iPod Sales Drive Stock Split

Apple recently announced a two-for-one stock split, thanks largely in part to strong sales of the iPod. In an interview with Apple Matters, Ted Allrich of The Online Investor said stock splits are generally used to make expensive stocks more accessible to the average investor. “Stock splits don’t do anything for investors except give them more stock. The split brings the stock down to a more reasonable price level for new investors.

Usually the reason the company does it to create more trading activity and to attract more investors since buying 100 shares of a $40 stock is easier than buying 100 shares of an $80 stock,” Allrich said.

According to Yahoo Finance, this is the third time Apple has split its stock. Although past splits have been successful, the last split occurred just before the dot-com bust of 2000. The opening bid for AAPL was $52.13 following its stock split in July of 2000. By January of 2001, that opening bid had dropped to $14.88. Because of strong sales of the iPod and sales through the iTunes music store, AAPL has managed to recover, trading with an opening bid of $77.05 this year in February.

The Financial Times says strong sales of the iPod are the reason the stock has recovered. The company’s shares have more than tripled in value over the past year to more than Dollars 80 apiece as millions of consumers have responded to Apple’s effort to develop a growing line of less-expensive versions of the music player. Profits from the iPod accounted for over 1/3 of Apple’s total sales in 2004.

Allrich agreed with the Times assessment, and said continued success of the iPod is crucial to the continued success of Apple stock. “At the moment the iPod is the most visible product for Apple. In terms of foundations for revenues, however, the computer market has been a strength for Apple for a long time. The iPod is the icing on the cake. It’s getting a lot of visibility and driving the earnings as well.”

“The downside [to a stock split] is you have twice as many shares. What drives a stock price is Earning Per Share. If the EPS continues to grow, there’s no concern from investors. The price stays high or goes higher.” Allrich then went on to say another hard drive based played could seriously threaten Apple. “If earnings start to slip, say because the iPod has more competition or if Napster comes along with a better product and threatens Apple, then the stock price is at risk because earnings will not be as robust.”

Gadget expert Julie Strietelmeier of The-gadgeteer.com feels confident the iPod’s future. “I think the iPod will continue to enjoy great success. It is still the player to which all other players are measured,” Strietelmeier said. She then went on to say Apple needs to stay competitive. “I don’t think Apple can rest on their laurels. They will need to continue to make advancements whether it be in hard drive capacity, battery life, or feature set. I think the iPod Photo came out way too soon after the 4th gen. The color display is cool, but the size just doesn’t get it in my opinion,” Strietelmeier said.