Stocks for Mom

By Bill Barker (TMF Max)
May 9, 2000

Trading at $110 1/8 as of May 8, 2000

Mom, you've got a couple of problems. First, though you seem to disagree with me about this, you need a new computer. I've got to say, they've done some very interesting things with computers since you bought your state-of-the-art Windows 3.1 operating system in 1994, and I think you'd be pretty pleased with joining us in the 21st century.

Second, you tell me that you need to make some new investments. As you'll probably recall from the days when you were assigning chores for me to do, I was always looking for shortcuts, and this is no exception. I think the answer to both of your needs is Apple (Nasdaq: AAPL).

Apple reported solid Q2 '00 results as strong demand across all product lines continued to provide great operating results and strengthened Apple's position in the computer manufacturing industry. Earnings per share of $0.88 were 46% higher than the same period last year. Now Mom, I know that you told me never to cheat on my homework or tests, but I'll have to confess that I'm copying a few paragraphs from the most recent Fool research report on Apple by John Del Vecchio (TMF Fuz). Regarding the most recent earnings announcement, John reports:

"Demand for the higher-priced iMac DV Edition continues to exceed management's expectations. Despite previously penetrating the sub-$1000 market segment, the firm's average selling price per unit continued to rise to $1,820 during the quarter.

"Apple's internal research suggests that both new computer consumers and WinTel owners are embracing the iMac platform. According to the company, first-time computer buyers made 28% of iMac purchases during the quarter. Additionally, 17% of iMac buyers during the quarter were switchers from the WinTel platform. Hence, 45% of iMac buyers during the quarter were new to the Apple platform. These numbers are very important. Since, contrary to popular belief, a majority of people do not own a computer, Apple is gaining market share through new computer buyers.

"In addition, Apple's platform is powerful enough and attractive enough to convert WinTel users. Traditionally, consumers have been reluctant to switch to an Apple product because most people use WinTel machines at their workplace. The recent trends of switchers should alert independent software vendors to provide more iMac software titles and improve the platform's overall capabilities. As a result, Apple's position in the industry may strengthen beyond current levels and expectations."

You'll have to pay for the rest of John's Apple analysis if you're really interested, Mom, but I think you should join all those people converting to the Apple platform from the Wintel platform, especially since Apple's iMac DV edition makes it so easy to watch and edit home movies. I've been taking a lot of footage of your new grandchild with that camcorder you bought us for Christmas, but how can I send them to you if you're still using that old computer?

That's anecdotal, but it underlines one of the keys for Apple's future. Steve Jobs and Apple have always excelled at the visual side of the computer experience and kind of lagged in their development of business applications. But what you, and most other American consumers, are going to be using a computer for more and more is surfing the Internet, sending e-mails, and looking at movies and visuals. For that, the best system to go with is certainly Apple's -- especially if you're not a hard-core techie.

There's so much more to say about this company. With $3.6 billion in cash and short-term investments at the end of the second quarter, the balance sheet is a dream. Even beyond the cash and cash equivalents, Apple has large stakes in Akamai Technologies (Nasdaq: AKAM) and ARM Holdings, PLC (Nasdaq: ARMHY).

Those investments are pretty volatile and were worth over a billion dollars before the recent Nasdaq unpleasantness -- but they're still worth several hundred million dollars. Since Apple took its stake in both companies (as well as a few others) at the start-up stage, Apple has realized some amazing return on its investments there.

Despite all this good news, Apple trades at a pretty moderate valuation based on traditional metrics. The P/E is still only about 30, and for a company that grew revenues in the most recent quarter at 27% and earnings by 46%, that's not a price that should scare too many people away. When you consider the potential market share that Apple is taking from its competitors, and that the PC sector as a whole is still growing worldwide in the mid-teens, that's some math that I like.

Mom, before investing in anything, as you know from telling me so many times over the years, you need to do your homework. You might want to check out both sides of the story from our recent Dueling Fools on Apple. Or, for a more detailed take, you might think about purchasing the Fool report on Apple.

Either way Mom, I'll be checking with you to see what you've decided about that computer. Remember -- I've got videos to send you.

Apple Company Information:
Trades on the Nasdaq under symbol AAPL

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    A Stock for Mom represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.