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Tech Check
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chakote Steve Jobs |
] CEO Steve Jobs announced he would be taking a 6-month medical leave of absence, Apple shares closed at $85.33. From the moment that news hit the tape, shares began to slide, and by January 20, Apple had dipped to $78.20, with investors starting to worry that a kind of China Syndrome was happening to the company. A complete meltdown, and no recovery.
But something bordering on miraculous has occurred since then: a rally, and a big one, in Apple shares. And it was ignited by the most unlikely of sources: financial fundamentals.
As Apple shares teetered at that 3-year low, the company announces stellar earnings, strong Mac and iPod sales and completely respectable iPhone numbers (far more so if Apple would merely change its subscription method of accounting methods to reflect more accurately the true profitability of this device). That was a pretty neat trick considering the nation was gripped by the worst holiday shopping season in almost 40 years, and Jobs said in a prepared statement: "Even in these economically challenging times, we are incredibly pleased to report our best quarterly revenue and earnings in Apple history," with the company posting its first $10 billion quarter ever, generating $3.6 billion in cash during the period.
Apple is sitting on an enormous cash position of better than $28 billion.
This is a company that hasn't made significant acquisitions, but it certainly can buy just about anything it wants to. Or buy back stock. Or offer a dividend. But here's the thing: In recessionary times, cash is always king, and Apple has a mountain of it. But the company's business is also surging. It's an incredibly powerful one-two financial punch not replicated by any other company, to this degree, that I can think of.
Last quarter's earnings report was a financial OMG moment for so many skittish Apple investors wondering what market research to believe, and whether this company had some economic elixir that made it immune to the recession that was killing everyone else.
And in case you thought the Apple story ended with Macs, iPod, iPhone, iTunes, the surging App Store, a robust retailing strategy where better than half the 500,000 Macs sold went to new-to-Apple customers, you might be missing the next chapter in this success story. Just yesterday, Piper Jaffray's Gene Munster predicted that Apple would sell 6.6 million AppleTV units this year, generating an additional 18 cents a share in profits for the year. He's also predicting new Apple TV hardware that will include live TV and DVR capabilities that will automatically sync with Macs, iPhones and iPods over a wireless network.
Better still, from Munster: "With its iTunes ecosystem, Apple could develop a unique TV without any set-top-boxes or devices attached. With the use of a CableCARD for digital HD TV signal, Apple could effectively replace the home entertainment system (including a music stereo, cable box, Blu-ray/DVD player, and gaming console) with an all-in-one Apple television. Such a device would command a premium among a competitive field of budget TVs."
In other words, innovation is alive and well at Apple and the company is laying the groundwork for what could become the next major revenue streams.
Couple that with one of the strongest balance sheets around and Apple looks like a pretty compelling place for investors to park their money, as they await some kind of economic turnaround. I mean, if Apple is doing this well now, imagine the possibilities when consumers actually have some money to spend.
And it's not just Apple's internal innovation and cash that make it intriguing; it's also about how its competitors simply can't seem to compete.
On the computer side of the equation, Mac sales growth is dramatically outpacing sales growth for PCs; so much so that Dell continues to slide and Microsoft, sorely underestimating PC sales during its fourth quarter, missed earnings expectations and was forced to jettison as many as 10,000 full and part time employees. Hewlett-Packard's [HPQ
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] doing fine, but it controls a far slower-growing segment of the market than Apple. While Intel [INTC
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] (Apple's chip supplier but generating far more business from the PC side of its business) risks swinging to a loss for the first time in 87 quarters this quarter, Apple just posted its best quarter in its history.
On digital music, Apple owns the market, plain and simple, and there simply isn't a meaningful competitor out there, even on the horizon.
And in smart phones? Research in Motion [RIMM
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] is beginning to surge, even though its top executives are mired in a costly and embarrassing stock options backdating scandal. But Apple has been able to fend off Blackberry's threat. The Palm [PALM
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] Pre offers some possible competition, but without a release date or price tag — and Palm's spotty track record in scaling expensive, complicated smart phones to market, I'm not clear exactly how big a threat the Pre may actually be.
Steve Jobs stepping aside temporarily from Apple has given this company some key breathing room, no longer distracted by the day-to-day liability of his health concerns. Investors can now focus on the company's fundamentals, which is what should have been happening all along. The Apple rally these last few weeks has been impressive, but with these building blocks in place, this may only be just the beginning of a long and sustained comeback
Questions? Comments?
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