Anthony Frausto-Robledo ([email protected])

19 Apr 2001

Opinion: Why Apple just earned the Street's respect

Now that we know the good news we can all just take a deep breath and sigh of relief. Apple just defied an industry and blew Wall Street away with its stunning $40 million profit—all in the midst of a major industry meltdown and waning global economy.

Respect Comes Hard for Apple, doesn't it?

I think Apple's performance this last quarter will pave the way for a new found respect for the company. You can see it in the news yesterday and today. And in its current stock price! Not more than a quarter ago Apple reported its first lost in three years as the whole industry was hitting the brakes hard. At that time the industry was fair about Apple's performance, blaming the wait for new products and a general PC industry slowdown. But one point analyst made very clear back then now seems not so valid.

Apple Suffers Harder During Industry Slowdowns. Or Does It?

Some in the industry said back in January when Apple reported a loss that the company was more volatile than the average PC company because it holds a smaller market share and in particular is hard hit when consumer spending on PC's declines. While that statement makes sense and Apple is dependent on strong consumer purchases for its computers, I believe Apple is actually better off than rival PC companies like Gateway and HP, for example.

Software and Hardware Integration Advantages

Initially Apple got its hot start on the iMac's good looks, but Jobs' new 'digital hub' and 'digital lifestyle' strategy actually makes a lot of sense. That's where Apple's advantage as a single-source integrator of both software and hardware pays off. And they can continue to press this advantage with more "i-branded" killer apps. iTunes is great and iMovie brilliant, but I think Apple is just getting warmed up. Once new apps take advantages of new features in Mac OS X (like Services) Apple's software integration is going to really shine.

Back in January industry analyst didn't really believe this. Steven Fortuna of Merrill Lynch said in a C/net article that:

Despite some interesting announcements and a solid display of exciting technology, we don't walk away with the sense that the near-to-medium-term prospects for the company are any brighter than previously thought --Steven Fortuna, Merrill Lynch, Jan 16th, 2001.

Steven was wrong. iTunes and iDVD are helping to drive sales of both high-end and consumer iMacs. Even Apple's improvements to older software like Final Cut Pro are helping them. Dell can't sell a computer to someone who wants to use Final Cut Pro. And Final Cut Pro is an industry leading application for video. So that's a killer advantage for Apple.

The bottom line: Apple is a very talented software maker and they are getting back to their roots as a killer software company...and that can help bolster Apple in hard times.

Management Shines at Apple - Best in Industry

Channel inventory overhand gotten Apple down? Back in January Salomon Smith Barney seemed to believe so:

While impressed with Apple's new products, we continue to believe that the company suffers from a channel inventory overhand of existing products and that March quarter guidance will be reduced again. --Salomon Smith Barney, Jan 16th, 2001.

This channel overhang hurt just about everyone but Apple defied an industry of analysts by announcing yesterday it is now back down to four weeks of inventory (the ideal spot to avoid both glut and "stockout") something that will certainly impress all in the PC industry.

And as Jobs made clear on CNBC yesterday, Apple is benefiting from "operational excellence". Many PC company's can't get to four weeks of channel even during good economic times. Here Apple proves it can do it in some very uncertain times.

Closing Comments

If Apple is more susceptible to harsh industry downturns it sure didn't show this quarter. I continue to believe that most industry analysts still don't fully understand Apple. However, I now think this quarter's performance may foreshadow a new respect on the Street for Apple. Some are starting to finally get it:

What Apple demonstrated in the March quarter is that its performance is more closely tied to the popularity of its own products than the overall health of the PC industry, -- Charlie Wolf, April 19, 2001

And analysts have even done a 180 degree turn on Apple saying:

They have a very loyal customer base and [are] not quite as sensitive to the general macro economics as the rest of the world, -- Steve Allen, Pomeranz & Co, April, 19, 2001

Clearly Apple can succeed in both bright and shaking times, and their performance this quarter has certainly helped them find some new respect on Wall Street. If the US economy begins to pick up in the second half of 2001—concurrent with new Mac OS X frenzy this summer—Apple's stock will surely be leading the pack.

Apple's stock at the time of this writing is super hot at 25.25 (up 10.84%). This is half of what it may be come next January. Be optimistic.