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Columns & Editorials

by Wes George



and Trading.

Mmmmmmm...... Good

A Detailed Look At Apple's Stock Drop
January 18th, 1999

The Apple Trader comes to you from Houston Texas this week. I am on the road and getting a chance to put to good use my PowerBook G3 series, the Wall Street addition, of course. It's actually my wife's PowerBook. Bryan, our good editor-in-chief here at the Mac Observer, has promised us all PowerBooks but not until after the IPO is completed; and that may be awhile [Editor's Note: That was actually a promise to let you all "look" at a PowerBook G3 after the IPO].

I've decided this morning to compose my little ditty at a rather chic looking coffee house here in the town that oil built. This is the first time I've ever brandished an information manipulation tool in public and I feel a bit self-conscious, but supremely cool.

That's good because I definitely lost my cool last week in the stock market. As my faithful readers probably remember I boldly, some say foolishly, predicted that Apple wouldn't sag below 45 bucks. This pontification was based on an old technical analysis rule of thumb that resistance once broken becomes the new level of support.

Naturally, Apple stock collapsed to 41 bucks in one nasty session, an 11% bust Thursday, after Apple's enemies fouled our favorite company with false charges of stuffing the channels.

I really thought the good news of Apple's first year-over-year quarterly sales increase since first quarter 1996 would be what Wall Street longed to hear. But apparently that had already been factored in by the pundits. The announcement of quarterly earnings above first call's estimates served only to give the analysts a chance to search Apple's track record for chinks in the armor.

Guess what? There's lots of them. For instance, although Apple is clearly on the come back trail with revenue up to $1.71 billion up from $1.58 billion a year ago that's still way down from early 1996 when Apple did $3.15 billion worth of business. So, while the PC zeitgeist thundered along with record growth on all fronts the last few years, the Mac universe collapsed in on itself like a neutron star leaving, analysts fear, only the densest, hard-core Mac aficionados as a customer base. A comeback was going to be hard enough in 1996 when Apple was on its knees. Too bad our hero and iCEO Jobs waited till she was face down in the pool to start the revival. Now I'm afraid she may be brain dead

Speaking of brain dead what was Steve Jobs thinking when these words left his mouth: "We think one of the most important questions now is 'what is your favorite color?' This is far more important than the mumbo-jumbo associated with buying a computer. People don't care about that stuff. What they care about is 'I want to express myself.'"

Hasn't anyone bothered to show Steve those famous Dilbert cartoon's where Dilbert makes fun of his non-techie boss by recommending computer purchases based on case color?

More importantly has Steve lost his mind? Sure, during the iMac induced sugar high of MacWorld such a hyperbolic paean to the gullibility of the American consumer was passed off as cute, if not visionary. But upon retrospect it looks embarrassingly like an uncle Steve dancing with the lampshade on his head.

Call it the 'morning after MacWorld' effect, the reality distortion field fades, everyone has a headache and the stock price fades a bit. Every time MacWorld rolls around I get all excited by the speculative run up only to be let down by the post-MacWorld sell-off. In fact, since Steve Jobs has been back one could make a case that MacWorld has been purposely turned into a nonevent as far as announcements go, except, of course, for that one where Mr. Gates made a Darth Vader style appearance. Perhaps Steve wants to spread the press releases out on the calendar more.

Apple needs to be concerned about it's image as a "serious" computer company, not one run by people who once tried (seriously) to levitate the Pentagon. A backlash of level-headedness was inevitable and it came in the form of profit taking and sobering reviews by suit-clad analysts.

All this buffoonery about candy coated computers obscured what should of been the big headliner story from MacWorld: The new G3 with the Yosemite case design, firewire, USB, and copper chips. Did the iMac really need another promotional boost, especially at the expense of the more "mumbo-jumbo" technical stuff Apple also needs to market well?

The under-promoted, new G3 may be just the leap in performance level needed to persuade all those who stubbornly cling to their 8500/9500 era machines to spring for that upgrade. By making yesterday's news--the iMac-- dominate MacWorld, Apple practically suggested to Wall Street that they're having a hard time clearing the channels of the Bondi-blue wonders in advance of the new G3's.

The OS X server story also seems to have gotten lost in the iMac purple haze. The OS X release hails the beginning of a new two-tiered OS strategy for Apple. There is now a pro and consumer version of the OS and this difference will become more pronounced in the future. It's release may someday be heralded in the history books as an event far more important to the future course of Apple than the addition of color to the iMac line.

Steve has also of late taken to telling the press strange things about Apple computer. For instance he said to the press that 69 percent of iMac purchasers are new clients for the Mac platform. The real number is more like 45 percent, Steve was counting in current Apple users who bought an iMac but didn't do so to replace an older Mac.

This type of truth stretching techniques dilute the credibility factor around the bossman when he does drive home honest to goodness points with the press. Happily, here's a true statement made by Steve: "Unit growth year over year was three to four times higher than the industry average. In addition, Apple ended the quarter with only two days of inventory, besting industry leading Dell's seven days of inventory."

Bad news or at least sober points of view were all the rage in the week after MacWorld. Rich Gardner, an analyst at Salomon Smith Barney, cut his rating of Apple to a "neutral" from a "buy". He said what I've been saying all along. "We were disappointed in Apple's unwillingness to reduce iMac prices during the December quarter." He's worried that Apple has too many iMacs left to sell. "During the seasonal weaker March quarter, the iMac will have even more intense competition from Intel-based PCs since Intel appears to have over-produced Celerons which must now be sold at reduced prices during the March quarter."

Perhaps Gardner is thinking about the E-machine threat. You know, that creepy little Korean PC manufacturer famous for it sub-$500 dollar computers. Now they are going to do no-frill systems for 400 bucks including the monitor. They have also threatened to try to cash in the iMac fad with a lookalike iMac PC rip-off. If they don't do it, it's only a matter of time before someone else does.

What really hurt the stock price on Thursday was Gardner's below the belt punch about channel stuffing. The jerk estimated that up to 200,000 of the iMacs shipped at the end of last quarter were to clear out inventory into the retail channels to artificially inflate the sale figures for the iMac. He also claimed that CompUSA and Best Buy had to sell iMacs at a loss during the quarter.

If true, these are fairly serious charges. If false, my more cynical sources have suggested to me that Solomon Smith Barney probably took profits on the recent Apple stock run up and was now going to a short position. Thus, Mr. Gardner's statements were a bald attempt to manipulate the market downward.

But don't panic, there are still plenty of experts who are bullish on Apple in 1999. Lou Mazzucchelli at Gerard Klauer Mattison, for instance, raised his price target on Apple shares to $60 from $55 based on his forecast of higher earning estimates as well. Kevin McCarthy at Donaldson, Lufkin & Jenrette also raised his rating on Apple.

The gross margins are the highest they've been in four years, close to 28 percent. This is remarkable considering the rest of the PC market is in a price war and increasingly going to see a steady, irreversible erosion of their profit margins due to overseas cutthroat competition, a la E-machines. Apple, coexisting with the PC world in it's own little niche, seems to have been partially immune to the type of pricing pressure the PC world has felt. No one bets that this happy state of affairs will continue forever.

To summarize this rambling didactic: Apple is going to sink or swim in 1999 based on innovative new consumer products. MacWorld was more a celebration of the beginning of the end of the iMac product cycle than a product launch for the new G3. Too bad. Look for the stock to slowly go nowhere till the iMac shows the naysayers it has staying power or the G3 proves to be a hot item, or both.

Ultimately, all bets ride on that unknown quantity that is the webmate. This secret machine seems to be Apple's one great hope for a repeat the iMac success in 1999.

Oh, and don't rule out any suprises, either.

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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