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Thursday, May 26, 2005

Figuring out Apple (AAPL) right now

Apple is enjoying a strong run at the moment. It’s moved up strongly in the last two weeks and I’m not quite sure why. Don’t get me wrong, I like the company and the stock. But I liked it a lot more at $19 a couple of years ago when everyone analyzed them based upon their PC market share. Right now, I feel like it’s getting frothy.

As far as I can tell, the stock strength is based upon the following two factors that are currently in the news:

  1. Potentially switching to Intel chips. This could be important as I’m sure they’re paying a pretty penny for IBM’s chips right now. However, a transition like this will take at least a year before it begins to impact the bottom line. And even then Apply may have to spend a bit before they see real savings in redesign and transition costs. Switching chip manufacturers when your chips are part of your hardware advantage can’t be very easy. Some sources are even saying that the news could be a ruse to get IBMs attention, and knowing how Jobs operates, I believe it.
  2. iTunes will support podcasting next year. Okay, this is great and all, but I don’t think the stock should be rallying on this news. Podcasting is the current democratic media technology du jour: it allows people to create “radio shows” on their computer and distribute them through the Internet. While interesting and certainly disconcerting to radio stations, I don’t see how Apple monetizes this trend. Additionally, the fundamental technology is very simple. Record a show on an MP3 and send it through the Internet and you’ve got a podcast.

Now, I could also be completely misreading the situation as well. It may very well be that intelligent institutions are starting to realize that Apple has other cards to play. I think that there are three other reasons to own Apple. Right now, Apple’s current story is that the iPod phenomenon is drawing computer buyers to their desktop and laptop products. The data shows that they are progressing nicely against this expectation.

The other two reasons have to do with large, potential markets that Apple could monetize if things go their way. First, Apple is trying to make a play for the mobile phone market by partnering with Motorola to integrate iPod platform technology into the phones. Interestingly, we haven’t heard much of this since the false start a few months ago where Motorola *almost* debuted such a phone at a conference. The debut was squashed by Apple, I believe, because they understand that it will be very difficult to get wireless carriers to accept this technology. The wireless carriers are loathe to let Apple capture song economics on their platform. The phone manufacturers, however, realize that integrated phone and iPods could create a huge phone buying opportunity and would like to see this happen sooner rather than later. In summary, I think this is a big upside for Apple, but I put a low probability of happening anytime soon.

The second reason to own Apple is their small-business initiative, which I also haven’t heard a lot of lately. The thinking goes like this: If you’re a small business owner, you probably don’t want the hassle of maintaining a Microsoft-based computer environment. It’s a royal pain in the ass. Networking, anti-virus, spyware, upgrades, program incompatibility, etc… All of Microsoft’s minor flaws are adding up to be one big pain in the ass for small business people who don’t have dedicated IT departments and even less time. Apple has opportunity to demonstrate how their computing platform is significantly better in all of these areas and should be the small business owners computer of choice. But considering I haven’t heard much from the company lately about this, I don’t have a good feel of how likely this will happen.

So, if Apple’s recent strength is based upon an Intel alliance and Podcasting, I’d be selling into the strength right now. However, if it’s because of progress in the mobile music or small-business categories, then I maintain my confidence in the company.

**Note: Please feel free to leave comments below as I’d like to hear intelligent points of view from others.**


At 9:33 AM, Anonymous Anonymous said...

That's an ecellent and well thought out posting! Thanks.

I think the Small Business Initiative would be a very compelling and exciting one. It makes sense on quite a few levels and the market for that is huge and always in flux. New small businesses are created each and every day, and what's better is that this has and always will be the case.

Being a "mac guy" and having started a small biz myself, I can tell you from firsthand experience that there is much for Apple to do on this front, but I can't think of anyone better suited than Mr. Jobs to really take that bull by the horns and deliver if he should choose to.


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