Dueling Fools Dueling Fools
April 01, 1998

Apple Bull's Pen
Louis Corrigan (tmfseymor@aol.com)

Apple has been a stunning disappointment to investors over the last decade, with management providing literally textbook examples of how not to run a business. I'm sure David could come up with dozens of reasons to be bearish. So why am I bullish?

For starters, I'm a Mac user. Despite Apple's troubles, I'd opt for a new Mac if Apple had an offering that is even close to the PC competition when I want to upgrade again. There's a sizable contingent of Mac loyalists out there who feel the way I do, particularly in Apple's stronghold areas of publishing, graphics, and education.

These are people with a reservoir of good feeling for Apple. They're mostly high-end users, too, the folks who helped Apple sell 133,000 units of the new G3 Macs between November 10 and Christmas, for the fastest new product launch in the company's history.

Comparing Apples to Wintels, Macs still come out ahead. Yadda, yadda, yadda all you want, but the Mac operating system is still more stable and more user-friendly than Windows. Plus, the G3 line outperforms comparable Pentium II PCs, both in absolute terms and on a price/performance basis. Care for some toasted bunny? Ease of use translates into higher productivity. Add that to the lower servicing costs, and it's clear Apple still makes the best personal computers with the lowest overall cost of ownership.

Plus, the turnaround is afoot. Since Steve Jobs arrived last summer, Apple has...

-- Put together a strong board of directors being paid only in options.

-- Killed its too-little-too-late cloning strategy that ultimately just cannibalized Apple's own revenues and margins.

-- Scored much-needed support from Microsoft in the form of $150 million in cash and a Mac-first Office 98.

-- Killed its money-losing Newton unit as a prelude to potentially extending the Mac operating system into new devices.

-- Reorganized Claris software, returning responsibilities for Apple's operating system to the parent.

-- Launched a build-to-order strategy that should alleviate the excess inventories and parts shortages that have constantly plagued Apple.

-- Hired Compaq's former procurement/inventory manager Timothy Cook to serve as senior VP of worldwide operations.

-- Launched direct build-to-order sales via its website, which did $12 million in business in its first 30 days.

-- Refocused its retail sales channel by (for now) ditching retailers such as Best Buy and Office Max in favor of a deal with CompUSA to serve up an Apple store-within-a-store format. Apple sales account for 14% of hardware sales at such CompUSA stores versus just 3% before the increased presence.

-- Simplified its product offerings with an (initial) emphasis on the more lucrative high-end of the market (the new G3 Mac notebooks are the fastest money can buy).

-- Turned profitable ($0.33 per share in the first quarter) by cutting operating expenses (to $313 million in the first quarter versus $521 million in the year-ago period and $353 million in the fourth quarter) while boosting gross margins (to 22% in the first quarter vs. 19% in the year-ago period and 20% in the fourth quarter).

Generally, a large, high-tech, consumer-oriented business should trade for at least one times sales. That would be $47 a share. Then there's Apple's brand. It's been through the mud, but it cleans up real well. With the right product, the Apple name could work as well as Sony's. Adding $1 billion for the brand could push the price target to $54.

Pie-in-the-sky? Maybe, but the key is management, since that's what turned Apple to mush. My bet is that Jobs officially takes the CEO post. Critics knock the vision thing, but Apple badly needed vision, and Jobs is a visionary. Plus, he's got the stature to enact that vision, no matter what it takes. He also has a wealth of contacts to make interesting things happen. His reputation is now tied to rejuvenating Apple, and he's not hiring any other CEO unless that guy or gal can do the job as well as he can. Not likely.

What's the vision? For starters, Apple still needs an under $1,000 box to shore up its education and low-end consumer markets. But the company's future depends not just on playing the PC-makers game but on finding a new one. Apple is still a hardware company by default. That's why the recent rumors of a project code-named Columbus are so intriguing. The company is said to be working on a low-cost WebTV-like handheld or TV set-top entertainment device that would offer Internet access and the ability to play multimedia CDs or even DVDs.

It's not clear how this souped-up riff on Apple's canceled Pippin device would play out, but Disney has been one rumored partner. And Apple may see this as a means of providing a lift to a server business run on Rhapsody, its next-generation operating system. Given Apple's rich consumer-oriented history, including the lessons learned from many false starts, it's just possible that Jobs could pull such a rabbit out of his cardigan.

Next: The Bear Argument

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