Dueling Fools
Apple Jack'd
The Bear Rebuttal
By
Bill has done an admirable job with his bull argument, and on valuation he may have a point. Apple is fairly cheap, though investors should always keep in mind when looking at a company with a low P/E that it may be cheap for a reason.
More importantly, I would argue that Bill overstates his case when he argues that the iMac has saved Apple's bacon. Before, no one would buy Apples because we were all locked into a Wintel world, Bill says, but now the iMac delivers all that anyone really needs: the Internet, e-mail, and word-processing. No one really cares that much about all that other stuff.
I beg to differ. First of all, do not underestimate the power of games. Companies like 3dfx have built almost their entire businesses around PC games. And while most people may not use their PCs to their full potential, that's not necessarily going to help Apple. Most people don't drive their SUVs off-road very often either, but that hasn't hurt their sales. Hey, we're Americans, we like choices, even if we never use them all. If the iMac has limited functions, as Bill says, then in the end it will have a limited audience.
But enough speculation, let's look at the numbers.
If Apple gets its supply problems straightened out, the company will probably sell over a million units -- iMacs, iBooks, and PowerMacs, etc. -- in the current quarter. That's impressive, but it's likely that almost 30 million PCs will be sold worldwide. Apple will also probably become the sixth largest PC manufacturer, up from seventh, if it hasn't already. Again, that's progress, but nothing to particularly write home about, since only one or two of the companies ahead of them are struggling, and despite Compaq's problems, they are not yet threatened by Apple. Meanwhile, companies like Dell and Gateway and, in certain sectors, IBM and Hewlett-Packard, are roaring ahead.
Apple will probably have a blowout fourth quarter, given all the backlogged orders it has, but much of that will simply cancel out last quarter's disappointments (and it's pretty much already priced into the stock). Apple's CFO Fred Anderson, in the company's most recent conference call, stated that their targets -- not forecasts, he stressed, but targets -- are 35-40% unit growth and 20-25% revenue growth in FY2000. If the company can meet those targets, it'll be in decent shape, but few analysts following the company seem to think it'll hit the revenue target. One bullish analyst recently exulted that the "company is about to make the transition to revenue growth in the teens." Ooh, growth in the teens?! Slow down, I'm getting dizzy.
CFO Anderson was also asked about who the iMac's customers were, and he stated, "We don't have any recently updated information on the source of customers, but it has been running about a third new customers, about 10% Wintel customers and about 55% are existing Mac customers." Since we don't know how many Mac customers are continuing to defect to Wintel, it's difficult to conclude what net gains, if any, Macintosh is making. But even if Macintosh isn't losing anybody, 10% would translate to approximately 75,000 Wintel customers buying Macintoshes in the most recent quarter. That's a very small portion of the Wintel consumer audience, and as stated earlier, Apple's barely a presence in the business market.
In the end, I don't think Apple has solved the problem that Bill identified: the incompatibility of Apple systems with the rest of the world. As former Foolish scribe James Surowiecki has noted, the ironic thing about Apple is that, despite its "Think Different" advertising campaigns and general countercultural image, the company has always demanded far more conformity from its customers than any other PC company. What Intel, AMD, Compaq, Gateway, Dell, IBM, and Microsoft do for "Wintel" machines, Apple does almost all by itself (with some outsourcing to companies like Motorola).
This desire to control the entire personal computing experience is Apple's original sin, what took it from a company fighting for the top spot in PC market share as recently as 1992 to a company currently fighting for sixth place. While that may be ancient history, the company is still facing the challenge of how to expand beyond its proprietary niche. Until it can do that, there is little reason to expect that the company will be a long-term market-beating investment.
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