Tuesday, April 14, 2009

Apple's Stock Considered

AAPL shares are currently on the rise, reaching the 120s after a market-tracking tumble to the 70s. Apple's valuation is still significantly below its 2007 peak of 202 and 2008 high in the 190s. Even after rising, it is still valued too pessimistically.

As is typical, earlier highs occurred before MacWorld San Francisco, when product improvement expectations are highest but facts are hard to come by. The most feverish hype was for the iPhone, of course, despite it being costly to develop, and so damaging to earnings, and facing a decent chance it would not succeed. Generally, the stock is prone to irrational pricing when investors are being prodded with press, which is almost always about non-Mac hardware debuts. This focus is misplaced. The core Macintosh personal computing business, OS and hardware both, are the real measure of the company's meaningful potential for growth.

While the market slid, Apple followed, and then some. Without price-pumping, press-fueling announcements, nothing could scatter the clouds of generalized negativity. As shares crossed "milestones" in price models, program trades and sales by quantitative investors served to pressure shares even lower. Never mind the wild speculation about "shorts" manipulating things, something that always seemed marginal to me.

Instead of stoking the fire of speculators who lust for new consumer non-core business scope expanding widgets, Apple has released a stream of Mac revisions, an iPhone OS X revision preview, and belatedly fixed the dates for WWDC. All of these moves are vital indicators, and all have gone barely noticed.

Most important, Apple has finally routinized Mac hardware development. Until very recently, almost every new Mac Apple announced would struggle out the door. Delays, sometimes lasting months, were routine. Constrained supplies of parts, or late-breaking design issues, were something Mac buyers planned for. Promised machines even dropped in speed before shipping (the G4 PowerMac), and sometimes simply never materialized (the "3.0Ghz G5.") When hardware shipped on time, it usually meant the Mac was stagnant technologically, an equally problematic situation for Apple (the anemic last generations of PowerBook G4.)

Today's Apple can revise an entire product segment, most recently the Mac Pro, iMac and Mac Mini desktop line, simultaneously, and deliver the products as promised. Even the most exotic top-end Macs are in production and available when released, once unheard of. (The XServe was revised and ready just weeks later as well.) I waited three months longer than promised for a Dual 800 Quicksilver G4, two months for a Sawtooth G4, and six weeks after a promised date with a Dual 2.0 G5. The problems were not entirely CPU supplier related, as the ship date of the first Intel MacBook Pro slid a month and a half, too.

Ignoring the smoothness of the Nehalem Mac Pro release is a mistake. Apple's software and hardware competence is on display and most strenuously challenged by the project of turning an eight core UNIX workstation into an intuitive tool for content creation. The latest hardware makes a G3->G4-sized transition, to new bus, core and memory architectures. What once felt like watching a trapeze artist work without a net, and was hyped to match, is now as undramatic as an AirPort firmware release.

Also under-considered was Apple's preview of iPhone OS 3.0. While iPhone hardware sends bloggers into orbit, software is somehow less compelling. The requisite "copy and paste hooray, and why did it take so long" articles hit the web, but little mention was made of most of the OS advances. Besides adding 1000 new APIs, Spotlight, Push Notifications, and other features, Apple revealed that the dock connector would be a functional interface for third party hardware.

This is huge news. The iPod "ecosystem" of hardware, speakers and so on that served the narrow mandates of the simple player, thoroughly cemented the dominance of the iPod. The fees from licensing and "Made for iPod" certification gave Apple more profit-heavy, reliable revenue streams. The iPhone has a similar, but much larger, opportunity, as it is able to run complex, custom software in tandem with external hardware. Seemingly on purpose, the glucose monitor demo Apple used to demonstrate this feature was fatally boring. Game pads, keyboards, printers, etc., a huge variety of devices across countless industries (retail, medical, logistics, etc.) have the potential to add to the iPhone-only feature list and give the platform even more momentum. Include 30% of all revenue derived from the apps required to drive this hardware, and the upside is even larger.

Apple also ended the uncertainty surrounding the development of OS X 10.6 by setting the dates for WWDC. The company did this later than usual. In the weeks after an announcement was expected, many Apple watchers posited that the operating system was meeting delays, and would slide to August or later, along with the conference. That has not come to pass, and June 8 is now the expected release date.

(I have previously written but reiterate here how vital OS X, particularly 10.6, is to Apple. The brains of the iPhone and Mac are Apple's most valuable asset. This release is particularly important as the future of computing lies in massively parallel multi-core hardware, and new technology in OS X.6 will unlock a far greater proportion of the power these chips offer. Already-shipped dual, quad and octo-core Macs are supposed to see meaningful to significant speed improvements without hardware changes.)

The market slide hit all securities, but Apple's drop was truly immense. The company has cash piled to the ceiling to use in the absence of operating credit markets, no leverage or debt, and evidently invested wisely enough through the Braeburn Capital fund the company set up to manage its money to avoid taking material losses. It has fixed the Mac business and is setting OS X up for the next decade of work inside the iPhone and Mac.

Concerns about consumer demand for "luxury" Macs are legitimate, but the Mac business as a whole has so many avenues for growth besides the home market. It is still miniscule by volume in the world, and below 10% of the US market. With Windows languishing, still not up to even older OS X standards, Apple has a clear field to continue to grow Mac sales. Daring Fireball had an apt analogy equating Wintel PCs to American cars in the 1970s; inferior and doomed to cede market share to Japanese models beyond the wildest nightmares of anyone in industry. Apple's stock takes none of that potential into account.


Constable Odo said...

Hah. All that reserve cash and deferred revenue and Wall Street treats Apple like an old toothless mistress. That's truly discouraging. Nothing Apple does seems to help the stock rise to a fair valuation. Apple even laid-off less staff than most (those poor salespeople), so Apple certainly was facing any money constraints. And still building retail stores, too.

Yet Wall Street looks at Apple and says it's gonna get hit worse than Dell and HP and Acer and everyone. It doesn't really appear that way at all, but those WS pundits think they know everything and scare investors away.

Share price-wise Apple appears no better off than RIM and RIM has almost nothing compared to Apple. RIM sure doesn't have Steve Jobs.

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