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by Wes George



and Trading.

Mmmmmmm...... Good

Is Apple Wall Streets' New Darling?
June 7th, 1999

First, the good news

AAPL performed like a champ for investors the first week of June. While much of the market sagged under its own overvalued weight, AAPL drifted higher on a daily basis. Some of the new momentum must be due to the 18 million shares in short interest that dangle in dire need of cover. The rest of the rise can be attributed to the combined strength of the recent upgrades, such as Moody's notable boost of Apple's debt rating.

But it was Salomon Smith Barney's buy signal with a 12-month target of $55 that gave news editors the ammunition to create sound bite size explanations of AAPL's recent good fortune. As if it were that simple.

The financial wizards at Salomon dallied until last week to upgrade AAPL to a buy from their former hold warning, issued back in January, on fears that the iMac might just be a passing fad. By last week AAPL was already trading at about $44 up from an average of $36 in April.

Nothing unforeseeable occurred at Apple since April to spur Salomon's upgrade. All the signs of ongoing success were in place then as they are now. Yet Salomon missed at least 50% of the recent move towards their target price of $55. And people pay them for financial guidance?

When the big investment dogs, like Salomon, put a buy rating on a stock after a solid run up such as we've seen with AAPL, it's usually an effort to perpetuate the upward momentum just a bit higher. Such an upgrade is often a signal for traders to wait 72 hours and then bail, or even short the equity, after the naïve investors buy in.

In AAPL's case the wait-72-hours-then-bail tactic might prove foolhardy since once again we're approaching the incredibly significant resistance level of $50 set back in 1995. Once that price is transcended the technical transformation from resistance to support should take hold. Those who didn't accumulate AAPL in the forties will wish they had.

Salomon's chief Apple analyst, Richard Gardener, also admonished investors to buy AAPL now before MacWorld. ‘Tis true, last year at this time AAPL did start a large $10 pre-MacWorld advance based mostly on high hopes for the iMac. This year our optimism hangs on the secret consumer portable.

So, thank you Salomon Smith Barney for the kind upgrade fashionably late to the party, but timed well for the big push towards fifty. Once again Smith Barney can claim that they're as wise as Salomon.

Just the fundamentals, thank you

The real reason behind AAPL's new momentum is the obviously terrific financial numbers behind this stock. It's the fundamentals that really put the shine on AAPL. There is perhaps no better deal on the NASDAQ right now than AAPL at its current price. As usual, Eric Yang of has an elegant chart illustrating the undervalued position of Apple relative to its peers. For instance, Apple actually has more cash on hand than AOL. However, AOL's market capitalization is about twenty times that of Apple.

Apple possesses the highest gross margins in the PC industry. Apple also maintains the lowest price to earnings ratio and the lowest price to book ratio and the best price to cash ratio in the PC industry. Inventory is the best managed in the industry. Unit sales are trending sharply higher.

Need I go on? Oh, the AAPL price is up 80% since last June. Dell, Gateway and Compaq all delivered lesser returns on investor's capital during the same time frame.

A few unsolicited speculations

Apple's prosperity stands in stark contrast to the rest of the PC sector. This beleaguered industry is experiencing permanent and possible terminal erosion of profit margins due to the arrival of machines under $600. As the Wall Street Journal pointed out last week in an article about the woes at Packard Bell, "With PC revenue relatively stagnant despite unit-sale gains, hardware profits have roughly fallen in half over the past two years. The situation is especially grim at the retail level, where manufacturers are saddled with store costs not borne by direct and online vendors."

The reason for Apple's immunity from the commodification of the PC market appears to be Apple's ability to rise above the fray. Just as Volkswagen's new Beetle doesn't seriously consider the cheaper Hyundai in their pricing scheme, the iMac can ignore the cheap PC ‘clone' invasion that Gateway and Compaq seem suicidally intent upon engaging. It's a futile battle that only an E-machine can win.

There are other reasons for Apple's good fortune while the winds of change wreak havoc in the PC aisle. One of the best management teams on the planet administers Apple's future course. Apple commands a monopoly on the Mac OS and all the hardware that goes with it. Apple doesn't have to play that stupid Intel jingle when they advertise on TV. Nor does Apple pay the extortion price Intel charges the PC manufacturers for their silicon. Apple isn't a member of the PC herd. When they veer right, Apple turns left.

But the single most important reason may be that Apple has an all-volunteer army of faithful users. This stands in stark contrast to the Dantesque spectacle of miserable Wintel conscripts chained to their PCs by their corporate masters. No one is forced to use the Mac platform.

The End Game

I've predicted before that all PCs will eventually not only be made in Asia, but due to the online revolution's effect on business structure, the American middleman corporate hierarchy will increasingly be perceived as deadweight. Dell in Austin, and Gateway in Sioux City, will shift to Korea. Asia will eventually claim the PC market from top to bottom for their own in a repeat history of the television and the VCR.

The only American survivors will be the technology houses who stay ahead of the commodification wave by riding the bleeding edge of R&D. That would be the likes Microsoft, IBM, Intel, Motorola and one would hope, our favorite little techno-innovator, Apple. One more business cycle and the fate of the rest will clearly begin to resemble RCA and Zenith.

Now for the bad news

In spite of the current bullish sentiment, Apple isn't without problems of its own. Apple's main headache is the total reliance on Motorola for G4 production. From the Register:

The sources claim that the second and third revisions of the G4 silicon -- Apple alone already has first revision silicon -- are now already six to eight months late. They also suggest Motorola has not yet issued an updated release schedule -- not a positive sign -- and reckon that it will have a real job getting production chips to market before Q1 2000.

Motorola has had problems delivering chipsets on time since the 68k days. Why Apple hasn't learned a lesson from Motorola's inability to keep a schedule is beyond me.

In fairness, Motorola denies the delays rather empathetically and claims that the G4 will ship on time in the third quarter. OK, but as noted above the G4 is already late and Motorola's recidivist history of production delays does not inspire confidence.

The problem stems from the break up of the AIM alliance. IBM and Motorola recently stopped cooperating on the further development of the G4, beyond agreeing on a few common standards for compatibility's sake. IBM abandoned the Somerset Research Center in Austin Texas. Apple has been excluded from the consulting role it once held in the development of the G3. This is mostly old news, but it's so complex, obscure and tainted with political infighting that the impact on Apple's bottom line is hard to fathom

Motorola's production problem is now Apple's problem. At the WWDC in May we were warned not to expect the roll out of the Power Macintosh G4 until sometime in the year 2000. That's a long way off by the clock of the New Economy. If Motorola fumbles yet again it could mean that Apple will turn to IBM's PPC chipset, available now, to stay in the MHz game with Intel. If so, this would be a sad day for all those committed to the vector processing magic of Motorola's AltiVec technology.

Either way, the bottom line for investors is that Apple must do whatever it takes to keep pace with the Wintel's MHz claims since this is still, right or wrong, the primary tech spec that all levels of consumers use to compare machines. Apple cannot risk the G4 falling behind the introduction of Intel's Merced.

Supporting and research links:

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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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