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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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AUGUST 27, 2002 SPECIAL REPORT: CAN APPLE KEEP ROLLING? A Good Time to Pick Apple's Stock? While several factors are weighing down the company's financial performance these days, many others could provide a nice lift
At the semi-annual MacWorld confab held in New York the second week in July, Apple announced revenues for the third fiscal quarter ending June 29 of $1.43 billion, down 3% from the same period the year before. Net income for the period fell nearly in half, from $61 million in the third fiscal quarter of 2001 to $32 million in the same quarter of 2002. At MacWorld, CEO Steve Jobs offered little hope that the gloom will be dispelled soon. While enthusiastic about an augmented product lineup -- including a new iteration of the iMac's OS X operating system, a powerful new Web server based in the industry-standard Unix operating system, a revamped professional line, and a 17-inch flat-panel iMac (vs. the previous 15-inch standard) -- Jobs predicted that the PC business will likely remain depressed for nine more months and that Apple investors might be in for a rough ride. POD PEOPLE. Rough or not, investors with an appetite for adventure might want to get a ticket. A handful of Apple watchers and industry analysts think it's ripe for a share-price rebound. Apple is already a lean company, they say, and some of the products that Jobs introduced at MacWorld could provide enough lift during the traditionally busy Christmas season and fall corporate-buying period to boost Apple's bottom line considerably. The ace in Jobs's hand right now is the Windows-compatible iPod portable music player. After much anticipation, Jobs introduced it at the July MacWorld, and it started shipping on Aug. 26. The market for MP3 players is growing quickly, according to a number of industry analysts, and Apple has the most recognizable item in the field, perhaps on par with the Sony Walkman in the early days of portable cassette players. Tech-data tracker IDC has forecast 2003 sales of 25 million portable digital-music players with total revenues of $5 billion. Charles Wolf, an analyst at Needham & Co., predicts that Apple could capture as much as 20% of that market, especially if the iPod becomes a must-have Christmas item in the absence of other cool tech toys. (Wolf owns Apple stock, and Needham makes a market in Apple shares.) That would translate into $1 billion in annual revenues and $130 million in profits. SERVER WITH A SMILE. Should these numbers materialize, they would be a huge boost for a company with annual revenues of about $6 billion. Even if Apple grabs only 5% or 10% of this market, its star could soar as sales of iPods to Windows users prove at last that Apple can sell to the Microsoft crowd. Whether those folks will switch to Apple computers remains doubtful. But selling them a music player is better than selling them nothing and leaving Apple pigeonholed in its niche. A few lesser trends could also benefit Apple. One is Xserve, its first rack-mounted server. With a software kernel based on the same OS X core that runs Apple's other computers, the Xserve can manage Windows machines as well as Unix-based machines or Macs. The Xserve has gotten solid reviews, and IDC Research Vice-President Jean Bozman thinks it could help Apple grab market share in corporate departments where its desktops are already in use. In fact, Apple, which held less than 1% of the low-priced server market in 2001, can go in only one direction in the server field -- up. Better still, margins on servers tend to exceed even those of Apple's comparatively high-margin PC products. If it can sell a mere 5,000 Xserves per quarter -- about double its current server sales -- that could add millions of dollars to annual profits. SYNC YOUR CALENDAR. Another possible contributor to improved earnings is the $99 annual fee Apple hopes to levy on users of its .Mac (yep, it's pronounced dot-Mac) suite of services. Macheads howled at this charge for a mac.com e-mail address and such iTools services as online disk space and Web-site production tools, which Apple had previously offered as freebies. The killer app in .Mac, however, could be the calendar-synching capability with PDAs that Apple previewed in July. By all accounts, it's vastly superior to existing synching efforts for Macs, a constant thorn in the side of users. If Apple can sell .Mac to a mere 1 million users from among its total of 25 million, it would bring in $100 million in revenues. Initially, that may not cover .Mac's costs. But as the service's adoption grows, Apple could turn it into a nice revenue stream akin to other types of software licensing. MONEY PIT? Of course, several variables could conspire to drag Apple's shares down further. Investors are already spooked by flagging sales at Apple's own retail stores. Revenues dropped from $70 million for 29 stores in the second fiscal quarter to $61 million for 31 stores at the end of the third quarter. Apple is pushing ahead with plans to open 50 stores by yearend, but any further erosion at its outlets could quickly alter those plans and stoke shareholder fears that Jobs & Co. has stumbled into a retail money pit. And if the economy slips into a double-dip recession, iMac sales could erode further. That would be doubly painful because Apple has lived and died in the past on the strength of its strong product introductions. "The new iMacs do need to rebound from what they did in June," says Joseph Beaulieu, an analyst at Morningstar who has a four-star (out of a possible five) rating on the stock. "I'm anxiously waiting to see if the June quarter was just a hiccup, or is it falling flat with consumers?" Another big concern is the advertising slowdown, which directly affects sales of Apple's highly profitable PowerMac line of computers, the machine of choice for many graphics professionals, such as those who work in the ad biz. If the iMac fails to levitate a bit and the new line of PowerMacs falls flat, Apple might even end up in the red. CASH-RICH. The education market is shaky as well. Apple gets one-quarter of its annual revenues from schools, but lately it has been steadily losing market share. Apple claims it has staunched those losses. However, if it takes another hit in the education market, investors might get spooked at the potential effect on Apple's long-term growth prospects. A final concern is component prices. Apple is less able than other PC makers to absorb increases here, since it tends to set prices and configurations and stick with them for some time. So Apple's profit margins move inversely to hard-drive and chip prices. Fortunately for Apple, component prices look to be heading south, as new factories come on-line to produce flat-panel displays, among other things. And Apple shareholders can take solace in the $4.3 billion in cash Jobs has amassed, equal to $11 a share. So if you buy Apple stock, even if you aren't buying into a growth dynamo, you're still getting in for only $4 to $5. Not a bad deal, considering that Apple could have a lot more upside potential than downside risk over the next few months.  By Alex Salkever, Technology editor for BusinessWeek Online Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | AUGUST |
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