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Post of the Day
October 18, 1999

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Apple Computer

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Subject:  Sanity Check
Author:  Standabove

OK. Now that the numbers are out, the stock is headed violently upward and we, the faithfull, have been vindicated its easy to look at our gains (you did buy @ the hi 50's/low 60's right?) and become complacent. I find it helpfull to anaylize my position from time to time, and since I've been focused on AAPL as my largest holding since a little more that 1 year ago today, this seems like the best time to do it. Some random shots:

1. AAPL BEATS LOWERED EXPECTATIONS: This is priceless, IMO. The Jobs RDF must be in overdrive- remember APPL beat expectations that were drasticly reduced after they screwed up the introduction of their new products. I know some of you will point to MOT, and thats fair, but APPLs shortfall was the result of several delayed products and poor management of their older product lines, not just a G4 shortage. Now everyone's excited that the beat these lowered expectations, like a schoolkid who brings home a c when his parents expected a D. Yes, for the FY AAPL did very well (72%!), but certainly not as well as they could've. I guess I'm a glass is half empty kind of guy.

"Now that AAPL has managed to convince the world that the next quarter will be phenominal it had better be."

2. AAPL IN THE SPOTLIGHT: Now that AAPL has managed to convince the world that the next quarter will be phenominal it had better be. AAPL got a gift few companies manage to get, leniencey over mistakes in anticipation of future greatness. This get out of jail free card won't come again. This comming quarter, more than any other, must demonstrate AAPL has left their sloppy buisness management practices behind. IMO, Jobs & co have done extrodinarily well since his return. But that was all prelude to this quarter. AAPL must execute.

As shareholders, it behoves us to keep abreast of our company's ability to execute its product stratagy. That's why I appriciate the field reports from those of you who visit CompUSA or Sears. I can't do that because I live in Japan and we probably won't see an iBook for awhile (but I do get a Sony PSII before any of you so it all works out!) Keep watching to see the availability and activity surrounding the Airport, ACD, G4s and iBooks. Thats where our success lies.

3. G4 MHz DEBACLE. Give credit to management for making the tough decision. They could've continues their "check is in the mail" policy of sliding shipping dates furthur and furthur into the future. But, instead, they bit the bullet and admitted they couldn't ship the products as advertised and offered a more realistic alternative. But, yeah, the screwed the PR pooch by handling it the way they did. Arogant is the word that comes to mind. They really should have honored pre-orders at the old prices to the greates extent possible.

During the announcement hype, Anderson made reference to the huge (700+ million $) backorders. Included in that there were 140,000 G4 pre-orders (I'm typing this from memory so that # may be wrong, but still it's a lot). Now, I wonder if he also mentioned the number of pre-ordered G4s that that should be subtracted from 140,000 now that many people have had their orders canceled (let me know if he did). Of those, how many people will replace their order? Hmmm. If you look at it, AAPL just lost millions of dollas worth of orders in one day. Those pre-orders were like money in the bank, right? Well, thats how AAPL spinned its dissapointment this quarter- by pointing to the next. In the next quarter we should see at least 140,000 worth of G4s sold.

Execution

"...to say that AAPL only made $.51 per share when in fact they made $.63 or whatever per share is... well, stupid."

4. PROFIT MARGINS. AAPL reported profit margins incresed from abour 26% to 28%. I'm eager to pour through the annual report and find out why. Ideally, I'd like to see prices (and therefore profit margins) come down in the comming year, with the intent to spur sales and increase market penetration. Not only is this important for wooing developers to Mac now, but I see it as essential to OS X's success. Hopefully this increase came about because of increased sales on high-margin products like PB or G3, but even if that is the case I'd like to see unit volume account for an increasing portion of earnings growth than it has tradittionaly.

Or maybe I just want to purchace a G4 and a ACD on the cheap.

5. NON RECURING ITEMS. As someone stated earlier (sorry I don't remember who to give him/her full credit), the profit from non-recurring items such as ARMHY sales should be looked at in a longer term light. While its important to make the distinction between earnings from operation and earnings occuring from one time events, to say that AAPL only made $.51 per share when in fact they made $.63 or whatever per share is... well, stupid. Earnings are earnigs, and AAPL has shown the ability to leverage its investment capital into new technologies and strategic parterships. ARMHY will continue to do well (Gooooo ARMHY!) and AKAMI will likely provide even more dead presidents, as well as access to important technology. So I think that for a while, AAPL will continue to post additional revenues to their balance sheet. More revenues is good revenues.

To wrap it all up, my outlook for AAPL is as optomistic as ever. I fully expect to see at least a %100 return on the stock at today's price for the following year due to increased sales, new cutting-edge products and increase attention to cost cutting and product management. My expectations are high though. AAPL is now a prime time player. They've proven their success was not based on a one hit iWonder. But, I can't help but think that the institutions and brokerage houses will flee AAPL like a sinking ship if it can't meet those expectations. There is no more room for excuses or slip-ups.

I'd welcome comments and observations from everyone.

Standabove