Dueling Fools Apple Core of Ailing PC Sector
Bull Argument

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Dueling Fools
By Rick Aristotle Munarriz (TMF Edible)
September 5, 2001

Will you forgive me if I start off with a question? Will you forgive me if I finish off with the answer? Will you recognize these as rhetorical questions? See, I haven't been around an orchard much of late so I'm left wondering what apples are going for lately. On the other hand, I do know what Apple (Nasdaq: AAPL) is fetching.

Last week, the company was fetching a market cap of $6.2 billion. With $4.2 billion in cash and enough in long-term investments to offset Apple's minimal debtload, we're talking about an enterprise value in the $2 billion ballpark.

At this point, you might be tempted to view this as more than just the company that made the fictional Forrest Gump rich. With two-thirds of the company's market value in liquid green, it's awfully tempting to see this as a tech-backed money market fund. It's not, of course. But if you begin to ponder the downside, you're three bucks down from marking Apple down to a cool billion and if the share price gets into the pre-teens, well, you're talking about buying Apple for free. The bonus here is that Apple has been able to plump up its piggy bank through both the fat and lean years. Apple might stumble but it doesn't take a match to its cash hoard.

But let's lock up the vault for now. The money's there, you can go count it later. For now, let's take a look at what the market thinks of Apple the company. Apparently, it doesn't seem to think much of the Cupertino powerhouse. Is Apple's enterprise value really worth a quarter of the $8 billion it generated in sales last year? Or less than three times last year's $786 million in earnings?

Oh, right. That was last year. Apple's getting sauced this year. Unfairly typecast as a commodity box maker, the personal computer industry's illing ways have Apple in a bit of a pickle. While Apple marches to the beat of its own operating system software, machines, and product cycles, I can't deny that the drastic markdowns in the non-Apple PCs have forced the company to discount aggressively too. It has. Apple's in a slump. Fiscal 2001 will be a mess. However, the company kicks off its new fiscal year next month. While there is a wide range of analyst estimates for fiscal 2002 earnings -- from $0.50 to $1.50 a share -- they are universally predicting a rebound. On the high end, it has Apple trading at just four times enterprise value. At the current $0.83 a share mean, it's going for just seven times enterprise value.

Bargain price? Limited downside? How is my good friend going to core Apple beyond anything more than attacking the personal computing blip -- the first year in which industry sales have slipped?

If I can borrow Apple's tagline, I've got two words for Wall Street: Think Different. Stop comparing Apple to "aren't yets." For starters, unlike a starving sector hanging on the prayer of Microsoft's (Nasdaq: MSFT) Windows XP, Apple already has its feature-rich Mac OS X, with its new version 10.1 coming out this month. How many computer makers have their own operating system to fall back on? One. It's that distinction that has truly set Apple apart from the realm of vanilla-flavored compatibles. While its competitors are scaling back, Apple is selectively raising its headcount through opening new retail outlets. Beyond raising the fashion bar with the colorful iMacs or Titanium-coated PowerBook G4s, it's what's inside that truly sets Apple apart.

Just a box maker for the loyal Apple crowd? Hardly. Next time you're surfing the 'Net on your clone and come across a QuickTime movie, thank Apple. When you come across a page authored by a java developer with high-end WebObjects applications, thank Apple. In the classroom, Apple commands the second-largest market. You see, Apple is a factor even in your Wintel world. Sure, it's the Apple users who are making the most of the company's multimedia stronghold. The newest Mac operating system even includes iDVD 2 software to make your own DVD-Video discs! 

In the computing space, Apple is the complete package. It's not all about the hardware. Apple is the master of innovation. It produces software across many different platforms. It powers the Internet. There was a time, when sales peaked at $11.1 billion back in 1995, when the company commanded a much bigger slice of the box pie. But it is a much more relevant company today. Apple is everywhere. After all, it's been everywhere else.

Apple has an unparalleled history in pioneering the computing industry. In the 1970s it was the Apple II that popularized the concept of personal computers. In the 1980s it was the Mac that brought a new level of functionality to the PC. In the 1990s it was the colorful iMacs and portable PowerBooks that brought the company back. Where do you want to be this decade?

Rick Aristotle Munarriz doesn't think an Apple a day will keep the doctor away, but it would sure make the shareholders happy. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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