by , 9:30 AM EDT, October 25th, 2001
It used to be that we could expect to hear ignorant attacks on Apple from the mainstream press quite often, especially from the financial press. For the last two years or so that situation has vastly improved, but today we bring you an article that shows that no matter how much those anti-Apple feelings have been repressed, they are still seething below the surface in a cauldron of ineptitude. Arne Alsin has penned a piece for TheStreet.com that not only says investors shouldn't buy shares of Apple, those who own them now should sell them. People are entitled to their opinion, but Mr. Alsin uses a massive dose of ignorance and misinformation in his condemnation of the company. The piece, titled "Apple's Scraping the Bottom of the Barrel," is a sort of caricature of all of the urban myths surrounding Apple and the Mac. From the article:
Don't buy Apple's stock. And if you own it, sell it. I know the company has a core following that is loyal, even cultlike, but the broader base of believers has been steadily eroding for years. To wager on this company is to bet that the exodus of users can be staunched and then, implausibly, reversed. It's hard to imagine such a scenario, given Apple's shrinking girth. With less than 5% of the market, the company is no longer an afterthought in PCs -- it's irrelevant.
Apple's user base has been steadily growing, despite the company having clinged to its 5% market share for too many years. With generally increasing unit shipments (the most recent quarter being an exception, a steady influx of first time buyers and Windows converts (though the most recent data to support that is too far out of date to make me comfortable quoting it), and increasing market share in education, Mr. Alsin's suppositions are blatantly wrong. It is true that Apple's revenue has shrunk, in part from having botched its changeover of its education sales team, but mostly from the fact that computers are simply priced lower than ever, it is not true that Apple's user base has been shrinking. From the article:
Products: Don't tell me about the dazzling products that Apple introduces from time to time. Because I'll agree with you -- they can be impressive. From the iMacs to the PowerBook to the new iPod portable MP3 player announced this week, it is clear that Apple knows how to design cool products. Successful investors don't invest in cool products, though -- they invest in profits. In the past six years, against a backdrop of unparalleled profitability in tech, Apple was profitable in only three of those six years, despite a slew of provocative product introductions.
This is a disingenuous comment at best, and outright chicanery at the worst. Apple was profitable in 1998, 1999, and 2000 (see Apple's last five years). The company lost US$25 million in 2001, and would have profited had not the terrorist attacks on September 11th further derailed the economy. So, while it is technically true that Apple was only profitable three out of the last six years, that it was three out of the most recent *four* years is a far more relevant piece of information. Mr. Alsin chose to couch his information in a way that is highly unusual for a financial piece. He also fails to note that Apple was the first PC company to recognize the slowdown of late 200/early 2001, and was the first company to recover from it. He also knows full well, or he shouldn't be commenting on Apple, that the company was on track to profit in Q4 and for the overall fiscal 2001 year. To fail to mention that is also most unusual for a financial analysis.
Business Model: It's safe to say that the business model at Apple is terminally flawed. The PC industry has been completely commoditized. And Apple loses on price because machines based on Microsoft's Windows are much cheaper. Apple also is a big loser compared with Windows based on the availability and breadth of applications.
Apple had gross margins this last quarter of some 30%. Dell's gross margins were in the single digits. Apple hasn't lost market share, and has maintained its gross margins. It seems to us that the only ones to be hurt from the commoditization process is Dell and the other PC manufacturers. Apple should be praised as the lone standout in a sea of mediocrity.
As for his claim that Apple suffers from not having enough software, this is nothing more than a tired argument. As we have stated many times at The Mac Observer, unless you are talking about accounting software or games, the Mac enjoys best-in-class software titles with Windows. There may not be 15 apps in a given category for the Mac, but there will be 2-3 good ones for both Mac and Windows, and another 12 very poor titles for Windows as well. This is a non-issue.
To survive, Apple has to convince Windows users to migrate to the Mac platform. But since Apple is not competitive on either price or applications, there is no compelling reason for users to switch. The game is effectively over. Dell, IBM, and Hewlett Packard have a stranglehold on the PC industry that is secure, with Dell's build-to-order model the clear winner over the long term.
Apple has held onto its market share, including gaining quite a few Wintel converts in the process. The company has been executing a steady plan for the last 4 years, and the proof is in the pudding. Mr. Alsin is simply wrong.
Balance Sheet: Fans of Apple stock can hail the financial strength of the company, but this is hardly a reason to buy its shares. Net of all debt (including off-balance sheet liabilities), Apple commands cash or near-cash (such as receivables) of about $7.80 a share. Interest income made up 42% of the profit in the year 2000 and is expected to contribute 50% of the pretax income in 2002.
This is just an embarrassing mistake. Apple's cash on hand for the end of fiscal 2001 was US$4.336 billion, and there were 345,613,000 shares outstanding. That comes out to US$12.54 a share, not US$7.90. There is simply no excuse for that sort of error. It is true that Apple is generating lots of money from its cash reserves, but for Mr. Alsin to criticize the company for this is inexplicable. Apple is taking advantage of its cash position, and for any company to do this is usually heralded as sound financial leadership. Mr. Alsin suggests it makes Apple's profits somehow less real. While it is true that Apple is not generating all of its profits from the sale of Macs, it is the cash flow from the sale of Macs that makes Apple's investments possible. More importantly, real profits are real profits no matter where they come from.
Retail Stores: It's desperation time in Cupertino, Calif., as Apple is going into the retail store business to ensure that its products receive enough attention. This move is fraught with problems, however, because the reason that Apple products are not getting the retailers' attention is because they are not selling well. If Apple machines were moving fast off the shelves, retailers would be happy to provide the shelf space.
And the move into retail takes Apple into an area where it has demonstrated no competence. Now it's going to take on Best Buy and Circuit City? Have the executives at Apple considered the sobering retail experience of Gateway?
Again, Mr. Alsin simply didn't do his homework. Apple's retail stores have been fabulously successful with each store paying for itself according to CFO Fred Anderson. The company has also guided Wall Street to expect its retail operations to generate a profit in the first year of operations. That's remarkable, but Mr. Alsin doesn't mention it. To suggest that Apple is competing with Best Buy and Circuit City is also embarrassingly indicative of his lack of understanding of Apple's operations.
It's too bad for Apple that the ending to this chapter in the PC story has already been written. The company had the ultimate first-mover advantage many years ago with an array of better products, a vastly superior operating system and even the best commercials! Apple's story now is fodder for business historians -- don't make it fodder for your portfolio.
People have been saying this for twenty years, and not one of them has been correct. At least not yet. It is not likely that Mr. Alsin will be the first. You can read his article in full at TheStreet.com. TheStreet.com also published a piece in praise of Apple today.
Spin: YAPTPAD (Yet Another Pinhead To Predict Apple's Death). It is amazing that this kind of thing can get printed at a publication like TheStreet.com. It includes erroneous financial information, misinformation, and a complete ignorance of the company being analyzed. Sad.