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Apple Explained Part III: Discounting The Fears This is the conclusion of the Apple Trader's three part look at why Apple's stock has become a basket case beyond the obvious reason that the tech stocks are experiencing their worst bear market since October of 1998. In fact, as I type these words the Nasdaq is pressing hard for a new 52-week low. Part I: In Steve We Trust, analyzed the market's instant reaction to Fred Anderson's September 28th earnings warning. Part 2: What Ails Apple began the task of listing Apple's major challenges to its prosperity and that's what Part III will complete today. Later this evening Apple will present its 4th quarter financial results conference call, which is now available for everyone to listen to via QuickTime. Apple will outline more exactly what the company problems are and how it plans on dealing with them going forward in the conference call. As the stock markets begin capitulate this morning. One would do well to remember buying low and then later, when the pessimism passes, selling high is how money is made in the stock market. AAPL has a bed rock bottom support in the $18 to $15 level. This market and Apple's stock is very oversold. Buy on weakness! So let's just begin where we left off—fretting over Apple's apparent lack of foresight: Research and Development, who needs it? When Steve Jobs returned to Apple, he rightfully slashed the company's bloated research and development projects, which had grown in numerable and penurious directions. (With 20/20 hindsight, I'll forever argue that the Newton was the baby in the bath water.) Jobs hasn't yet restored Apple's R&D budget to even 25% of what it should be. Shortsighted shareholders may feel that R&D is only worth its drag on the profit margin if it bears fruit for next season's harvest, but the company's long-term future and how fast Apple gets there, or if it gets there at all, is built on a foundation of research and development. Putting money into R&D is like living a healthy lifestyle: it's impossible to know what illnesses one avoids by living right. If Apple had spent an extra $500 million since 1998 from its burgeoning cash reserves on focused, well-managed R&D projects, perhaps the company would be elsewhere today. Maybe CyberDog would have realized its early promise. Maybe QuickTime would have more functionality, such as a way to save multimedia files to the desktop. Maybe Apple would have built decent CD-burning utilities so the Cube wouldn't have foregone a CD-RW out of an embarrassing lack of software. Maybe the Cube's hairline seam issue would have been smoothed out before going to market. Maybe the release of ADC monitors in July would have been accompanied with other solutions so no Mac user would be left stranded monitorless. And maybe the early iMac logic board problems would have been more adequately addressed. Selling Macs The third biggest problem at Apple is how the company markets its products. Apple is struggling to coordinate a complex system of resellers, field sales reps, inside sales reps, chain-store retailers and the online Apple Store. Almost every sales group has redundant goals and overlapping territories, which results in an endless chain of conflicting interests and generally demoralizing conditions for the Mac sales footsoldiers. Mitch Mandich, VP of worldwide sales, who recently announced he is retiring, did a commendable job at regaining control of the exterior retail channel, but now it's time to reform Apple's side of the sales equation as well. For starters, Apple pays its inside sales staffers less than Dell or Compaq while the commission system is so byzantine that most salespeople at Apple can't plan their personal finances. Since Steve Jobs' return, Apple has taken one employee perk after another away, until today, as unemployment hovers at 30-year lows, a situation exists where Apple's best and brightest are fleeing to greener pastures. Mr. Mandich's parting is an opportunity for Apple to get its inside sales house in order. On Wednesday afternoon, we'll see if Fred Anderson announces any new directions for Apple's multiple sales operations. It's widely hoped he'll announce Apple will emulate Gateway's sucess with their Country Store operations by opening an Apple owned and operated chain of Mac boutiques in a few major US cities. That would be very exciting and fun, but it won't address the drudgery of internal reform the company also needs. Perhaps, most disturbing are reports like the recent Wall Street Journal article which points out that Apple has allowed its service and sales support to schools decay to a level where the PC manufacturers look positively user friendly. According to the article, "...the company has trained schools to deal with Apple primarily through the Internet. And that has left many educational districts displeased. At School District 135 in Orland Park, Ill. technology coordinator Rich Kalinski says he sees Apple representatives only occasionally, even though 95% of the computers in the district's 10 schools are Macs." One school district's technology chief told the WSJ.com, "I haven't talked to an Apple rep in over a year and half. A lot of teachers used to feel that Apple was the education machine. Now I don't hear that anymore." As with research and development, what sort of management strategy is it to leave billions of dollars in cash lie idle as the company's core business atrophies due to lack of attention? Mac OS X: the Uncertainties Mac OS X is the forth-biggest issue dragging down Apple's stock price. Let's get this straight: Mac OS X is really, in the long run, Apple's savior, but the next 9 months are going to be full of trepidation. The new OS X is powerful, super stable and has more potential than any consumer OS in the world. Apple has really taken care of business in the most far-sighted of ways with Mac OS X. It literally guarantees there will be a viable Mac platform in 2010. Nevertheless, Mac OS X will be, from the average investor's point of view, merely a nagging source of uncertainty. Most investors have only media descriptions of the OS X situation on which to base their judgements. Already, Microsoft has announced it will be impossible to ready MS Office — the most important productivity suite on the market — in time for Mac OS X's release. There will be lingering fears about developer commitment, and then missed deadlines over and over this winter and spring. There will be a hundred articles penned by reviewers nitpicking details, often merely because the Mac OS X is different from what they are comfortable with. Already, old timers are nostalgically recounting how much better the good old Mac Plus days were. Why, those were the days when the Apple corporation stood for something meaningful, like making computing user friendly, not like today when Apple, uh, stands for the same thing. Early on I had hoped that the world would see the potential for Mac OS X to really steal market share from Windows NT, CE and Linux because it combines the best of these operating systems while jettisoning their legacy of crap. But now it's apparently that no OS X-driven stock price boost is going to occur in AAPL, not until Mac OS X really does begin to help Apple gain market share (and that would appear to be at least a year off yet). In conclusion, Apple has a lot of work to do, but every problem the company faces has a silver lining. Motorola has removed the traditional speed-induced upgrade cycle for Macs with its tardy timetables, but, ultimately Motorola will come through with faster G4s. The upgrade cycle so missed this quarter and next is merely deferred and not deceased. The elegant Cube, so bedeviled by technical and marketing issues, will undergo some intensive therapy and will eventually find its identity in Apple's product line-up, wherever that may be. Apple is going to arrive late to the Internet device party, but does that mean the first movers will necessarily have a huge advantage? The truth is that no one knows what form factor will dominate this nascent market. Apple could learn a lot by watching what misses and what hits as the other PC vendors take their pot shots, most of which will surely miss the target, maybe by as far as Dell's WebPC. Apple's sales organization is a confusing and inefficiently run operation. But new leadership and perhaps emulation of some of Apple's bean-counting PC peers could turn things around quickly. Hey, look, the PC guys have emulated Apple's insanely great hardware, why shouldn't Apple now return the favor and borrow from the best of what they do? Let's just hope Apple is better at imitating Gateway's successful sales paradigm than the PC vendors have been at borrowing from Apple. Mac OS X is ultimately Apple's savior, but for the next few months the uber-OS will be the source of repeated frights for investors unable to discern fact from fiction in the predictably confused media reporting. Operating system adoption and software development are subjects that give investors the jitters. Cha-ching, All totalled, the Bottom line: This is the single best buying opportunity in Apple's stock since the last time AAPL sold for $20 a share in April of 1999. It's not a get rich quick scheme and there are risks, but Apple's management has shown they can get their house in order in the past. What do you think a share of AAPL will sell for in November of 2001? Your comments are welcomed. |