Dueling Fools

Dueling Fools

Apple Jack'd
Bull Argument

By Bill Barker (TMF Max)
November 10, 1999

Apple Computer (Nasdaq: APPL), in case you hadn't noticed, is back -- and back with a vengeance. Holders of Apple stock have seen their shares more than quintuple in value in the last year and a half, the company remains the top seller of computers in the educational market and is the top seller in Japan, and, most importantly, Apple is finally gaining market share of the entire U.S. computer market.

After its profitability bottomed out shortly before bringing Steven Jobs back as CEO in 1997, the company is now growing profits at a very impressive rate. This year (the fiscal year ended in September) the company earned $3.62 a share, so even though the share price is up over 400% from just 21 months ago, the shares are still trading at a P/E of less than 25. Even though those earnings include a sale of some equity holdings in ARM Holdings PLC and are not fully taxed because of tax loss carryforwards from the disastrous 1996 and 1997 results, in his rebuttal I'd like to see my fellow Fool, Chris, name any other leading technology company that goes for such an extraordinarily reasonable price.

Actually, the share price is even more reasonable than that. The P/E of less than 25 doesn't even take into account the wonderful level of cash and investments that Apple has. Currently the company has over $3.1 billion in cash and short-term investments, so when you buy a share of the company, you're getting nearly $20 a share in liquid assets. On top of that, Apple has a significant stake in newly public Akamai Technologies (Nasdaq: AKAM), which currently amounts to about another $5 a share in value for the Apple shareholder. So backing all of that out, shares of Apple are currently trading at an enterprise value of maybe 18 times this year's fully taxed earnings.

All of that might be considered irrelevant, to an Apple bear, if he or she thinks that Apple is flawed in ways that are similar today to its flaws of yesteryear. And here is where the real argument for the Apple bull comes in. The problem (well, one of the problems) that befell Apple before is that it lost the operating systems war to proven monopolist Microsoft. Ultimately, there were very few applications being written for the Apple operating system (OS).

Even though the Apple OS has virtually always been considered the superior product, the simple lack of software to run on the Apple platform limited the attractiveness of buying an Apple computer. Apple sales fell steadily from $11 billion in 1995, to $9.8 billion in 1996 to $7 billion in 1997 to $5.9 billion in 1998. But they're back on the rise this year, and expected to show a sharp increase next year because all of a sudden Apple has a computer worth owning again: the iMac.

For millions of people today, a computer means surfing the Internet, sending e-mail, and maybe word-processing -- that's about it. A huge number of people who are buying computers today are not interested at all in whether the computer runs the latest video games, spreadsheet programs, and who knows what all else. Apple is, and always has been, synonymous with providing the easiest computer to use; it's just that because of the mistake of not licensing out its operating system to others, the applications were never written for it. But now, the Internet and e-mail are completely Mac compatible, so for the majority of consumers who are just now signing on to the computer revolution, an iMac is not only as good as a Windows-based computer, it's better. It crashes less often, and, well, it's got all those pretty color choices.

Consider how many iMacs are likely to be purchased this Christmas season. In a recent meeting with analysts, Apple management predicted that its December quarter sales will be 71% higher than in the quarter just passed. True, this is in part related to shifting some sales out of the September quarter and into the December one, but that's amazing growth in demand for any product from a mature company, even considering the nature of holiday sales. And while you're trying to figure out whether Apple's operating system has any viability in the future, consider what the likely effects of the Microsoft monopoly ruling are. I've got to say -- I would consider that to be a pretty strong plus for Apple.

Don't forget that Apple has a few more tricks up its sleeve than simply selling better operating systems and computers in prettier colors than the competition. There's also the little matter of QuickTime's potential for Apple. QuickTime is the video streaming program that, while not currently the standard in the industry, certainly has enormous potential as the Internet moves more and more from being a provider mostly of words and numbers to one that primarily delivers high quality video.

In essence, the Internet revolution is just beginning to hit Steven Jobs' sweet spot -- visuals. Let's face it, the man has always been extremely visually oriented. You can take his purchase and building of Pixar Animations (Nasdaq: PIXR) as part proof of that, or you can consider the fact that Apple is still the dominant computer for graphic artists, or you can just look at the outside of an iMac.

The man was never truly built to concentrate on the programs attractive to the business world. But once computers become primarily about delivering visuals to individual consumers -- look out, because that's Jobs', and Apple's, playing field.

Next: The Bear Argument