Paul Larson (TMF Parlay)
One thing to keep in mind when looking at Apple is that it has had a very cyclical history. The company's market share and profitability have been on a roller coaster for the past several years, and it looks like the company is on the precipice of yet another major downswing.
Just how cyclical have the company's results been? Take a look at this table of Apple's past financial results:
Fiscal Year�� � Sales� � Earnings
1994� � � � � � 9,189� � � � 310
1995� � � �� � 11,062� � � � 424
1996� � � � � � 9,833� � �� (816)
1997� � � � � � 7,081� �� (1,045)
1998� � � � � � 5,941� � � � 309
1999� � � � � � 6,134� � � � 601
2000� � � � � � 7,983� � ��� 786
Rick was correct in pointing out that Apple grew its sales and profits by roughly 30% in the fiscal year ended in September. However, fiscal 2001 is shaping up to be much like fiscal 1996, with lower sales and significantly lower profits. Remember, Apple has said its calendar fourth-quarter sales (fiscal first quarter) should be around $1.6 billion versus $2.34 billion last year, or more than a 30% contraction. Unless it can also quickly shave 30% from its costs, profitability should drop far more than 30%.
Lest you think Apple is "cheap" today, in every year since 1994 where Apple had a profit, it at some point traded with a single-digit P/E ratio. Right now, the company is expected to earn $1.34 per share in fiscal 2001, a 34% decrease from fiscal 2000. Moreover, the company's last profitability downswing eroded almost two-thirds of the company's book value between 1995 and 1997, and red ink burns cash.
Am I being too myopic when looking at Apple? What about the company's long-term positioning? I do not exactly like what I see.
First, the company's loss in the education market should not be glossed over. By having a strong foothold in the schools, Apple was able to incubate future buyers of Apple platform products. As Apple's share of classroom computers continues to shrink, so does the future built-in demand for its products.
Moreover, there seems to be much less of a gap between Windows-based PCs and Macs as far as usability. (That is, if you can actually get an Apple that works!) With the advent of the USB port and Windows ME, PCs are just as easy to set up as any Mac. Moreover, Apple is no longer alone in making cool-looking, colorful computers, which was its major competitive advantage over the past three years.
Of course, then there is the software issue. The available software titles for the PC far outstrips that of available Mac titles. Unless Apple can make some significant inroads in selling more units and gaining market share, this is not likely to change.
So what are the differences between PCs and Macs these days? Beyond Apple computers being anywhere from 50-100% more expensive than a comparably powered PC, not much. Apple is also highly dependent on a select number of suppliers for its components, and this is a major drag when trying to keep ahead of the curve in an environment of ever-falling computer prices.
Apple is not going to die. It has far too many loyal customers for that to happen. However, the company is having problems executing today, and the environment for harvesting profits and creating shareholder value only looks to get much worse in the future.
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