Keeping Your Shirt On

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By TMF Cheeze
February 5, 2001

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ChicagoBob posted a link to the sharkyextreme website with an article by Jon Simon about the innovation leadership Apple has shown in the PC industry.

It's an excellent article, demonstrating the importance of Apple as an innovator, both historically, and even up to the present day, pushing the rest of the PC world to adopt one new technology after another. One may shudder to think what awful, bug-ridden, inelegant contraptions Wintel users would be forced to use if Apple were not there to prompt and goad PC box makers into creating computers that actually serve those who use them.

That being said, the most telling sentence in the whole piece was right up front in the first paragraph:

Even if the inventor or the first company to use the idea lost their shirt in the process, someone eventually made these ideas successful enough for them to become the industry standard.

I guess that's what we're talking about: The Innovator's Shirt, and how to keep from losing it. It's a question that Apple seems to have to confront every two or three years, over and over again.

What price does Apple pay for being the innovator? A look at the record of the past ten years shows that even with the brilliance this company has shown in leading the vanguard of computer design, it is usually, alas, leading with its chin. This gives me the occasion to express both my enthusiasm for Apple the company, and my reservations about AAPL the stock.

Maybe the best way to measure what I'm talking about is with the very crude instrument of annual revenue. Let's compare:

          AAPL        CPQ        DELL       GTW
1990   $ 5,558     $ 5,300     $           $
1991     6,309       4,883        546
1992     7,087       5,789        889
1993     7,977       8,873      2,014      1,731
1994     9,189      12,605      2,873      2,701   
1995    11,062      16,675      3,475      3,676
1996     9,833      20,009      5,296      5,035
1997     7,081      24,584      7,759      6,293
1998     5,941      31,169     12,327      7,467
1999     6,134      38,525     18,243      8,656
2000     7,983      42,383     25,265      9,653
2001     6,200*     45,500*    31,714**    9,950*

*Value Line estimate
**Dell estimate.

Please note that these numbers are all for fiscal years -- for example, Dell's fiscal year ends in January, while Apple's ends in September, meaning the data in those respective column is nine months out of sync with each other. But the information is accurate enough to make the point.

Now, the most obvious thing that jumps out at me when I look at these numbers is the nice smooth revenue growth that the Wintel box makers have, compared to the genuine struggle that Apple has had just trying to stay even. Apple was well ahead of each of these companies in revenue at one time, but not any more. While the rest of the industry was experiencing an astonishing explosion in revenues, Apple, the innovator, has had to deal with some nasty, and major, failed product launches. A graph of Apple's annual revenue is a jagged line, and four of the last six years have shown revenue declines.

An investor has to look at those numbers and find some way to account for the disparity. Looking purely at the numbers, forgetting about the industry these companies are in, any objective observer would surely conclude that Apple is the dog of the bunch. And anyone arguing otherwise would have to make a pretty persuasive case that the future would be different from the past.

Is it fair for me to compare Apple with the rest of these companies? I'm sure that some of you are already formulating your complaints that these numbers project an unfair picture, that you cannot compare Apple to Dell, for example, because Dell doesn't have to develop software -- it only has to take orders, assemble parts, ship the product to the consumer, and watch the share price keep rising. But such a complaint only begs the question: If Apple is burdened with all the baggage, and all the risk, that goes along with being an innovator -- why on earth invest in it, especially when there are other companies with much simpler models that don't carry the same burdens, companies admittedly with more modest records of innovation, but with much better records of pure economic performance?

The next ten years will not give us the explosive growth in revenues that the last ten years have seen. If there is an argument for Apple relative to the Wintel world, it might be found there. As the PC world in general becomes more of a commodity-driven enterprise, perhaps Apple's uniqueness and maverick reputation will help it differentiate it from the rest of the pack. As an Apple user myself, I certainly have an affection for those qualities Apple has that draw many to elegance in computing. That differentiation might help it thrive in a more competitive environment. But that observation is more hope than certainty, at least for me.

I think that, at the very least, an investor in Apple needs to recognize that, given the difficult place in the industry Apple holds, inconsistency in performance is likely. Even though Apple has taken steps to correct the problems seen in the last quarter, even though we can expect some recovery in performance in the next twelve months, in the long term we are still looking at a blank slate. The only thing we can really be sure of is that the problems and risks inherent in holding the position as the industry's outsider are still going to be confronting Apple in five and ten years, just as they have always been.

An investor must look to what is predictable about an investment before deciding what is a reasonable price to pay for a piece of the company. One can have a great deal of admiration for the company, and still have reservations about its prospects as an investment, especially when it has been so consistently challenged.

Apple has a lot going for it -- a strong balance sheet, a genius for design, and a maverick spirit that really sets it apart from its competitors. A case can certainly be made for its attractiveness as an investment. I do, however, think that that enthusiasm has to be tempered with a sober understanding of the risks involved.