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Why Has The Long Rally In Apple’s Stock Stalled Out? Why has the long rally in Apple’s stock stalled out? The problem is twofold. One. People invest based on their expectations for the future. On average, investors attempt to visualize the trends 12 to 18 months out. Apple’s policy of not commenting on future products or strategies has the downside effect of leaving investors and end users with little guidance on how the company plans to cope with new challenges. Normally, this isn’t much of a problem because the PC industry evolves incrementally. The next step is usually fairly obvious. But today the industry is faced with a radical design challenge brought about by the ubiquity of the Internet and steady advances in electronic component miniaturization. Two. People invest based on their expectations for the future. With the Fed dead set on slowing the economy–even if it means an itsy-bitsy recession–interest rates are likely to climb at least another full point by 2001. Once consumers grok that prosperity isn’t likely to slip out from under Greenspan’s thumb they’ll cut back on their purchases of all things not entirely necessary, including iMacs and iBooks. Or so goes the conventional wisdom, but we won’t digress into the macro-woes of the equity markets. Suffice it to say the stock market has the flu. Back to the first point: Most tech companies don’t vaporware their new products so as not to tip off the competition or create undue expectations. However, Apple is more than a company, it’s an entire platform. Even more than that, Apple is a philosophy about how humans should interact with machines. Apple is in total control of an entire computing environment that on the Wintel side is chaotically patched together by hundreds of companies. Thus, Apple needs to move in more stately steps than a fly by night PC vendor. After all, the PC user need not know what Gateway’s or even Compaq’s future plans are to know his or her platform is secure. Even the threatened breakup of Microsoft doesn’t effect the massive momentum Windows has in the market place. WWDC is just days away and we can expect an update on Apple’s future plans. But will it be comprehensive enough to attract new investors to Apple’s stock? A new investor to AAPL would be wise to ask how the company can double its stock price from this level. The simple answer: Grow unit sales. A doubling of the stock price would mean Apple propels unit sales, currently averaging about a million Macs a quarter, to about twice that number. That’s the bottom line. How can Apple double Mac sales? The company could start advertising at a meaningful impact level. They could lower margins to offer special deals to move more product. They could set up retail superstores to raise the company’s profile. But most of all Apple could get on top of the trend towards Internet appliances by inventing the next killer, must-have wireless handheld net widget and then providing the soft services that such a device needs to be user friendly. Steve Fortuna of Merrill Lynch believes the nascent Internet appliance market is Apple best opportunity in over a decade to steal the lion’s share of a whole market. He said in an ON24 report that Apple has a chance to dominate this emerging genre because of the company’s superior design culture and marketing savvy. Fortuna also pointed out that Internet appliances will mark the first time in over a decade that Wintel’s platform dominance won’t be a decisive factor in how consumers choose to buy a new computing device. Functionality, ease of use and style matter more on the Web where all things are compatible. In fact, the complexity of Windows is a major liability on consumer net device design for obvious reasons. Apple has spread before it an entire emergent market for the taking, not just a niche like Apple has been relegated to in the PC space. This is a truly a revolutionary change in the business environment for Apple. But there has been little sign from Cupertino as to how the company plans to develop this mega-opportunity. The dearth of information from Apple at this critical junction in PC history is killing the stock price. To buy AAPL today is an act of faith, not due diligence. Until Apple reveals how it’s going to evolve to meet the challenges of the coming post-PC era only those with an almost religious faith in the company’s ability to pull an insanely great rabbit from the hat are going to place their bets now. Of course, I have faith in Steve Jobs and the gang to do just that. But most investors are not Mac faithful nor do they invest their money on faith and so we can expect the stock to drift downward until management more carefully articulates the company’s trajectory. Only one thing is for sure, Apple has made a spectacular comeback. It’s a done deal. If you missed the ride, well, you missed it. The recovery is fully reflected in the stock price. The future can not be more of the same. If Apple keeps trying to milk the same "four corner" hardware strategy into the next year things are going to get grim for shareholders. We need a fifth corner. What do people really want? Forget the information age jargon for a moment. People, like all good monkeys, are noisy social animals. That’s why the Net is such a hit. The Net is a big virtual tree for the whole human family to hang out on chattering at each other. It taps into the primal human instinct to smooze, to groom and just be with the tribe. Today the average home PC is used mainly for e-mail, net surfing (for a multitude of reasons), bookkeeping and games. That’s a radical departure from half a decade ago when non-networked, stand-alone applications dominated the desktop. Today even Quicken and most games are net savvy. The average home PC user doesn’t need a faster PC. He or she needs a way to carry net access away from the desktop and into their lives. For most people logging their PC on to the Net is analogous to city commuters being forced to drive trucks instead of compact cars to work. It’s overkill. Yet, the current generation of Palm Pilots and such are about at stage the Mac Classic represents in the history of the desktop, leaving the first movers with little real advantage. The Internet appliance market is wide open, vast as a steppe and as untapped as the cell phone market was in 1991. Where’s Apple? This is an interesting time to be a PC vendor. Instead of the complacency of incremental chip and bus speed upgrades spawning new models and new cycles of growth, PC vendors are faced with a dramatic departure from the desktop paradigm they have built their expertise around. The challenge is immense and could perhaps prove fatal to the weaker hands in the industry. The network devices PC vendors soon hope to bring to market might awaken formidable forces like Sony and Nokia who feel the handheld market is rightfully theirs to lose. Now more than ever it’s evolve or die. While global demand for PCs should stay strong for several more years, in the developed nations a saturation point is fast approaching. Especially in the consumer space where a plateau of computational power has been reached lessening the need for ordinary users to upgrade as often as in the past. Time is running out for the PC vendor’s comfortable status quo. In conclusion: AAPL’s head and shoulders chart pattern represents a consensus among investors that the company has seen its stock price make a high for the year unless Apple can re-invent itself once more as a consumer Internet appliance company. Your comments are welcomed. |