Apple's Stock: A Double Your Money Gamble? December 4th, 2000 A fashionable friend of mine from San Francisco's dot com culture asked me if I still write about the stock market. When I said I do, she said, "Oh, silly, haven't you heard? No one is buying stocks anymore!" In fact, I have noticed the market is going through a little downturn, but I found her quip strangely reassuring after the this-time-its-different tech stock mania earlier this year. All is well. The more things change the more they stay the same. "My dear," I should have said, but didn't, "The time to buy stocks is during a bear market — not at the bull's peak." I rarely think of snappy retorts in the heat of conversation. Of course, the real time to buy stocks is at the END of a bear market and that may still be a long ways off, especially for PC stocks. Recently, I've received a number of pertinent questions about Apple's stock, so this week I'll try to answer a few of the most common ones. Is AAPL a good buy at this point? Yes and no. Everything depends on what sort of product strategy Apple has in the pipeline for next year. Obviously yes - if you look only at Apple's fundamentals. The stock is so beaten down that there's very little room for it to move further south. Apple has $4 billion in cash, so even without looking to future sales the company is worth about $12 a share. If the company decided to close up shop and liquidate all its assets in cash, Apple's shareholders would probably receive more than the current trading price per share. Apple is a true value play. Apple is also an excellent investment from a technical or chartist point of view. The old cliché, buy low, sell high, succinctly summarizes the obvious opportunity presented by AAPL's plight for investors doing bargain basement shopping. Apple has given back all its gains from the frivolous technology bubble and then some. The stock is planted solidly on a stable support level backed up the company's fundamental net worth. Only really awful news could push the stock lower. However, if you are looking for a quick turn around on your investment or a business with an unequivocal path to future earnings growth, check out beaten down companies like Motorola or Akamai who are leaders in industries that are clearly in expansion mode regardless of the slowing economy. As you might have noticed, PC stocks are way out of favor with investors. Conventional wisdom suggests that the traditional MHz-driven PC upgrade cycle is finally breaking down. Most U.S. households already have one or more PCs. Savvy consumers realize replacing their Power Mac G3 250 MHz machine with a new G4 won't deliver a significantly improved computing experience for the most common user tasks. The situation is the same on the PC side. What difference does an extra 500 MHz mean to the average office worker who already has a 450 MHz PC? The breakdown of MHz-upgrade cycle is most disconcerting to PC stock investors, because it means that a huge industry must fundamentally shift its traditional business models to new modes of marketing, new categories of products and even attempt to invent entirely novel markets. Sounds exactly like the type of daunting challenge Steve Jobs thrives on. No PC company has yet made the transition. In fact, most have only just begun to take steps towards new models for sustainable growth. Worse, it is entirely unclear what the PC industry is transitioning towards! No one knows what the best business strategy will be for PC manufacturers in the near future. No one knows what new product form factors will prove successful with consumers. Historically, such forced paradigm shifts in an industry's fundamental modus operandi has meant some firms will fail to successfully complete the transition and disappear into the fog of history. Who remembers Wang? The shifting sands of the PC market deserves a more complete analysis than the above, but suffice it to say that Apple is both ahead of the curve on emerging PC business paradigms and behind it too. Apple's dependence on Motorola's perpetually lagging semiconductor speeds reinforced Apple's talent for developing products based on elegant design factors and user friendliness rather than depending on CPU speed as the only driving force behind sales. Apple was hip to the Internet as the killer app driving PC sales well before its peers. The iMac was the world's first Internet Appliance. AirPort anticipated the accelerating trend to abolish cables. The iBook is only a few morphogenic steps from being a gorgeous and powerful handheld iDevice. As Steve Jobs might say, the DNA is there. However, Apple has lagged behind the other PC vendors in marketing skills. Cupertino has neglected adding services to their inventory of sales enticements. Dell is overtaking Apple in schools because Dell puts people on the ground to solve problems in a personal way. Gateway's emphasis on a warm and fuzzy family image is quite a contrast to the icily clinical Mac ads. Nor has Apple followed up on its early lead in the Internet appliance market with handheld and countertop iDevices. Should I buy AAPL now or wait? While it seems unlikely that AAPL can fall below $16 a share even in the face of a recession, all the bad news is not out on Apple. When Apple announces its 1st quarter earnings in mid-January, there is no doubt that comparisons with last Christmas's earnings are going to have a negative effect. AAPL is not likely to make much, if any, headway for several quarters until the company gets back on track with earnings growth or announces inspiring new products. In fact, there is some doubt that Apple can meet its lowered estimates for the 1st quarter due to the unexpectedly weak PC market. Worse still, some reports claim that Apple has yet to make much of a dent in its over-hanging inventory, which Steve Jobs said the company is going to liquidate in just one quarter. Apple's inventory problems could spill over into the 2nd quarter — normally the weakest of the year anyway. Sales could be so bad that Apple delays the introduction of any planned product upgrade cycles. Perhaps the most likely scenario for AAPL is for it to trade in a $16 to $25 dollar range until something substantially new changes the picture. If you missed the current dip to $16.50 because the oversold Nasdaq decides to rally this week, you may well get another chance before this bear market is over. How does Apple plan to grow earnings and revenues next year? Good question. Not only are Apple's future plans entirely secret, there is little agreement among observers as to how Cupertino should proceed in a PC market which is changing faster than at any other time in its short history. Of course, I have my opinions about what Apple should be doing to grow its market share, but no one outside of Apple has all the pertinent research assembled before them like Apple's management. Only Apple's management can save Apple and they aren't talking. It's important to note that Apple's leadership isn't overly concerned with the price of Apple's stock. That would explain, in part, why Apple reveals very little about their strategies to sustain growth going forward. Mac heads love to rail about how Wall Street hates Apple and punishes it disproportionately from the other PC vendors. That's just naive. What's really going on is that many investors can't even imagine how Apple is going to be profitable once the iMac phenomena becomes yesterday's news. Of course, this hardly means Steve Jobs and his visionary team don't have an excellent plan — just that no one has a clue what it is. Thus, the level of perceived uncertainty surrounding an investment in Apple is a few notches higher than Gateway or Dell and far higher than companies like Oracle, Sun and Microsoft, who go out of their way to weave vaporous scenarios of happy futures in order to reassure to their shareholders. I am looking for a double-my-money play — is AAPL it? After reading the above it may seem a contradiction, but I believe Apple's stock is likely to double within 12 months. My double-your-money forecast is based upon the assumption that Apple is going to introduce new products that capture consumers' imagination next year. Such a supposition seems like a reasonable gamble in light of Apple's recent product history. However, if you don't believe Apple can recreate the iMac's success with some sort of handheld or consumer Internet device, then do not buy the stock. At this point, with the future of the PC market in question, a looming economic downturn and with little knowledge of Apple's future hardware strategies, all we have to go on is how Apple has behaved in the recent past. I bought AAPL at $65 a share —should I average down, just wait for the stock to come back or take a tax write off? Apple could introduce successful new products and even capture new market share in 2001 and still not make it back to $65 per share. Only the most Pollyanna forecasts call for new highs in the PC sector in the next year to 18 months. The type of frenzied tech bull market we experienced last October through March may have been a once in a generation event. Instead of waiting several years for AAPL to make new highs and absorb that extended period of risk, a better approach might be to average down by buying more shares of AAPL at the current price. What's the worst-case scenario for Apple? Apple is in the position of an up-and-coming theater company, it's only as great as its last big hit. The company's last production, the G4 Cube, is an over-priced flop, even though the critics gave rave reviews. Ironically, just when Apple seemed to have moved its show permanently to Broadway, the Cube's botched debut envinces that Apple is merely a flop or two away from financial extinction. The $4 billion in the bank will quickly begin to atrophy unless Apple creates new products to drive new revenues next year — products that are not only insanely great, but box office successes too. 2001 will be the most critical year for Apple since Mr. Jobs returned to the helm. Your comments are welcomed.