April 01, 1998
Apple Bear's Den
David Forrest ([email protected])
Being a bear on Apple is almost a cliché these days. The poor company has been slapped around by Microsoft and Intel for the past decade. Revenue in 1995 was more than $11 billion and will, at best, be around $6.5 billion this year. CEOs have come and gone at Apple and none have done much good. The one real asset the company has is its brand name. Apple is still, despite all of the horrible execution problems at the company, one of the most recognizable brand names around. But, is that enough?
As for making the bearish case, I really don't have to do any work at all. The company did it all for me in the most recent SEC filing, the 10-Q. Here are the lowlights for your perusal:
1. Mac sales declined slightly quarter-over-quarter and substantially (26%) year-over-year.
2. Peripheral sales declined by 49%.
3. Average revenue for the Mac platform is expected to "remain under significant downward pressure due to industry wide pricing pressures, increased competition, and the need to stimulate demand for the company's products."
4. Worldwide market share is now down below 3%.
The most telling statement in the entire document is as follows, and it sums up the whole enchilada:
"The Company believes that the Mac OS, with its perceived advantages over Windows, and the general reluctance of the Macintosh installed base to incur the costs of switching platforms, have been driving forces behind sales of the Company's personal computer hardware for the past several years. Recent innovations in the Windows platform, including those included in Windows 95 and Windows NT, or those expected to be included in a new version of Windows to be introduced in 1998, have added features to the Windows platform that make the differences between the Mac OS and Microsoft's Windows operating systems less significant."
The company is clearly admitting that it doesn't have a dominant technological advantage over Windows. Further, it uses the reluctance of users to switch because of "perceived" advantages as the reason for the weak sales it has had in the past few years. What's the issue here? This is a weak little company with no clear differentiation in product line over the massive competition it faces. The company has almost no products that appeal to the mass consumer. It just scrapped Newton, the only real competitor to Palm Pilot in the PDA market. The debt of the company is considered "junk." The only thing keeping Apple remotely afloat is the die-hard cultish nature of its existing base of users, and even they are bailing with every passing year.
The financial statements, while improving a little, are only improving as a result of a massive restructuring in the company that has basically gutted most of the operation. Perhaps this is a smart move. Maybe Apple will be able to focus on that ever-shrinking market where it is able to be profitable -- the high-end, G3 user. Still, debt has tripled in the past three years and now rests at $950 million. Cash has remained stagnant at $1.2 billion.
Is there more ugliness? In a wild "about face," the company stopped licensing the MAC OS just months after starting the plan. Clearly the plan to try and saturate the market either didn't work, or the company decided not to go that route. What was up with that? What a deal for Power Computing. Speaking of "great deals," can someone explain to me why Steve Jobs is willing to take millions of dollars from Apple with the acquisition of Next Software (Jobs' company), but he won't buy more than 1 share of Apple's stock? Guess he has lots of confidence in how things will turn out, eh? In fact, according to recent records, the entire Board of Directors owns only 20,000 shares, and most of that (18,000 shares) is owned by just 2 of the 13 executives.
What once was a marketing powerhouse and innovative leader in personal computing has become a pathetic little company that just doesn't know enough to lay down and close its eyes. The directors of the company are constantly in flux, the operating system bears no real value over the Windows OS, sales are declining rapidly, and there is no recognizable plan to revive this ailing corporation.
Never being one to see problems and not try and offer potential solutions, to Steve Jobs I say: "Give in." You won't beat Microsoft or Intel. Join them. Use the innovative spirit and programming power of your company to help develop better operating systems with Microsoft. We'll all be better for it. Then, still using the powerful brand name of Apple Computer, you could compete on the Wintel platform with Dell, Compaq, IBM, and Gateway, and probably blow them all away. Remember, your obligation is to increase shareholder value, not to satisfy your ego. I suppose that the Apple's street address -- 1 Infinite Loop -- is more appropriate than it will ever know. It just keeps going around in circles and never gets anywhere.
Next: The Bull Responds