreads around the risk. So why did Apple tumble, and so dramatically?

One could say that the rulebook is kind of out the window right now, having as a populace gone from riding a bunny slope of general worries about the economy to falling screaming over the cliff of a global money market freeze — within the space of a week.

The other culprit is the fact that as the economy contracts, consumer electronics spending tends to shift to the lower end of the market: in other words, Apple is likely to sell fewer high-end Mac desktops and more iPod Shuffles. And for Apple, it’s still the expensive desktop that pays the bills. Interestingly, in her ratings cut on Apple, Morgan Stanley analyst Kathryn Huberty cited the fact Apple doesn’t really play in the under-$1,000 computing market as a big consideration in watching the company’s fortunes going into the Christmas shopping season.

And wherefore the iPhone? Apple itself last week revised the expected number to be manufactured to 15 to 16 million, down from 18 million, but the market largely had no reaction. In the downgrades on Monday the outlook for iPhone sales remained unchanged. Balancing that out, however, is the bugginess of the iPhone 3G launch and recent developer backlash against the Apple App Store, but still — the iPhone remains a strong asset in the Apple stable.

So what can we learn from the Apple tea leaves? Keep an eye on the handset market. If spending going into the Christmas season does shift to lower-end splurges (skip the flat-screen, get the BlackBerry), this could be a good thing for the wireless industry. If on the other hand the economy constricts into economic Armageddon (ahem, global banking, you’re on), sparking business failures, job cuts and widespread consumer debt default, it’s unlikely handsets and wireless data will see any kind of growth.

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