Apple vs. Chesapeake Energy: Apple

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

Every tournament has its marquee matchups. That's what we've got today with Apple (NASDAQ:AAPL) going up against Chesapeake Energy (NYSE:CHK).

Tussle of the titans
Color me nervous. I can't badmouth Chesapeake. Nor would I want to. CEO Aubrey McClendon has spent millions buying up shares of his own company. That's an extraordinary commitment that isn't to be easily brushed aside.

But as I wrote on Wednesday, no stock is without risks, and Chesapeake has its share. Allow me to briefly introduce the two most critical:

1. Cyclicality.
2. Katrina.

Let's start with cyclicality. What I mean here is that Chesapeake profits most when natural-gas prices rise. Fortunately for investors, they've been on a huge winning streak.

Then there's Hurricane Katrina. Go back to the chart that last link sent you to. See the massive spike in natural-gas prices in 2005? When hurricanes ravaged the Gulf Coast, they pushed natural-gas prices to astronomical levels. Chesapeake CEO Aubrey McClendon admitted as much in an interview with Mad Money host Jim Cramer at the time. Here's the relevant exchange:

Cramer: "What if gas prices were to stagnate?"

McClendon: "That would be fine. We're not happy about the tragedy of Hurricane Katrina. We'd like prices to back off and let consumers catch their breath." [Emphasis mine.]

Give McClendon credit for being a first-class human being. Just don't let that sway your vote in this contest. Choosing Apple over Chesapeake is anything but "Stock Madness," as my Foolish opponent, Rich Smith, might say.

Never leave a pinpoint shooter open on the perimeter
Why? Here's the first reason:

The iEmpire, already tops in retail with -- wait for it -- 4.3 times the sales per square foot of Best Buy, has a tiny store network compared with its rivals. But that won't last. Apple has more than $11 billion in cash and investments to fund global expansion.

Now, here's the second reason. See? After the Katrina-led spike in prices, Chesapeake's stock went nowhere. Why should anyone believe that's about to change?

Mr. Softy off the bench
But there's also a third reason: Microsoft (NASDAQ:MSFT). Yes, I'm completely serious. I'll explain why in a minute. First, I need to take you through some numbers.

According to Gartner, a tech researcher, worldwide PC revenue is expected to rise 4.6% to $213.7 billion this year. By my math, that means Apple's $8.06 billion in 2006 computer revenue equaled just less than 4% of the total market.

Here's why that's interesting. During the fourth quarter, Apple grew its global share of PC shipments by almost a third to 5.1%. What do you think would happen if the iEmpire made similar gains in terms of revenue share? If Gartner is right, it would mean another $2.7 billion on the top line before a single iPhone, iPod, or Apple TV were sold. 

Now, back to Microsoft. It has every reason to stay out of Apple's way. Think about it. Even if the Mac maker sticks it to Hewlett-Packard (NYSE:HPQ) and others, Mr. Softy stands to lose little, if any, revenue. Why? Intel. Thanks to a prescient switch to its chips, Macs can now run Windows. Expect users new to OS X to keep Windows as a backup and pay Microsoft $400 for the privilege.

Scoreboard
There's no question that, on an absolute basis, Chesapeake is cheaper than Apple. It's also a great company and a decent stock. But Apple's potential growth remains nearly unlimited. And its competitive advantages include an unlikely, and tremendously skilled, sixth man in Mr. Softy. That's as balanced an attack as you'll see in this tournament. And it should be enough to give the iEmpire a shot at the title game.

Convinced? If so, follow this link and rank Apple to "outperform" in Motley Fool CAPS. Later this week, our editors will tally your votes to determine which stocks will advance one step closer to the title.

Read our opposing entry on Chesapeake, and see all of our articles in the tournament.

Think you could pitch your favorite stock -- or ditch your least favorite -- in 27 seconds or less? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.

Fool contributor Tim Beyers, who is ranked 784 out of more than 25,200 in our Motley Fool CAPS investor-intelligence database, wrote this article on his MacBook Pro but didn't own shares in any of the stocks mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. Best Buy is a Stock Advisor pick. Chesapeake, Intel, and Microsoft are Inside Value recommendations. The Motley Fool's disclosure policy is, like the old Mac Cube, irresistibly shiny.