Weekday Trader
What Does Apple Do for an En-Core?
By Lisa R. Goldbaum
Apple Computer's (AAPL) dramatic comeback in 1998 has investors believing
in miracles.
After all, it was only a year ago this month that the company fired CEO
Gilbert Amelio, who was deemed a failure for not getting the foundering
company back on its feet in his 500-day tenure. The company seemed to be
teetering on the brink of extinction, and its stock was hovering around 16,
near its 52-week low.
In fact, Apple had sunk so low that arch-nemesis Bill Gates felt
comfortable showering $150 million of Microsoft's money on the Cupertino,
CA-based computer maker last August. Gates's sudden "generosity" sent a
clear signal to Apple, once Microsoft's bitter rival: You're no longer a
threat. (Indeed, at the time, there was some speculation that far from
being a vote of confidence, Microsoft's investment in Apple was more likely
an attempt to keep the Justice Department at bay.)
But whatever the reason, Gates's investment in Apple has helped turn things
around for the company. In addition to the money, Microsoft (MSFT) promised
to make Macintosh versions of some of its big-selling software programs,
like its Office suite. That was key for Apple, which had to win back
software developers who, as we noted in our January 8th Weekday Trader
("Despite Profits, Apple Faces Perilous Future"), had abandoned the company
as its market share fell.
The return of founder Steve Jobs also gave the company some direction.
Apple launched an aggressive new marketing campaign and released successful
products like its G3 line of computers, which boasts speeds said to surpass
Intel's (INTC) Pentium; and more recently, the new iMac, which caters to
the consumer market and has been well received in the trade press.
Apple's stock has certainly reflected the company's recent successes. Since
the end of last year, it has risen from a 52-week low of 12 3/4 to its
current price of 33 15/16 -- a gain of about 160%. That has made it the
best-performing major PC hardware producer in that time -- even better than
Dell Computer's (DELL) 150% gain and Compaq Computer's (CPQ) relatively
meager 20% advance.
But now some industry pros have grown cautious on Apple's stock, suggesting
that any further gains may be tough sledding. They say that the company,
whose market share is a paltry 5% in the U.S., may have a tough time
winning new converts and first-time buyers to its machines.
Analyst Keith Bossey of Robert M. Cohen & Co., who recently lowered his
rating on Apple to Neutral from Speculative Buy, notes that Macs are still
more expensive than are comparable offerings from PC makers like Dell. But
the last thing Apple can afford now is to wage a price war, especially in
an environment where average selling prices of PCs have been plummeting and
titans like Compaq have been feeling the heat.
It's been obvious for some time that Apple can't lure potential customers
on superior technology alone. So-called "Wintel" machines running on
Microsoft's Windows operating system and Intel's Pentium chips have
dominated the computing world in the 1990s, even though many users swear
the Mac is better and easier to use. That means that while Apple may be
able to keep its existing base of loyal followers with its new product
offerings, it will have a much tougher time taking market share away from
Wintel machines. "People still consider buying a computer to be an
expensive purchase, and they want to make the safest choice. That's not
Apple," argues Soundview Financial analyst Mark Specker.
If Apple decides to become more of a niche player for the education and
graphic design markets in which it has historically been strong, some
analysts worry that won't be enough to fuel its future growth and push its
stock price even higher. "You can't increase top-line growth with a narrow
focus," argues Bossey. "They are at a crossroads: Are they going to be a
box maker for the world, or a narrowly focused, high-margin company?"
That's why some analysts think it might be time to take some profits in
Apple stock. At current levels, the shares certainly don't look like
screaming buys. After rising 1 7/8 Monday to close at 33 15/16, they change
hands at about 20 times Zacks Investment Research's $1.75 consensus
analysts' estimate for the fiscal year ended September 1999. That's about
in line with its expected growth rate for next year, but a pretty steep
premium to the company's projected five-year growth rate of about 12%.
"Why would we want to pay that multiple after a more than 100% gain in the
stock, especially in a declining environment for margins in boxes?" Bossey
wonders.
Faced with that kind of skepticism from Wall Street, Apple won't be able to
make any mistakes on its path to recovery if it wants to see its stock
return to the near-70 all-time highs it achieved in its heyday during the
early 1990s.
But if it begins disappointing investors again, not even a miracle may be
able to save Apple Computer this time around.
BARRON'S Online Weekday Trader is located at
interactive.wsj.com
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