Dueling Fools Apple Core of Ailing PC Sector
Bear Argument

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Dueling Fools
By Paul Larson (TMF Parlay)
September 5, 2001

I loathe writing the bearish take on Apple. When we last Dueled about the computer maker in November of last year, it was not a pleasant experience. My email box got stuffed to the brim with emails from Apple loyalists telling me I was an idiot. (Among other not so nice names I got called.) Furthermore, I lost badly in the voting, with less than 20% of the readers thinking my argument was best. And to add insult to injury, I also got another one in the loss column because Apple was actually trading higher six months after the Duel ran.

Not fun.

So why am I here relaying my bearish thoughts on Apple yet again? Because, basically, nothing has changed over the last nine months. That is, beyond Apple seeing greatly decreased sales while ringing up copious losses. Moreover, the company's competitive positioning still has the company as nothing more than a niche player fighting for its survival in the mean world of PCs.

Let's take a look at the company's financials over the past nine months. To say they are rotten would be an understatement (dollar figures in millions, except EPS):

                 9 mo. 2000     9 mo. 2001
Sales             $6,113          $3,913
Operating Income  $438             ($397)
Net Income        $616              ($91)
EPS               $1.71           ($0.26)

Notice that I last wrote my bearish case nine months ago, well before year-over-year sales dropped 36% and the company was forced into the red from massive write-offs. Nevertheless, I still managed to lose the Duel due to the stock rising over the next six months (though it's now back down). Incredible!

Of course, Apple is far from the only computer company feeling the pinch brought about by the decelerating economy. Everyone from Dell (Nasdaq: DELL) to Gateway (NYSE: GTW) to Compaq (NYSE: CPQ) has seen sales drop off and a certain amount of profitability evaporate. But what differentiates Apple is the extent to which the financials have decayed.

For the first six months of 2001, Dell, Gateway, and Compaq combined saw their sales decrease less than 5% year-over-year. Apple, on the other hand, saw its sales decrease nearly 23% in the same period. This begs the question -- Is Apple losing even more of its meager market share?

It wouldn't surprise me one bit, which leads me to what I see as the largest problem for Apple. Namely, the fact that its dwindling, low single-digit share of the market for personal computers makes it very much a niche player, and the software developers are finding it increasingly difficult to serve such a small market. The pure variety of applications available for Windows-based PCs makes PCs much more attractive to the average computer buyer.

Want to play Roller Coaster Tycoon? Can't do it on a Mac. Need Intuit's (Nasdaq: INTU) QuickBooks for your small business? The latest update for Mac is several years old. The list goes on and on, and the fact is that Apple's tiny market share is just not as profitable for software companies to cater to. The smaller Apple's share gets, the more this is going to be a problem.

Besides, the argument that "Apple's hardware is so much easier to use" is running a bit thin. About the only difference between Windows-based machines and Apple machines are the prices. Forget about the high end, even the cheapest iMac goes for $999 while sub-$800 Windows machines are plentiful. I've also got to wonder how much longer Apple will be able to overcharge its customers since many of the components in the two platforms are almost exactly the same.

Still, the largest problem I see for Apple is the availability of software titles and how the mainstream buying public will compare Mac-based systems to Windows-based systems. Though Apple still has its fair share of fanatic fans, I've got to believe even this base of supporters will also start to erode once software titles begin to accelerate their retreat from the Mac platform.

This all adds up to continued long-term sales declines and increased financial pain for the company. Remember, Apple had over $11 billion in revenue in fiscal 1995, and this year it is on track to have less than $6 billion in revenue.

Though I'm sure I will get an earful from the Mac faithful about what a fool (small "f") I am, I can't deny what I see. Namely, I see a company with extremely weak competitive positioning that should only get weaker over time. I wouldn't want to buy a Mac today, and I certainly wouldn't want to be an investor in this shrinking company.

Paul Larson rarely has an apple a day, but he's managed to (mostly) keep the doctors away. Paul owns shares in Microsoft, and you can see the rest of his holdings online. The Motley Fool has a progressive disclosure policy.

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