Time to Bite at Apple’s Stock?
Time to Bite at Apple’s Stock?
By Hal Plotkin
Silicon Valley Correspondent
It’s bruised on the outside, but the core looks solid.
Can Steve Jobs revive his revival of PC maker Apple Computer Inc. {AAPL}? That’s the 64-gigabyte question in Silicon Valley these days. This stock has been so battered, in fact, that if you bought it today, it would only have to regain about half of what it lost from its peak of more than $60 in August for you to double your money. Apple shares plunged on Sept. 29, when the company warned that sales of its new iMac and Power Mac G4 Cube computers were softer than expected. Then, on Oct. 18, Apple managed to produce numbers below even the lowered expectations. That sent the shares below 19.
But what are the chances of a rebound?
It depends on whom you ask.
Longtime PC-industry watcher Charlie Wolf at UBS Warburg believes that Apple will come back, but not soon. “My gut is telling me the stock’s fall has been an overreaction,” says Wolf. And, he cites encouraging signs among the company’s dismal numbers: “Forty-three percent of the people who have been buying iMac are first-time computer buyers or people switching from Windows [based-PCs]. If Apple can continue to attract a significant percentage of new and switching customers to iMac then this remains a growth story.”
Wolf, who has been following Apple’s fortunes for more than 15 years, says he’s preparing a new research note on the firm that will reiterate his “buy” recommendation. Although he doesn’t see much upside for the stock over the next quarter, he says it’s probably fallen about as far as it’s likely to go—and could start heading up in another quarter or two.
“Apple’s sales have fallen off the cliff many times before,” Wolf says. “The worst was in December, 1995 when they wrote off hundreds of millions of dollars worth of inventory. Investors recall those other instances, if only vaguely, and that’s got them worried. So the stock could drop to 18 or 19, I think, but if it gets to around $12.50 [approaching book value and a theoretical bottom] the company could buy back every single share.” Not that Wolf thinks such a thing will happen. But at $12.50, Apple’s market cap would be less than $4.2 billion; the company has $4 billion in cash and equivalents on hand.
Apple’s most recent troubles started late last month when the company warned that fiscal fourth quarter revenues and earnings would fall far short of expectations. Before the warning, analysts surveyed by First Call Corp. had estimated the company’s Q4 revenues at about $2.05 billion with earnings projected at roughly 45 cents a share. Apple’s September 29 warning shaved those expectations down to somewhere between $1.85 billion and $1.90 billion in revenue and also dropped the earnings forecast to between 30 and 33 cents per share, excluding investment gains.
When the final numbers came in last week, Apple hit the low end of its own revised estimates, posting revenues of $1.87 billion and earnings of 30 cents per diluted share.
And yet, as Wolf points out, there’s more to those numbers.
Apple’s fiscal fourth-quarter revenues, while disappointing, still represent a 40% increase over the same quarter last year. What’s more, the company gained market share vis-à-vis other computer makers, capturing an estimated 4.4% of the market, according to new figures released by Dataquest released on Monday. That’s nothing like Apple’s glory days, but a nice increase from the 3.9 % share that Dataquest says Apple had a year earlier. Indeed, the report shows that Apple was the third-fastest growing PC maker during the most recent quarter, in terms of total unit sales, posting year over year quarterly growth of 25.2 %, as compared with 26.1 % for Dell Computer Corp. {DELL} and 46 % for Hewlett Packard Company {HWP}.
You throw into that steadily falling prices for high-end flat panel displays, which are used with Apple’s highest price, highest margin systems, and founder Steve Jobs’ promise that Apple will introduce its most exciting products ever during the coming year and, Wolf says, you have what appears to be a good recipe for an eventual rebound.
“If you drink some of Steve’s water, then there’s hope they can continue to attract new users while building on their base,” he says.
But for those drinking at other fountains, another Apple rebound looks dicey.
“Right now Apple’s future is more speculative than at any time in the last three years,” says Kurt King, an analyst with Banc of America Securities, based in San Francisco.
He says investors shouldn’t make too much of the fact the company’s valuation is approaching its book value.
“Lots of companies trade for less than their book value,” he says. “We’ve even had times when the entire market traded below book value.”
King’s fear is that the momentum that Wolf cites will disappear, because the bad news surrounding Apple’s stock will frighten new PC buyers and would-be Windows switchers switching away from the Apple platform.
“The unanswered question is the degree to which Apple’s recent problems will quell enthusiasm in the end market,” he says. “It increases the level of uncertainty and adds to the concerns.”
Somewhere between ebullient Wolf and bearish King, falls Richard Chu, an analyst at S.G. Cowen Securities. He says he’d be a buyer in the $20 price range. He currently has a “buy” rating on the stock, his firm’s second highest recommendation, along with a $30 12-month price target.
“The stock doesn’t have a lot of visibility but at these prices you’re not paying for a lot of visibility,” he says. “Apple has some things going for it. They have an ability to innovate, a strong brand, and a business model that drives affinity in the user base. If you buy a Mac you’re locked into Apple. If you buy a Wintel machine, you can easily switch vendors. So they have an opportunity to monetize that, and I think those arguments still hold.”
Rob Enderle, vice president of the Giga Information Group says he would not be surprised to see Apple’s problems continue over the short run. “The PC market is looking extremely soft right now,” he says, referring to evidence of a recent slow down in the overall growth of new PC sales.
But he quickly adds that overall trends in the computer industry are working in Apple’s favor.
“Longer term, the market is actually looking better for Apple than it ever has,” he says. “That’s because the market is moving.”
Enderle says the increasing availability of applications over the Internet is beginning to erode the main complaint about Apple’s hardware, which is that there are fewer applications available for Apple computers as compared with Windows-based PCs.
“As more and more gets done on the Internet it makes that less and less important,” he says. “Apple benefits more than its competitors from the Internet as applications move online.”
And finally, there is what may well be the single biggest unknown factor: exactly what new products will Apple introduce next year?
The company isn’t talking and declined to be interviewed for this report. But seasoned observers who have tracked Apple for a long time say they expect to be surprised, particularly since Jobs decided earlier this year to stay on permanently as CEO. Already a billionaire, Jobs is there to make waves, not avoid risks, they figure. That, they hope, will mean a return to “insanely great” products, as well as great design, Apple’s forte of late.
“I have absolutely no idea what the new products will be,” says Chu, of S.G. Cowen. “But Apple does have the freedom to innovate that other PC makers don’t have. And that can often make things very interesting.”
