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To: kemble s. matter who wrote (155479)	3/22/2000 6:56:00 PM
From: calgal	Read Replies (1) \| Respond to of 176387

Kemble, FYI, An interesting article about Apple. :) Leigh "On the financial side, Apple has become a manufacturing machine just as lean as Dell, the poster child for efficient capital utilization. Apple carries only a day's worth of inventory, and free cash flow in 1999 was more than 12 percent of sales." cnbc.com Mar 22 2000 2:16PM ET More on Stocks Contributor... Apple Computer Thinks Differently by Pat Dorsey Senior Stocks Analyst, Morningstar.com Special to CNBC.com If there is one thing the past couple of years has taught technology investors, it is that style matters. As technology becomes a central part of our lives, we are no longer willing to settle for ugly utilitarian boxes that do what they are supposed to do; we want a little pizzazz as well. Nokia Corp. {NOK}, for example, figured this out some time ago and positioned its mobile phones as fashion accessories, rather than just communications devices. Meanwhile, most computer manufacturers are just starting to get the picture. But Steve Jobs, cofounder and CEO of Apple Computer Inc. {AAPL}, got the picture a long time ago and has been in the vanguard of personal-computer design from day one. The original Macintosh was a blockbuster, not only because of its easy-to-use interface, but because it was designed with the novice computer user in mind. You took it out of the box, plugged in the keyboard, and you were ready to rock 'n' roll. Same goes for today's wildly popular iMacs. Apple gave consumers a choice of colors and made the machines easy to set up and use and the world has beaten a path to its door. What Jobs is doing with Apple is similar to what Herb Kelleher did with Southwest Airlines Co. {LUV} -- creating a whole new market for products instead of just attacking the competition Just as Southwest priced its tickets low enough to entice leisure travelers into taking trips they would have otherwise foregone, Apple is making its computers slick enough to attract folks who have never owned a computer. Thirty percent of iMac buyers are first-time PC buyers, a figure that hints at the machine's appeal to the half of U.S. households that don?t own computers. The Wintel crowd -- companies that make computers based on Microsoft Corp.'s {MSFT} Windows operating system and Intel Corp.'s {INTC} microprocessors -- is just starting to notice this untapped market. It wasn't until well after the iMac was a raging commercial success that Compaq Computer Corp. {CPQ}, Dell Computer Corp. {DELL} and Gateway Inc. {GTW} brought out PCs that broke the beige-box mold and were aimed at the novice user. As for Apple's stock, the biggest risk hanging over the shares -- that Jobs would decamp to Pixar Animation Studios {PIXR} and leave Apple in the hands of mere mortals -- is gone, now that he has dumped that wishy-washy "interim CEO" title and promised to stay on. This is a big reason to give Apple's shares a close look, even after they've more than tripled over the past year. The reason is simple. Jobs understands consumer computer design better than anyone else, and as computers become increasingly commoditized, design and usability are elements that can help keep Apple's gross margins higher than the rest of the PC crowd's. Moreover, Jobs has figured out that PCs are consumer products just as much as they are information-access devices. This insight is crucial to tapping into the new-user market. Microsoft Intel Compaq Computer Dell Computer Gateway Pixar Animation Studios On the financial side, Apple has become a manufacturing machine just as lean as Dell, the poster child for efficient capital utilization. Apple carries only a day's worth of inventory, and free cash flow in 1999 was more than 12 percent of sales. And speaking of cash, Apple carries about $3.7 billion -- or $20 a share -- in cash and equivalents on its balance sheet, which is a nice chunk of change to have lying around for investments, acquisitions, buybacks and the like. Apple's Achilles heel is the corporate market. The company has had little success in this arena and isn?t making much effort to attack it. In a way, this might be a smart move. Instead of wasting money and time trying to penetrate a market that's owned lock, stock, and barrel by Microsoft, Apple is focusing on its core strengths in the consumer and educational markets. Still, not having a corporate presence limits Apple's room to expand its 4.4 percent share of the U.S. computer market and is certainly a worry. Another negative is the company's limited product line. Although only having a few models has done wonders for the company?s efficiency, it also makes the risk of a new-product flop that much more significant. So far, Jobs is batting a thousand, but you never know what's around the corner. However, given Jobs' success at targeting the "newbie" market -- people who haven?t owned computers before -- I'm inclined to give Apple the benefit of the doubt. The world is changing, and corporations are no longer the be-all and end-all of the PC market. At the end of the day, companies that focus relentlessly on the consumer's experience with their products usually do well, with Nokia and America Online Inc. {AOL} being two of the most prominent examples. Although the risks aren?t small, Apple's comeback is the real thing, and Jobs is a horse worth betting on. Pat Dorsey can be reached at patrick.dorsey@morningstar.com