Q & A on Apple (Stock Research) May 11, 2000

Research Q&A on Apple

With John Del Vecchio (TMF Fuz)
May 11, 2000

How can the iMac maker keep its success going? Motley Fool Research Analyst John Del Vecchio answers your questions on computer rebel Apple (Nasdaq: AAPL).

Q: Apple stock has risen from $13 on 12/31/97 to over $110 today. Is there still the potential for meaningful intermediate-term upside in the stock for an investor who wants to buy today and hold for five years, for example?

A: Yes, the company has a market capitalization of about $18 billion, which pales in comparison to Dell Computer (Nasdaq: DELL) at $124 billion and Compaq (NYSE: CPQ) at $45 billion. While market share is not the best indicator of success for a highly differentiated company, Apple continues to gain share, both in the professional and consumer segments. The product features have caught hold with a substantial amount of new computer users as well.

Apple's cash position has continued to strengthen, which may be used for further strategic investments. Further innovations that will continue to drive demand are likely. In addition, Apple has many assets such as QuickTime and Mac OS which may not be properly valued compared with companies like Microsoft (Nasdaq: MSFT) or RealNetworks (Nasdaq: RNWK). I think that further innovations and greater awareness of Apple's portfolio of assets will lead to even more upside for shareholders.

Q: Is Apple dependent on introducing great new products like iMac for future successes, or now that Apple has regained some market share with iMac, is it likely to retain this market share? In a nutshell, how loyal are new Apple purchasers likely to be, and how rapidly can that be further monetized?

A: The company is probably not as dependent on new products today as it was three years ago because there is more awareness surrounding Apple's offerings today, and the brand is much stronger. However, one of Apple's key advantages is the innovative nature of its products and employees. I think that continuous innovation will build more momentum for the company and demand for its products. The new upgrades to the PowerBook and PowerMac for instance, helped to spur demand for the professional segment of Apple's product line.

Many of Apple's new customers were certainly not loyal to the WinTel platform, because switchers made 17% of the iMac purchases in the recent quarter. Most people still do not own a computer, so the increased consumer awareness for Apple's products bodes well for the company as it continues to pick up market share in the new user segment. I would expect these trends to continue to monetize rapidly. One primary reason for this is that customers are willing to pay premium prices for Apple's systems, and the average selling price remains firm, leading to strong operating results. In addition, Apple is likely to continue to move beyond the box and tie-in a number of services to enhance the iMac experience. For instance, the company believes that it will earn the higher end of the $25-$35 million range in gross profit for signing up customers for Internet access through EarthLink (Nasdaq: ELNK).

Q: How can Apple continue to gain market share as the "new buzz" surrounding iMac gradually fades?

A: I don't think the buzz is fading, but actually growing stronger. As Apple announces upgrades to its existing line, demand grows stronger, and the company continues to sell systems at a premium price with growing average selling prices, despite penetrating the sub-$1,000 market segment.

Apple should have a strong buying season in the educational market, where the company remains a leader. I believe that Apple's greatest potential to gain market share will be in handheld devices that effectively format Web content. This market is growing more rapidly than the personal computer market, and wireless devices are rapidly converging with the Internet. The potential exists to lock in consumers to a truly powerful device and create a great Web experience. While Apple's management does not speculate about future products, I'll bet it has its eyes sharply focused on producing a high-quality product to take advantage of the rapid growth in this segment of the market.

Q: Apple is definitely back, as evidenced by the company's regained ability to attract new users and to get old pros to switch. Assuming its success is not entirely based on CEO Steve Jobs' uncanny leadership, what has the company learned by reinventing itself, and how does it plan to keep its success going?

A: Steve Jobs made many changes to Apple after rejoining the company via the NeXt acquisition. One thing that has not changed, however, is Apple's innovative nature. Certainly, the creation of the iMac helped to thrust the company into the spotlight and create renewed interest in its products.

The company has also benefited substantially from operational restructuring. Apple's management has successfully implemented better asset management practices and utilized the direct sales method effectively. In addition, the product line is more focused and Apple has begun to offer products along different price points, creating reach among different segments of consumers. Previously, the Mac was priced way beyond the reach of many consumers, and the independent software vendors were not creating as many titles for the product line. I think that Apple is much more consumer-oriented today, and this will lead to continued success.

Q: The company has a large amount of cash on hand. Will this be used to continue stock buybacks, begin paying a dividend, or acquire companies that will be synergistic with Apple's core competencies?

A: Apple still has nearly $400 million in cash to spend under a share repurchase plan. Although management did not repurchase shares in the second quarter, I would expect it to buy back some stock with the recent market volatility.

Paying a dividend would not be prudent in my opinion, and it has been about five years since Apple has paid a dividend to shareholders. The future investment opportunities are much brighter internally than what shareholders will be faced with on their own. Apple has made solid investments in Akamai Technologies (Nasdaq: AKAM), ARM Holdings (Nasdaq: ARMHY), and a few other firms. I would be more than happy to let management continue to make strategic investments that complement its core business, and I expect that it will continue to do so.

Q: Should I be concerned that Steve Jobs lives up to his name? I mean, he does have another full-time job with Pixar.

A: I think that Steve Jobs has already lived up to his name, and will continue to do so. He has done a fantastic job of restructuring Apple and making the firm a viable competitor in the marketplace. His role with Pixar (Nasdaq: PIXR) does not appear to have detracted from his effectiveness as CEO of Apple. Many of Apple's top managers were brought aboard during the NeXT acquisition, so he has surrounded himself with people that he can feel comfortable working with.

Related Links:

  • Get John Del Vecchio's Second Quarter Update on Apple
  • Apple for Mom
  • Q&A With Apple Co-founder Steve Wozniak
  • Apple Discussion Board
  • Apple's Website