Beleaguered Apple Computer may not be rotten, just temporarily bruised

For Apple Computer Inc. CEO Steve Jobs–not to mention plenty of the pioneering personal computer maker’s long-suffering fans–Sept. 29 must have seemed like déjà vu all over again. Apple’s stock plunged to $25 (all currency in U.S. dollars) from $53 the day before, chopping $10 billion off the company’s market value. The Cupertino, Ca.-based company’s hip marketing campaigns and ultracool products weren’t enough to keep Apple from getting tarred and feathered by investors and analysts for failing to execute its business plan properly–just as it was in 1997 and several times in the early 1990s.

But the skeptics who rushed to dump their Apple stock should remember one thing: The September carnage seemed like déjà vu because the company has been down there before. Stumbling is a part of Apple’s culture–in fact, it seems to be hard-wired into Apple’s DNA. Getting back up again–not to mention breaking into an all-out sprint–also seems to come fairly easily, particularly to CEO Steve Jobs, who is now a legendary (or notorious) figure in Silicon Valley.

If anyone can bring Apple back from the brink, his supporters say, Steve Jobs can. It’s almost old hat for him. To take just one example, when Jobs took over from former CEO Gil Amelio in 1997, Apple was almost a complete write-off. It had dozens of product lines, some old and some new, and none of them were doing particularly well–especially the ill-fated Newton hand-held device. Apple was up to its eyeballs in debt, and regularly missed its revenue and profit targets, if it managed to make a profit at all.

Less than two years later, the company was back near the top of its game. Jobs cut down the number of product lines, and in 1998 and 1999 he introduced some of the coolest computers since the original Macintosh: the candy-coloured iMacs and iBooks. Like the updated Volkswagen Beetle, the iMacs instantly became part of popular culture, and analysts fell over themselves to praise Jobs. Apple’s stock climbed. As recently as January, 2000, an analyst at Morgan Stanley Dean Witter put a “buy” recommendation on Apple’s shares with a target price of $60 (adjusted for a 2-for-1 split in June, 2000).

So what happened? The iMacs got a little long in the tooth, for one thing. So, earlier this year Jobs introduced one of the first new Apple products in a year: the Power Mac G4 Cube, a funky-looking machine aimed at power users. After raving about the G4 for months, however, company watchers noticed that not that many people were buying them. Why? They were expensive–$1,800 for a 450-megahertz version without a monitor. The computer also seemed underpowered compared with PCs powered by 500 MHz Intel chips. Apple adherents protested that the G4 was faster than the Intel-powered machines, and they appeared to be right–but it didn’t help.

At the same time, there was increasing fallout from an operational change that Apple later admitted was handled badly: The company stopped contracting out its educational sales–a traditionally strong market–to third-party contractors, and switched to using its internal sales staff. Even critical analysts agree that this was the right thing to do–too much profit was flowing to the contractors. Unfortunately, Apple made the change in the summer, when most schools are making their big buying decisions for the coming year.

Apple’s sales started to soften, so the computer maker warned analysts on Sept. 29 it would likely miss analysts’ sales and profit forecasts for the fourth quarter ended Sept. 30. The stock fell as low as $25, giving Apple a market value of less than $10 billion, down from $25 billion in the spring. But the bloodbath wasn’t over yet: When the company reported its results on Oct. 19, it didn’t even hit the reduced targets, and the stock sank even lower.

By then, many firms had already cut their ratings on Apple to “hold” or “neutral,” and several said the news raised questions about the company’s business model. “We do not see this as a one-quarter phenomenon for Apple, but rather as the beginning of many tough quarters ahead,” said Steve Fortuna of Merrill Lynch & Co. Apple had always had a big chunk of the school market, giving it an edge when schools wanted to upgrade. Apple’s market share in the consumer, education and artistic markets climbed to 6% in 1999 from just 3.8% in 1997. If this category had peaked, some analysts wondered what was left? Apple had never had much of a presence in the corporate world, except for company graphics departments.

In the end, however, none of the problems Apple faces now are company-killers. The move to using an internal sales force was handled badly, but it can be overcome. Similarly, boosting the power of the Power Mac G4 Cube and cutting the price should win some more market share. Other companies have overcome far worse mistakes: Dell Computer Corp., for example, had serious problems with its notebooks in the early 1990s, and not only recovered, but went on to dominate the market. Compaq Computer Corp. also had numerous problems in the mid-1990s, and yet it became the No. 1 PC seller.

Apple is nowhere near as badly off as it was in 1997, when there were rumours it might file for bankruptcy protection after recording a $1-billion loss, and its revenues had fallen to less than $7.1 billion from about $11 billion in 1995. For the fiscal year ended Sept. 30, 2000, the company turned a $786-million profit on revenues of just under $8 billion, meaning that at $20 in October, the stock was trading for less than one times sales.

Apple has consistently demonstrated that there is a strong desire within a significant proportion of the market for an alternative to the traditional grey PC. Going from a 6% share in its core U.S. markets now to 10% over the next few years wouldn’t be that much of a leap, but it would push Apple’s revenues well past $10 billion. Even if its profit-making ability has been reduced, it should still be able to produce a healthy stream of earnings from that.

As Apple devotee Steven Kowaski, a former contributor to the defunct magazine MacWeek, put it in a comment to Wired News: “The gods must love Apple. Either that, or Steve [Jobs]is sacrificing goats to a dark being. This company has had more near-death experiences than a bimbo in a cheesy horror flick. But unlike the bimbo, Apple manages to survive. Every damn time the company gets kicked to the curb, they reinvent themselves and return stronger than before.”

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