All Aboard The AAPL Express! August 28th, 2000 Wall Street woke up last week to discover AAPL is a value play, something Apple investors have known since 1997. A clever analyst recently noticed that Apple's P/E ratio is about half the industry average while Apple's revenue growth, even at low-ball estimates, is equal that of the PC industry average. Of course, it's been that way for years, so it's a bit disingenuous for Wall Street to just now pretend to discover the discrepancy in Apple's price to earnings ratio. Many Mutual funds appear to have been accumulating shares of AAPL all year. That's the way the system works. It's all about timing and riding waves of momentum. AAPL is off its lows for 2000 and has established a sense of momentum, so now is the time to board the gravy train. Wall Street's attempt to build momentum behind AAPL isn't a bad thing, but long time followers of AAPL have got to be a bit skeptical about the fidelity of Wall Street's new found faith in our favorite computer company. The Apple Cycle Last year, Apple's stock gained the most between July and January. In June I wrote an essay identifying all the various seasons of the Apple cycle and events are eerily unfolding right on schedule. In the autumn of 1999, Apple's price per share steadily climbed. The only interruption to the stock's momentum was the tragic earthquake in Taiwan. In September of 1999, the earthquake created a component shortage for iBook production which combined with a breakdown in the G4 processor supply to endanger Apple's profits. The episode was quickly resolved and turned out to be a buying opportunity. Climbing the Wall of Worry In the late summers of 1999 and 1998, many Mac pundits and stock boards were consumed with evaluating how much of a success the iMac (in 1998) and the iBook (in 1999) would be. With the iMac, many analysts believed the initial, very strong sales were driven by Mac fans and once the rather small market was fulfilled sales would drop off substantially. Later in the year they claimed the iMac's success was really part of an upgrade cycle and a fad that would soon die out. In January of 1999, one analyst even claimed that Apple was stuffing the channel to hide falling iMac sales! The iBook was also beset by doubting Thomases. There were worries that the iBook was too girlie looking. On the other hand, there were those who feared the iBook would cannibalize PowerBook sales. This year's scenario for Apple is in many ways exactly the same as in 1999. In fact, I'd go so far as to bet there will be another scare or two this year as well. MACWORLD in July served as a launching pad for a slew of upgraded products and a wholly new desktop paradigm, the G4 Cube. Just as with the iBook, and iMac before, there is concern that the G4 Cube will flop or that it will "cannibalize" sales from other Mac products. Just like in '99 and '98, there are concerns about production ramp-up delays that could dim this quarter's bottom line. Just like in '99, there are fears that electronic component shortages could cut into Apple's profit margin this autumn. Nevertheless, AAPL's stock climbed $60 in the second half of 1999 and $16 in 1998 (pre-split calculations). The first fiscal quarter of 1999 witnessed record sales numbers. The similarities are so strong that investors are piling on the Apple Express. In the dog days of August, when volume on the Dow and the Nasdaq have slowed to the lowest levels of the year, Apple's stock was trading a million plus shares over its daily average on Thursday and Friday of last week. A rising stock price confirmed by stronger than average volume, especially from the low price levels of last week, are the sure signs of more upside to come. Apple's stock has gained $10 in ten days. Resistance Of course it's never a ride straight up - it's always two steps forward and one back - as those who merely want a tidy short term profit cash-out. More importantly, Apple's stock is going to have to deal with so-called resistance created earlier this year. Resistance and support are two technical analysis concepts that are easy to discern in charts, but are rarely explained to the public. Apple's stock will encounter resistance as its rising price hits pockets of investors who bought in the upper price ranges AAPL set during the technology bubble last December, March and April. Many of these investors watched with regret as their investment in Apple turned to red ink soon after they bought. Others have lost their faith in Apple and some even forgot why they bought in to start with. All they remember is their money has been dead for months now. A few so-called investors bought AAPL in those heady days as a mindless momentum play and got caught so deep underwater that their short term play became a long term hold. The psychological state of these poor souls will compel them to liquidate their shares once the stock price trends back up to their purchasing price - only too happy to get their investment back whole. Thus, when the AAPL's price hits a zone of resistance demand for the stock may be overwhelmed with sell orders and the price will retreat lower to find equilibrium. Eventually, if demand stays strong, the disenchanted investors forming the resistance zone will exhaust their supply of shares as buyers overwhelm sellers and push the price through the zone to new highs. Of course, how strong demand remains for Apple stock this autumn depends on many conditions well beyond Apple's control. The $58 range is one such strong resistance zone that has already turned AAPL back twice — once in June and once in July. Nevertheless, AAPL's recent momentum suggests that at some point the sellers in this zone will exhaust their supply of AAPL and the buyers will advance onward to the next resistance zone at $64. OS X, the wild card Last year the wild card going into the autumn was what effect, if any, the Y2K turnover would have on the stock market. Actually, Y2K had a huge effect on the market, but that effect was just exactly opposite of what most people (including myself) predicted it would be. The Federal Reserve poured billions into the system to assure liquidity in the event of a Y2K financial crisis and in hindsight this was like pouring jet fuel on the already flaming hot tech stocks. This year the wild card is more localized. Mac OS X is likely to make its beta stage appearance sometime next month. Without a doubt the introduction of OS X will herald the single most critical phase shift in Apple's history since the switch from 8600X Motorola processors to the PowerPC platform in 1994. Although Mac OS X is not likely to be released in its full glory till the spring of 2001, investors have a way of anticipating major bifurcations. OS X's beta outing this fall could really add a head of steam to Apple's stock as investors realize the exact opposite of Eric Raymond's The Mac is Doomed prediction is likely to come to pass. OS X could fill a broadening market gap that Linux is opening up in the Windows/NT facade. Windows is a decaying corpse and Linux is enterprise only. Gnome is years behind the Mac OS GUI. There could even be a run on Apple's stock, much like the speculative mania that swept the Linux stocks late last year, as investors realize the Mac OS is the only truly consumer friendly OS left standing. The Mac market share is already so small that any disintegration the Windows' monopoly is likely to incur as result of its collision with Linux will strongly benefit the Mac platform, even if the lion's share of users migrates to some flavor of Linux. Moreover, as we move away from the platform monoculture years of the late 1990s, the broad IT trends favor OS diversity, not consolidation. The remainder of the year should be very interesting for Apple investors. I'm glad I'm fully invested. Your comments are welcomed.