Dueling Fools
Apple Jack'd
The Bull Rebuttal
By
Chris premises his bearishness almost exclusively on the argument that for Apple to be a good long-term investment it must grow sales at a rate faster than the competition and that it is unlikely Apple can accomplish this kind of sales growth. My first response is that Chris should look at what has actually been happening. Apple has, of course, been an absolutely phenomenal investment over the last couple of years while significantly reducing its total annual revenue.
As I'm sure Chris knows, growth for the sake of growth doesn't ultimately help shareholders at all. It isn't the case that for Apple to be a good long-term investment it constantly has to be increasing total revenue -- rather it is the case that Apple needs to be allocating its capital rationally, and needs to avoid putting new capital into projects that provide inferior returns. That, in a nutshell, is precisely what Apple has been doing lately, and why Apple has been such a fabulous investment since Steven Jobs returned to the helm. Jobs and company have killed off a bunch of suspect product lines (e.g., Newton), reduced research and development on things that were going nowhere, and made superior investments not only into the iMac line of computers, but also into things like ARM Holdings, Akamai Technologies, and in-house projects like QuickTime.
So it simply isn't the case that Apple needs constant sales growth to be a good investment in the first place, but I'm hardly willing to concede that Apple's days of significant top-line growth are behind it anyway. If you look at Chris's chart you'll see that the year-over-year change in units sold worldwide for FY99 has been spectacularly strong. The fourth quarter jumps out as being the "one of things that doesn't belong" among the last four quarters, so let's explain that number quickly.
Last quarter Apple announced that its new superior line of G4 computers would be coming out soon, and that announcement killed off consumer interest in the old lines. Meanwhile Apple's chip supplier dropped the ball on production of the new G4 chips, and therefore Apple couldn't come close to meeting the very strong demand for the new line. Nobody is currently arguing that demand for Apple products has fallen in any way -- in fact just the opposite. Apple has now moved to rectify its chip supply problems, and this quarter is expected to show explosive growth in the top line.
Ultimately, Chris's argument about Apple's potential for sales growth works against him. Apple is working off such a small percentage of total sales in the PC sector that it is far easier for Apple to grow by taking market share away from others than it is for almost any other company in the sector. The reality of the situation is that Apple has always had among the best engineers and programmers in the business, but it lost its way for about a decade as it floundered without any visionary leadership. Now that Jobs is back, the product performance is translating into real earnings growth and real free cash flow, and the numbers don't lie about that.
Despite the gloomy scenario that Chris tries to paint, it appears obvious to me that it's morning again at Apple Computer.
Next: The Bear Responds