Fund Manager: Apple Can't Compete With Microsoft

by , 9:30 AM EDT, June 25th, 2003

Reaction to Apple's PowerMac G5 announcement has begun to take on a more varied tone from the initial acclaim from most quarters. While Mac users and developers alike lauded and applauded the announcement of Apple's newest platform architecture -- initial coverage from mainstream reports was likewise positive -- a darker air of criticism of the company has begun to seep out, as well. While the controversy over Apple's testing methods on proving the G5 is faster than Intel's offerings is being well-covered in other reports, we wanted to bring you some very harsh comments and quotes from a TheStreet.com report:

According to that report, an unnamed source the outlet says is a fund manager, presumably a Wall Street fund manager, said that Apple simply can't compete with Microsoft. From that report:

"Apple clearly has great customer loyalty. But they just can't compete with Microsoft and Intel," says one fund manager who asked to remain anonymous, calling Apple "a classic example" of a company on the losing end of long-term competitive pressure. "It's been a value stock for a long time. I think we made the decision a long time back on sticking with winners," says the manager.

Analyst John Park, who covers the stock for Independence Investments, says buysiders are likely to stay on the sidelines until Apple can show progress on profitability and market share.

The article goes on for a total of three pages quoting analysts, such well-known Apple critic Michael Hillmeyer, as saying that Apple's very business model doesn't allow it to compete:

At Merrill Lynch, Michael Hillmeyer has been equally skeptical on the expenses front. "Apple's higher costs force it to charge more for its products than similarly equipped Wintel boxes, thus limiting the company's ability to retain market share," he said in a research note Monday. Hillmeyer has a sell rating on the shares and Merrill has not done recent banking for Apple.

Apple's stock closed at 18.78 on Tuesday, some 31% higher than it traded when Mr. Hillmeyer first issued his Sell rating. See TMO's full coverage of Michael Hillmeyer's comments and thoughts on Apple from April 10th of this year for more information.

The cost themes touched on by Michael Hillmeyer and the unnamed fund manager were also echoed by another fund manager, Vincent Colicchio. From the article:

Advertising remains touch and go. "If I thought the ad market was turning around, Apple could be a play on that," says Vincent Colicchio, co-manager of the All-American Equity fund. "But Adobe cutting its numbers last week tells me there's not a turnaround."

Against that backdrop, the G5 chip likely won't be enough to force a turnaround. After all, prices for the gussied-up computer that incorporates the silicon -- the PowerMac G5 -- start at $1999. "Given how weak the market is, I don't see the volumes being very exciting, no matter how good the product is," says Colicchio.

"I mean, this is a niche company, and where the niche is weak it's not going to get a lot of interest from the Street," he says of Apple. "Not to mention that from the competitive standpoint it has higher costs than Wintel."

Absent were comments from Charles Wolf of Needham & Co., who recently raised his rating on Apple's stock from a Hold to a Buy, partially on the strength of the then-coming G5. See TMO's full coverage for more information.

You can find more information in the full article at TheStreet.com Web site. Note that the article is three (short) pages long.

The Mac Observer Spin:

This report was a very unbalanced article, especially considering its source, TheStreet.com. The financial publication hasn't always been positive about Apple, but does have a fairly good reputation for quality finance reporting. There are very prominent Wall Street analysts who not only understand Apple's business model, they have issued positive comments on the company. Dan Niles and Charles Wolf spring to mind. A more balanced article would have had comments from these analysts, as well.

Michael Hillmeyer, however, suffers from a very basic lack of understanding of what Apple is, and the market in which the company competes. Mr. Hillmeyer, just like Messrs. Colicchio and Anonymous Fund Manager, want to put Apple into the context of a Wintel cloner, and obviously do not grok that this is not the only way to do business.

In the end, these comments will join the Apple Death Knell Counter with the many other people who have loudly proclaimed Apple's demise. Apple certainly faces a challenge in growing market share, but as we have said in other articles, the company now has everything in place to try and do just that. Accordingly, we think this summer will mark a turning point for the company.

While we're finding fault with Mr. Hillmeyer's comments, we are greatly amused that Apple's stock has risen some 31% since he issued a Sell rating. That's a rather poignant statement on his (lack of) understanding of Apple. Then again, this is the same analyst who said Apple could dip to US$11.50 a share when the company had more than that in cash holdings.