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Happy New Year!
and a quick review of the last one...

By:David K. Every
©Copyright 1999

As a geek, I'm a master of the obvious. I wanted to start out the New Year right, by saying "Welcome" and "Happy New Year". I notice that civilization did not end over the Y2K issues, and despite the chicken little's proclamations -- the world goes on. Of course the millenium really starts next year, but why pick nits? Maybe because the writers or proofers know better (or could if they wanted to), but they just don't care. Every time some reporter is proclaiming "Welcome to the new millenium" -- I translate it to "Look at me, stupidity is the norm". Anyway, on to the topic at hand.

Apple Products

1999 was a pretty good year for Apple. Apple released some of the best and most innovative products in the industry -- and continued to make huge strides forward for users.

Apple continued to push the iMac forward, introduced colors, reintroduced fanless (quieter) computers, pushed for more power efficiency, increased speed, graphics and game playability. Apple continued the evolution away from anachronistic ports (like old style serial, ADB and SCSI) to newer I/O like FireWire, USB, and digital video -- and bringing those technologies across the product line. Apple added things like front loading CD and DVD drives, added easier expandability to the iMacs -- and totally redefined easy upgrading with the G3 and G4 enclosures, and added things like "a door" and "handles" to mainstream computers. Apple even started a push towards wireless networks.

Apple pushed innovation in the portable front with the iBook (and PowerBook). The iBook brought in better design tradeoffs with lower cost, a built in handle, battery life measure in many hours (6+?), durability, styling, and simplicity in I/O. Performance of Apple portables is still market leading -- and sales are reflecting that many people value the changes and improvements that Apple made.

Apple pushed hard in the OS area. They released a major update to Mac OS 8, then a minor update, then they release Mac OS 9. Mac OS 9's included multi-user support -- something that UNIX and bigger systems have had, but has not been mainstreamed. And OS 9 also brought back the keychain -- a great idea that had died with the ill fated PowerTalk has been reincarnated and improved. Most important may be automatic net-based upgrading -- while a little immature this will be a fundamental concept for the future. Besides many major improvements this year we only went backwards (or sideways) in a very select few areas (like the interface on QuickTime and Sherlock) -- so the overall progress is a gain. QuickTime brought multimedia even higher than it was before -- with integration of streaming. Sherlock integrated Internet searching into the user experience. Apple continued its work on OS X, releasing OS X Server, and shipped an early developer release of OS X consumer. Many new technologies to help the transition have been released or announced.

The improvements to the OS weren't just customer features -- but also developer features and marketing, which should help with more Mac products. Apple was able to shut down most of the security leaks -- and was able to suprise the industry a few times (for the good of all). To a point they went too far, and developers are getting a tad frustrated with the new "closed" Apple. But overall, the marketing and health of the platform is good and compensating. Apple products are getting attention, and being seen everywhere, commercials, hidden in movies and TV shows, and in other companies commercials -- and when you start looking at what you get from the products in features per dollar, the Macs are just fantastic.

Apple Analysis

I'm not a financial analyst, nor do I play one in a magazine. But I can observe some basics -- like that Apple's stock basically tripled (going from the $30 range to the low $100's) -- and I think I can safely say that next year should be pretty good as well. My reasoning is the somewhat deluded view that eventually reason wins out over hype. So assuming reason matters -- let's compare Apple to another computer hardware company -- Dell.

Apple has a market evaluation of $16 Billion (that is how much all the stock outstanding is worth), on yearly sales of over $6 Billion, running over $600 Million a year in profit. Earnings per share are about $3.61 and the Price/Earnings ratio is running around 27:1. Apple has about 7,000 employees, and a return on sales of around 10%. Now lets compare Apple to another hardware company -- like Dell.

Dell's market evaluation is $133 Billion. Dell is running about $18 Billion per year in sales (3 times Apple) -- but Dell only has a little over double the profits. Dell has a return on sales of around 8% (or 2% worse than Apple). That means Apple has better margins. If we were to assume that market evaluation (stock price) was related to either total sales or profits, then Apple's stock evaluation should be at least 1/3 to 1/2 of Dell's. That means Apple should be at about $44 - $66 Billion -- or about $300 - $450 per share. If we realize that Apple's margins are better, then Apple's stock should be higher still. Running at the $100 / share rate they are at now shows that Apple stock is still a bargain.

Stock value isn't just about sales and profits -- there are many other factors. Earning per share is another indicator. Apple's shares are earning about $3.61 per share -- Dell's share are earning about $.53. So for each dollar you put into Apple you get about 7 times the money returned (in earnings). So by that metric, Apple should be selling for about 7 times what it is to be even with Dell (or about $700 per share for Apple). Still seems like Apple stock is a bargain.

Another indicator of health is how much money you make, and how few employees it takes to make that money. Remember, employees are assets to a company in that they help the company get its job done -- but they are a liability when it comes to costs, payroll and so on. So companies that make the most money with the fewest employees is often a better investment. Apple has about 7,000 employees on $600 Million in profits -- or about $86,000 in revenue per employee. Dell's 24,000 employees on $1.4 Billion in profits is only about $58,000 in revenue per employee. So Apple employees either work harder or smarter, or the company is just run better. This implies that Apple should not only be trading at roughly the same evaluation ($500 per share), but far more since it is a better company.

Of course there are dozens or hundreds of other indicators for what a company is worth. Growth, market health, assets and liabilities, back inventory and so on. Apple didn't do great on total income growth - they've eliminated sales of lots of peripherals (devices), software products and so on -- and they cut the cost of many products (reducing the total income as well). But cutting out chaff is often a good thing - and the actual growth in areas that they are selling products has gone up, and the volume of sales has gone up dramatically. And almost every other indicator seems to reflect Apple as the better investment and still way under valued.

When you deeper analysis on the markets you realize quickly that Dell is just another PC clone maker, in a fickle industry that buys the cheapest (not best) product. There is brand recognition, and some loyalty -- but there are problems as well, and the whole PC-clone industry will sell their souls to save $.50. Dell is hanging on to their position by a rather tenuous hold, in an over saturated market (over saturated is reflected by the number of PC makers that shut their doors each year). Apple on the other hand is a market leader, in it's own market -- and Mac buyers buy based on value (and not just cost). Apple has some of the highest brand loyalty (and brand recognition) around -- more than Dell. Apple's customers are far less likely to leave the Mac, because the environment is superior and the products are higher quality. The only big erosions away from the Mac was when the press was scaring the customers away with tales of doom and gloom. Now that Apple is seen as secure, and doing well, the momentum of Mac platform growth will continue -- and accellerate.

When you look further into the future you see the PC industry is trying to make a transition from the current PC architecture to either a true RISC chip (like Merced/Itanium), or is trying to redesign the current platform (with all sorts of "platform" specifications). The PC's have an OS that is in serious transition, trying to get off the foundation of DOS. Win98 was a half step, Windows 2000 is another partial step. But the market is paralyzed by Microsoft's incompetence, and people are catching on to, and growing tired of, getting locked in to Microsoft's proprietary products. Now the market is being broken open with new solutions; Linux is making a dent in the PC server area, Java is a way to make more platform independence, even options like vertical computing appliances like Pilots, Game Consoles, and WebTV all show that the industry is willing to accept computing devices that are not just PCs. Since users are feeling less locked in to buying only IBM compatible PCs (and OS's), this bodes well for Apple and the industry at large, including Sun, IBM, and others. It is also a trend away from PC companies like Dell. Companies are realizing some true pain with NT and the pay-for-fix and continuous upgrades required --0 and that some of the so called "proprietary" solutions are as open as the supposed open PC. The rosy glow of "no one got fired for buying Microsoft" is wearing off. Then there is a possibility of Microsoft getting broken up -- which means more choices for the industry, and more opportunities for companies like Apple (and harm to PC only companies like Dell). Almost no matter how you cut it -- there are more opportunities for growth for a company like Apple than just another clone maker. So it seems to me that Apple could conservatively double or triple in value this next year, and still be dramatically under valued compared to the rest of the PC industry.

And that is the least exciting way to look at Apple's potential. If you were to break Apple up into a few companies and evaluate those parts -- then Apple wouldn't be valued dozens or hundreds of times higher than it is today. as a portal would be valued higher than likely all of Apple currently is (just going by current internet standards). QuickTime and QuickTimeTV should be valued as much as Real Networks alone (if not more) -- that would just about double Apple's valuation for that segment alone -- and if the whole company was evaluated on that scale, Apple would surpass Microsoft on total evaluation (and many thousands of dollars per share). Now Apple is going into more internet arenas, they should be a serious player.


You can't really measure one companies to anothers value. The sad truth is on Wall Street (or elsewhere) reason does not always win out (at least not short term) and sometimes insanity is the norm. One need only look at the ridiculous over valuation of a few Internet stocks. The perception is that all Internet stocks are doing good -- the reality is that a few are grotesquely over valued, and most are ignored. Hype, perception, and rumor all factor in -- short term. But eventually the market, or companies, go through corrections. I think the three fold growth to Apple's stock this last year is just the beginning of that correction. As someone who owns a few shares of Apple's stock, I hope that the positive correction continues its trend for another year or two, and brings Apple up to a more logical and reasonable evaluation.

Apple is doing a fantastic job on what they have control of. There are a few annoyances and frustrations, of course -- but their products are the best ever, their marketing is much better, the public relations is much better, they are continuing to move forward. And this whole last year, was just the windup for the punches to be delivered this year. They have OS X coming out, likely to have MP -- and then that will empower even MORE Operating System growth, and Application features. There are some huge improvements due for the processors, memory bus, graphics, sound and styling. The products are continuing to drop in price, they are more open and compatible than every, and they are delivering more and more useful features and performance. If we see as much progress next year as we've seen this year, things will just be incredible! I think I'm going to have a very happy year this year, I certainly expect that Apple will -- and I wish everyone else the same.

Created: 11/07/99
Updated: 11/09/02

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