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by Wes George
 Apple,

Finances,

Money,

and Trading.

Mmmmmmm...... Good




Where's Apple's Next Insanely Great Idea?
August 23rd, 1999 

A Brief History of Earnings

Much has been made of Apple's astounding growth in the past year. Let's review a few significant Apple stats. In the third quarter, Apple showed a 38% increase in earnings over the previous year. Apple has accumulated almost 3.5 billion in cash as of July. Gross margins are holding steady around 27%, higher than any PC manufacturer. Likewise, Apple has shrunk internal inventories to less than a day, the lowest in the industry, so low it's measured in hours!

Short interest has all but evaporated as bearish traders bought to cover, ducking out of the way of the AAPL freight train. Yet, the price to earnings ratio still hovers around a very tempting, and value laden, 18, the lowest in the PC industry. In fact, AAPL's big price pop last week was in part due to rising interest rates which tend to shave points off overextending stocks with astronomical PEs, while favoring those more modestly valued. There is still plenty of room for AAPL's momentum to carry the stock price higher.

Market share, does it matter?

There's so much happy-happy, joy-joy noise around Apple's roaring sales numbers, due almost entirely to a single product, the iMac, that it's easy to forget the big picture.

Apple is, for the moment, an extremely healthy corporation, and there seems no doubt that this will remain the case through next year. But how robust in the long term is this health? There are a few red lights flashing on the dashboard. The one that worries me most is the market share indicator. Apple's market share, in spite of steadily increasing units sold per quarter, will continue to decline in the year 2000.

It's really just simple addition. Even as Apple's projected unit sales in this quarter could top 1 million, this stellar performance can't keep pace with the combined unit growth of Apple's half dozen or so major PC competitors. While Apple's market share may gain on any one PC manufacturer, combined categorically as the Wintel PC cartel they crush little Apple like a 500 lb. gorilla.

An Apple employee said to me in June, while I was fretting over the inevitable swamping of Apple's market share by cheap PCs, "Who cares, as long as Apple is making a decent profit? Unit sales are increasing and earnings per share is rising. What does it matter?"

This struck me as whistling past the graveyard. "Won't developers abandon the Mac platform if the Mac market share goes below a certain critical mass", I asked him? "No", he replied," people will develop where ever there is money to be made, and at 3 to 4 million units sold a year, Apple is still a big market regardless of declining market share."

I call this the Parallel Universe Theory of Apple's future and I don't see it as a particularly appealing road to wander down. Our visionary leader, Mr. Jobs, and Apple's historic aspiration to greatness seem destined for much more than becoming just another niche player; a Saab of the PC world.

But where to from here?

During the keynote address at MACWORLD, Steve Jobs spoke of the iBook as the fourth corner of the Macintosh hardware strategy, as if he were invoking a cosmological map of the Macintosh universe. However, it begs the question of what will come next. The picture seems too complete, without room for the next insanely great idea.

Last year at this time as iMac production was ramping up, rumors were that Apple was working on a consumer portable that would shake the PC world. By early 1999, hope for the P1, as the iBook was called, gave investors a fairly clear road map forward for the Mac platform beyond the iMac, and the blue and white G3.

This year the rumor horizon is empty. Three hundred days from now will Apple still be pushing iBook and iMac iterations with the same aura of hipness as today?

The iMac Zeitgeist

By June of 1999, what the pundits had earlier christened as the iMac fad had been elevated to a full-fledged sub-culture as it became clear that Apple was going to sell over 2 million iMacs in the first year. 1999 is the year of the iMac.

How quickly things change. The PC world, though slow learners, are now aggressively adapting to the new iMac dominated environment. The recent iMac rip-offs are half the price of the Apple original. Worse, they have the enthusiastic support of legions of PC sales borgs who are only too overjoyed to have a semi-rational response to the millions of witless newbies who want an iMac. "Right this way Ma'am, I have something just like an iMac at half the price and it runs Windows!"

I suppose I shouldn't have been shocked to read this aesthetically blind and ethically repugnant article in the Chicago Tribune by James Coates. It begins with these bone-chilling words,

"I have found the computer of my dreams, and because this is my worst time of year, that is to say back-to-school season, when everybody I encounter seems to be asking me what computer they should buy to send Dick and/or Jane off to the dorm with, I am absolutely delighted to be able to tell you about eOne, which is a dream come true, the very essence of The Computer, the machine that I personally would have designed if they ever put me in charge down at the factory… Irvine-based eMachines Inc. has blatantly copied Apple Computer Inc.'s Steve Jobs and produced eOne a virtual carbon copy of the glorious iMac, with one superlative difference… The knockoff runs Windows 98 rather than the Macintosh operating system and thus puts a buyer in the consumer software mainstream."

You can hear the mocking laughter in Mr. Coates' words. It's one thing to be inspired by the iMac design manifesto, it's quite another to violate intellectual property rights.

The iMac Zeitgeist has spread well beyond the bounds of the PC world. Translucent plastic shells are appearing on everything from overpriced desktop staplers to industrial toilet paper dispensers. The Five Flavors have become the late nineties equivalent to the pastel pinks, blues and adobe that were all the rage in "post-modern" architectural design in the 1980's. iMacs have been placed without solicitation in dozens of MTV videos, movies and TV shows as a symbol of our times. The iMac is living the wonderfully fast, glorious, and glittery life of a pop star. The iMac is having its 15 minutes of fame.

The danger, as another columnist pointed out, is that, "The definition of fashion is that which becomes unfashionable." Apple, unable to handle it's newfound success, has become addicted… to iMac sales! Unfortunately, there is no Betty Ford clinic for corporations.

Indications are that the iMac, one of Apple's axis mundi, has seen its brightest hour, and the slow descent into industrial design history has begun. Yet Apple has not announced, or let leak any hope of, new products stepping up to bat. The announcements of new product updates this week at Seybold may hold the line for now, but increasingly, investors are going to ask: What's the next insanely great Apple product?

The G4, OS X, QuicktimeTV, chipset updates and possible new marketing schemes are cool but are merely the standard evolution of existing technologies that consumers living in a world defined by Moore's Law take for granted. Alone, these types of innovations and updates may keep the faithful but won't win Apple new users.

When you are 10 points down in the 9th inning even with the bases loaded, two home runs aren't going to cut it.

Hey, but what do I know? I'm the moron who sold my Apple stock at $60 a couple of weeks ago and have been hopelessly waiting for it to re-trace ever since. Please don't read my August 9th article. It's a perfect illustration of the danger (and hubris) inherent in trading too much. It's awfully hard to time the markets, and very easy to get left behind by a stock, like Apple, that has captured Wall Street's imagination.

Your comments are welcomed.


Check out the Apple Trader Forum in the new Mac Observer Forum section! Talk about Apple's stock, the markets, or give your best stock tips, just come on in!

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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!

Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.



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