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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: dybdahl who wrote (72020)	8/2/2002 2:14:23 PM
From: Rusty Johnson	Read Replies (1) \| Respond to of 74651

Apple seeding 2002-07-30 As broadband takes hold, Apple's graphics strength should come to the fore Multex Investor by Dave Sterman, equity research columnist Conventional wisdom holds that Apple Computer (AAPL) will never be able to break beyond its niche of multimedia-savvy users and educational institutions. But the conventional wisdom is wrong. You won't see it in the numbers yet, but Apple's new products and strategies are setting the stage for a strong multi-year growth spurt. If you can visualize where the Internet is headed-interactive games, streaming media, and other entertainment products that capitalize on broadband-then you can see how Apple's digital media focus will start to pay off. Of course, myopic investors only look at the short-term. And they have little to be enthused about right now. Second quarter sales were disappointing, sending shares down to $15; the stock hasn't been this cheap since 1998. Apple's shares had taken flight this spring on hopes that the new iMac would be a home run. But after an initial spurt, sales cooled as consumers have turned spendthrift. But focusing on the iMac-or the next few quarters-is missing the bigger picture. New digital products, a new retail strategy, and a strong management team means this story has legs. Apple is positioned for growth in the coming years, even as the broader tech landscape continues to contract. The recently-released iPod gives a glimpse of what's to come. The music player has been a hit with consumers thanks to its cutting-edge design. On Aug. 24, Apple will methodically expand the product to be Windows-compatible, which should boost sales, just as the initial Mac OS device reaches a degree of market saturation. The iPod shows a glimpse of Apple's future-along with its potential profitability. Technology research firm IDC thinks the iPod could capture up to 20 percent of the MP3 portable music player market in 2003. If they're right, that would translate into about $1 billion in additional sales and $0.35 more in EPS for Apple in 2003, according to Needham & Co.'s Charles Wolf. And UBS Warburg's Don Young adds that iPod's gross margins are roughly five percent better than PCs. Now extrapolate that one product into a broader vision of a line of higher-margin digital products. Later this year, Apple is expected to capitalize on the iPod momentum by steadily releasing a new stream of products. The company's iPhoto software is a natural for the camera industry. An operating system that edits, crops, re-sizes (and eventually wirelessly transmits photos) further positions the company for new, non-PC markets. Leverage that notion into areas such as moving images, animation, and gaming, and it's easy to see how Apple can grow at a faster clip than the moribund computer market. Tying all these products together: the Apple store. Many have questioned the company's plans to open a retail store base-especially after Gateway (GTW)'s highly-publicized failure and retrenchment from a retail strategy. But a retail presence for AAPL makes sense for several reasons. For starters, the company has found it difficult to convert PC users to Mac because consumers are concerned about a lack of software support. That's why Apple's market share has been steadily eroding over the last decade. To dispel those concerns, Apple's shelves are lined with hundreds of different Mac-related titles. Apple has found that customers that become aware of the high level of software support convert to their products at a much higher rate. More important, the Apple store visually demonstrates the combinations of PCs with Apple's current and upcoming digital mobile products. The customer can actually play around with the products and see how seamlessly they interact with the Mac OS. The Internet simply cannot deliver that level of user interaction. Right now, the company is in a slow rollout mode, tinkering with size and layout. Thirty-one stores have already opened, with plans for an additional 20 stores later this year. The company expects to be profitable on a per-store basis within a few quarters, and if all goes well, the pace of new store openings could accelerate as we head into 2003. Ron Johnson, former vice president of merchandising at Target (TGT), has been hired to lead the store base effort. Other execs from Target, Gap (GPS), and Federated Department Stores (FD) have filled other key retail posts. Of course, a store base costs money. But management is convinced that Apple can offset operating expenses by capturing higher gross margins by eliminating third-party distributor commissions. So why are we talking about Apple right now, while quarterly results are lagging? Because Apple is sitting on a hefty $4.3 billion in cash ($11.74 a share). Which means that the company's stock price reflects little more than cash on the balance sheet. With shares trading some 80 percent lower than their March 2000 peak, they should now hold appeal to both value and growth investors. For the value crowd, there's that bullet-proof balance sheet and a trailing price-to-sales multiple of 1.2 times. Dell Computer (DELL), in contrast, trades for 2.4 times sales. For the growth crowd, there's well, growth. Wall Street is still not sure how earnings will ramp in the coming years (the company is always tight-lipped about product plans). But this company has been counted out several times before, only to make a Phoenix-like rebound. Merrill Lynch's Steve Fortuna expects a new round of hot products to appear in time for the holidays. At that point, the Apple story "should get more interesting" he notes. There's a good chance that the stock will start trading back up in coming months as investors anticipate Apple's next wave of products. And the current entry point, right above cash, looks mighty enticing. Dave Sterman is the Director of Research of Chelsea Research and a financial commentator for various news outlets