|by Wes George
AAPL Starts To Rise...At Last
April 26th, 1999
I often run into people, especially those with MBAs, who believe that the stock market is largely a rational affair of ask and bid, of earnings and evaluations. The market certainly is never wrong but it is often freaky and always full of suprising opportunities for profit. No amount of analysis can ever be anything more than nostalgic hindsight pasted over an uncertain future.
Take last week for example. I, for one, had just about had it with AAPL. For months now there has been more action in my municipal bond portfolio. Then, WHAM!, on Thursday AAPL gapped upward over a point at the open and continued to soar through Friday with more than double normal volume. Cool.
Big price gaps that form overnight are powerful signals traders often use to determine when a stock is ready to steepen its angle of ascent and break out of a trading range. Apple's long languish in the mid $30 range was being artificially maintained by the bad news from Compaq and the general downgrade pronouncements made upon the whole PC sector. Then, Apple in one swift move went from being a lagging value/growth issue to a momentum play
Well, we should wait and see how this week plays out before we use the honorific "momentum" label.
They Have Seen the Light
Apple investors are clamoring to "know" what "caused" the leap in the share price and volume last week. Analysts are adepts at inventing rational explanations for price moves. But usually price moves are more closely associated with the shifting gut feelings of investors than with any new fundamental change in the issue at hand. Apple is a perfect example of this. The company has been executing flawlessly for six quarters. It doesn't take Nostrodamus to predict which way the stock price is heading now.
My own rational b.s. on Apple's surge is that there is now taking place a fundamental shift in the gestalt of how Apple is perceived. In fact, I half-believe that Compaq's botched quarter has increased investor's efforts at "due diligence" in the whole PC sector and that has brought to investor's attention the insanely great numbers surrounding the little Apple Corporation.
I'm not surprised by the move towards the $40's, only by the inscrutable timing. We've been in an upward trend since bottoming out at about $32 in mid-March even while hemmed in a narrow trading range below $39 and above $34. Apple has every reason to be more highly valued than it is.
So it's not hard to imagine that when IBM, Gateway and other big techs came out with strong earnings, skittish investors realized Compaq's illness wasn't contagious. In fact, with a closer examination, PC sector investors may be coming to the same conclusion AAPL investors have had for months now. That the PC price wars, Pentium III fiasco and softness in the enterprise market have only an amplifying effect on Apple's long term market share.
As for Compaq, that train wreck is really the result of the merger with Digital and Tandem which gave Compaq a huge and envious (at the time) distributor base. Pieffer and Rosen thought that this was a huge advantage but it turned out to be like wearing leg weights in a 100-yard dash. Dell pioneered the direct Internet marketing approach that Apple has emulated admirably. Now the results are in and online stores win hands down.
Nothing but painful and dubious restructuring options exist for Compaq who must now, belatedly, come to grips with the Internet age. Thus, Compaq's meltdown has nothing to do with the over all health of the PC market and investors are flocking back in droves.
Still groping for a more causal explanation for the AAPL surge? Last week Herb Greenberg, a PC analyst without a clue to what Apple is up to (I think I called him a PC borg' once, sorry) did have the savvy to post the ramblings of some anonymous Wall Street stock picker who's been on a lucky streak lately. The nameless high tech PC-centric guru insists that
- "I may have lost my mind on this, but I am really beginning to believe this company is misunderstood and under appreciated." (Duh!!)
- "Apple will have over $2.6 billion of net cash on the balance sheet, which is $15.20 a share, -- NET. That is 42% of the stock price
Once they eliminate their convertible debt on June 1." (Bet you can't name another high tech issue with now 38% of its stock value in cash!)
- "Remember that Apple has a cost advantage of over $100 a box over the Wintel contingent because they don't pay Intel for their expensive processors and they don't pay Microsoft." (Wish I had thought of that. It's such an obvious fact that its nearly invisible; we tend to forget about the price advantage of being an OS and hardware company in one.)
- "13% of buyers are Wintel converts and a large percentage are first time computer buyers." (Old news, but bears repetition till the true forward-looking implications dawn on investors.)
- "Apple doesn't have much of an enterprise business. This suggests to me that they have less Y2K push-out risk than other hardware companies have, and that could be the reason that suppliers are telling us that orders from Apple are accelerating." (Hmm, if a Mac friendly analyst said that I'd be impressed by his or her creativity.)
- My 14-year-old needs a new computer, and she'd really like a blue iMac! (Perhaps the most bullish reason yet to buy AAPL.)
- "The net of all this is that I could see perception of Apple changing dramatically over the next six months or so. In a world of vast uncertainty in the PC space, Apple should be one of the few companies to grow." (Hallelujah! They Have Seen the Light!)
Laptops sales are accelerating
A closer look at IBM's numbers reveals more interesting clues. I was surprised to see that IBM's laptop sales increased 67% last quarter. Sure, their ThinkPad 600 is an excellent machine, if a bit pricey at around 3,000 bucks. However, that 67% indicates something more about consumer demand for laptops beyond the latent quality of ThinkPads.
The Wall Street Journal said on Friday that, "Paine Webber estimates that laptop sales account for about 40% of IBM's commercial PC sales, and that they are growing faster than other types of personal computers." IBM holds the number 3 spot in overall laptop PC sales. The commodity giants Compaq and Toshiba hold the number 2 and 1 slots, respectively. Neither of those companies has ever shown much innovation and are marked targets for market share snatching.
Looks like great timing as Apple plans to bring out the Lombard PowerBook next month perhaps at WWDC, May 10th. The market for laptops is expanding more rapidly then desktops. (See the 101 Lombard at http://ogrady.com/models/101.asp ) And this expansion is accelerating. The portable market is expanding industry wide at 19%.
While Apple's share of this market is miniscule compared to IBM's projected $4 billion plus in laptop sales this year, the world has yet to see the likes of the consumer portable. Look for the P1to debut strategically spaced late in the fourth quarter.
Actually, the age of the laptop has only just begun to dawn. Although laptops have been around for a few years its only recently that displays, size and CPU power factor have converged with long battery life and DVD-ROMs to make laptops a compelling purchase for most people. Less expensive portables could really ignite a whole new market niche for a company with consumer savvy, incredible design factor and powerful branding. Sounds like a mission for Jobs and company.
In other interesting news, Apple's poison pill option that it has had in place for ten years expired last week. This means that there just might be the excitement and volatility that comes with take over offers in the next few quarters. Apple is still way undervalued till that PE ratio gets up to the industry average of 30 something. Short term Apple with no poison pill looks like a low risk speculative buy on the hopes that a credible take-over bid could drive the stock straight through the forties without a hitch. Note to hacker types: don't jack with us a la Pairgain.
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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.