Creative saw its quarterly profit plummet 72 per cent due to a price war with Apple's iPod.
Analysts fear that Creative is "sacrificing profitability in its pursuit of market share," writes Reuters.
During a conference call, Creative Labs president Craig McHugh explained that price cuts of Apple's iPod mini and the introduction of Apple's very basic flash players at lower-than-expected prices had pushed Creative's gross margins to 23 per cent, below its forecast of 27 per cent.
Creative CEO Sim Wong Hoo said the company had to lower prices in response to Apple's price cuts. He explained: "The whole market is at an explosive stage. There are a lot of young users. We need to get them early, with simple flash players. If we lose them to somebody else, we will lose them for life."
Kim Eng Securities analyst Dharmo Soejanto is concerned. "We don't agree with their strategy of pursuing market share at the expense of profitability," he said. Soejanto has a "Sell" recommendation on the stock.
Creative's Sim Wong Hoo defended the strategy saying: "We are going to continue our aggressive channel marketing campaign and our very competitive pricing strategy." He now expects gross margins to hit 20 per cent.
"We are working hard to be a strong number 2 player in the market," he said in a conference call.
The company said sales for its third quarter were the "highest ever", rising 65 per cent to $333.8 million. But net profit dived to $15.9 million, including a $14.8 million investment gain, compared with earnings of $57.0 million a year earlier, which included an investment windfall of $48.3 million.