Apple Computer
About the Company
Apple Computer, Inc. is a Silicon Valley company based in Cupertino, California, whose core business is computer technologies. Apple helped start the personal computer revolution in the 1970s with its Apple II and shaped it in the 1980s and since with the Macintosh. Apple is known for innovative software and hardware, such as the iMac its iPod digital music player and the iTunes Music Store.
Apple has been criticized for their vertically integrated business model, which runs against the grain of much of the perceived wisdom of economists, particularly for the computer industry. However, the company is profitable. Other criticisms have included that it has been very personality driven, especially in the two different eras of Steve Jobs’ tenure; some even regard it as being a cult, or at least having cult-like features. From a technical standpoint, Apple has also been criticized for having a closed and proprietary architecture with the original Macintosh, and a “not invented here” syndrome against adopting open standards.
However, that trend has been largely reversed with Mac OS X, and the company now has an official policy of adopting open industry standards where they exist. Apple has now used industry standard hardware technologies for many years, which has helped to lower prices significantly. Many Apple technologies have become industry standards where no former standard existed, e.g. ZeroConf network configuration, FireWire, etc. Other technologies, invented elsewhere, only gained wide industry acceptance after Apple adopted them, including 3-1/2-inch floppy disks, SCSI, USB, Wi-Fi and, of course, graphical user interfaces. Mac OS X itself is now based on an open source kernel and core operating system called Darwin. Apple also uses an open source HTML rendering engine in its Safari web browser.
Some third-party developers are also critical of the competing factions within Apple themselves, illustrated by the perception of an ongoing rivalry between the developers of Cocoa, which came from NeXT, and those of Carbon, which came from Apple. This rivalry is seen as counterproductive and unnecessary by many developers.
Apple’s retail initiative has had a mixed reception. They have been considered a success in raising awareness of the Apple brand. Retailers have suggested that the Apple-owned retail stores have preferential treatment when receiving Apple hardware, and therefore receive limited stock product earlier, and at lower prices – an accusation that has been officially denied by Apple.
History
In 1975, Steve Wozniak was working Hewlett-Packard and helping his friend Steve Jobs, with whom he had been friends since 1971, design video games for Atari. Wozniak had seen a 1975 issue of Popular Electronics magazine on how to build your own computer terminal, and , Wozniak designed the Computer Conversor, a 24-line by 40-column, uppercase-only video teletype that he could use to log on to the minicomputers at Call Computer. New microcomputers such as the Altair 8800 and the IMSAI inspired him to build a microprocessor into his video teletype and have a complete computer.
When MOS Technology released its twenty dollar 6502 chip in 1976, Wozniak wrote a version of BASIC for it, then began to design a computer for it to run on. He completed the machine and took it to Homebrew Computer Club meetings to show it off. At the meeting, Wozniak met his old friend Jobs, who was interested in the commercial potential of the small hobby machines. Jobs approached Paul Terrell, the owner of a local computer store, the Byte Shop, who said they would be interested in the machine, but only if it came fully assembled, offering to pay $500 each for fifty machines. Jobs took the purchase order that he had been given from the Byte Shop to Cramer Electronics, a national electronic parts distributor, and ordered the components he needed to assemble the Apple 1 Computer, using the purchase order from the Byte Shop as collateral. Jobs, Wozniak, and their small crew spent day and night building and testing the computers, and delivered them to Terrell on time to pay his suppliers and have a tidy profit left over for their next order. Eventually 200 of the Apple I’s were built. Steve Jobs had found a way to finance his soon-to-be multimillion-dollar company without giving away one share of stock or ownership.
Many of the design features of the Apple I were due to the limited amount of money they had to construct the prototype, but with the income from the sales, Wozniak was able to start construction of a very much upgraded machine, the Apple II. It was presented to the public at the first West Coast Computer Faire on April 16 and 17, 1977. The main difference internally was a completely redesigned TV interface, which held the display in memory. The Apple II included graphics, and eventually, color.
Building such a machine was going to cost a lot more money, and Jobs started looking for cash, but banks were reluctant to loan Jobs money. The idea of a computer for ordinary people seemed absurd at the time. Jobs eventually met Mike Markkula who co-signed a bank loan for $250,000, and the three formed Apple Computer on April 1, 1976. When Apple went public in 1980, the initial public offering (IPO) generated more money than any IPO since Ford Motor Company in 1956, and instantly created more millionaires than any company in history.
With both cash and a new design in hand, the Apple II was released in 1977 and became the computer generally credited with creating the home computer market. Millions were sold well into the 1980s. A number of different models of the Apple II family were built, including the Apple IIe and Apple IIgs, which could still be found in many schools as late as 2005.
By the 1980s Apple faced emerging competition in the personal computing business. Chief among them was IBM, the first big name in computing. IBM’s PC model, running DOS, was capturing a large share of the emerging desktop computing market in large companies. Several smaller businesses were using the Apple II, but the company felt it needed a newer, more advanced model to compete in the corporate desktop computing market. The Apple III had design problems and was expensive and, though the company introduced an updated version in 1983, the initial bad press discouraged buyers and left the III largely a failure.
Meanwhile, various groups within Apple were working on a completely new kind of personal computer, with advanced technologies such as a graphical user interface, computer mouse, object-oriented programming and networking capabilities. When they brought him to see the work being done at Xerox PARC on the Alto in December 1979, Jobs decided the future was in such graphics-intensive, icon-friendly computers. Over the objections of some PARC researchers, Xerox granted Apple engineers 3 days of access to the PARC facilities in return for selling them one million dollars in pre-IPO Apple stock (approximately $18 million net). The Lisa debuted in January 1983 at $10,000. Once again, Apple had introduced a product that was ahead of its time, but far too expensive (the company would continue to follow this pattern for the next few years), and Apple again failed to capture the business market.
The Apple Macintosh was launched in 1984 with a new, user friendly GUI. In anticipation of the Macintosh launch, Bill Gates, co-founder, chairman of Microsoft was given several Macintosh prototypes in 1983 for software development for the new computer. In 1985, Microsoft launched Microsoft Windows, its own GUI for IBM PCs using many of the elements of the Macintosh OS. This led to a long legal battle between Apple Computers and Microsoft, ending with an out of court settlement, which granted Microsoft access to, and allowed unlimited use of, the Macintosh GUI. Although the first version of Windows was technologically inferior to the Mac, a Windows-equipped PC clone could be purchased for much less. Also, because of the open nature of the PC platform there was always more software available for Windows.
The Macintosh, though a better product than the Apple II in many ways, did not quickly displace it in Apple’s product line. They were separate, incompatible platforms, and Apple promoted them to different market segments: the Macintosh to colleges, college students, and knowledge workers, and the Apple II to homes and public schools. A few months after introducing the Mac, Apple released a compact version of the Apple II called the Apple IIc. In 1986 Apple introduced the Apple IIgs, a hybrid product with a mouse-driven, Mac-like operating environment. Apple II computers remained an important part of Apple’s business, and were not discontinued until the early 1990s.
At the same time, the Mac was becoming a product family of its own. The original model evolved into the Mac Plus in 1986 and spawned the Mac SE and the Mac II in 1987 and the Mac Classic and Mac LC in 1990. In 1989 came the Macintosh Portable, a failure. Apple’s much more popular laptop, the PowerBook, was introduced in 1991. The first of these was co-designed with Sony, and established the modern layout for laptop computers that has remained popular ever since.
In 1994, Apple revamped its Macintosh line with the introduction of the Power Macintosh, which was based on the PowerPC line of processors developed by IBM, Motorola and Apple. Apple’s operating system software was adjusted so that most software written for the older processors could run in emulation on the PowerPC series.
After an internal power struggle with new CEO John Sculley in the 1980s, Jobs resigned from Apple and went on to found NeXT Inc., which Apple ultimately bought. This move brought Jobs back to Apple’s management. On July 9, 1997, Gil Amelio stepped down as CEO of Apple after overseeing a 12-year record low stock price and crippling financial losses. Jobs stepped in as the interim CEO and began the critical restructuring of the company’s product line.
One of Job’s first acts as new acting CEO was to begin development of the iMac, which served two purposes. It bought Apple time to restructure and it was an all out financial success. The iMac has sold roughly one million units each year since its original introduction.
In 2001, Apple introduced Mac OS X, an operating system based on NeXT’s NeXTstep, that married the stability, reliability and security of Unix with the ease of use of the Macintosh interface. It was targeted at professionals and consumers alike. Mac OS X enabled consumers to migrate to the new technologies while maintaining access to older applications written for the older Macintosh OS revisions.
In early 2002, Apple unveiled a new iMac G4, and the XServe 1U rack mounted server. Originally featuring two G4 chips, the XServe was unusual for Apple in two ways. It represented an earnest effort to enter the enterprise computer market and it was also relatively cheaper than similar machines released by its competitors. In mid-2003, Apple launched the PowerMac G5, based on the G5 processor. This was the first 64-bit computer sold to the general public.
In addition to computers, Apple has also produced consumer devices. In the 1990s, Apple released the Newton, an early PDA. Though it failed commercially, it defined and launched the category and was a forerunner and inspiration of devices such as Palm Pilot and its descendants – PocketPCs.
Financial Health/Revenue Growth
On April 13, 2005, Apple announced second quarter results and they were quite strong. “The Company posted a net profit of $290 million, or $.34 per diluted share. These results compare to a net profit of $46 million, or $.06 per diluted share, in the year-ago quarter. Revenue for the quarter was $3.24 billion, up 70% from the year-ago quarter. Gross margin was 29.8%, up from 27.8% in the year-ago quarter. International sales accounted for 40% of the quarter’s revenue.” An examination of these results indicates that the music business appears to be the strongest part of Apple, and could be the key to maximizing shareholder value. The Power Mac product, which includes the Xserve product line, was the weakest over the past year and could indicate that this area should receive less emphasis in order to increase shareholder value.
Apple’s management has been working to reduce the company’s expenses, eliminate inefficient product lines and restore a reasonable margin or return on each piece of computer hardware that is sold by Apple. This necessitates a reduction in market share and sales revenue in the short-term, in order to reap the benefits of greater efficiencies, better products and larger margins in the long-term. It does not mean that management is writing-off any markets or are disinterested in revenue growth, it means rather that they are more interested in solid financial fundamentals than they are interested in short-term sales and immediate profits. In the last fiscal quarter Apple was able to once again establish gross profit margins above 25%. This is a tangible sign that the company is poised for efficient growth and better financial health.
Cash Flow
This stock’s price/cash flow ratio is normal compared with those of both the broader market and other stocks in its industry. Price/cash flow is similar to price/earnings, except that cash flow, which is the money available to be distributed to investors, is substituted for earnings. When purchasing a stock, a low price/cash flow is generally preferable to a high one, though one also needs to take into account the company’s growth prospects.
Cash Flow (Values in millions of $ except per share values.)
Cash Flow table with Five Columns of Quarterly Data
Cash Flow
30 Sep 2000
Reclassified
29 Sep 2001
Net Income/Starting Line
Depreciation/Depletion
Deferred Taxes
Non-Cash Items
Changes in Working Capital
Cash from Operating Activities
Capital Expenditures
Other Investing Cash Flow Items, Total
Cash from Investing Activities
Issuance (Retirement) of Stock, Net
Issuance (Retirement) of Debt, Net
Cash from Financing Activities
Foreign Exchange Effects
Net Change in Cash
Cash Interest Paid
Cash Taxes Paid
Efficiency
Most stocks in the computer equipment industry have seen steadily growing revenue and impressive earnings growth over the past three years. This stock has also seen steady revenue growth over the past three years, with its results over the past year being particularly impressive. Like its peers, this stock’s earnings per share have grown at a very high rate over the past three years. Note that this stock’s sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. That means that the company will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate. Apple currently has no long-term debt.
As Apple recently touted the sale of the 500 millionth song by its iTunes music store, reports emerged that the company could be close to adding video features to iTunes and its iPod music players. The growth of iTunes over its two-year history underscores Apple’s dominance in the online music market. When Apple reported its third-quarter results July 13, the company cited data from Nielsen Soundscan that gave the company 80% of the market for legally downloaded songs. Apple also said the latest reports from NPD Techworld gave its iPod 75% of the market for MP3 players, and the company posted iPod sales of $1.1 billion for its third quarter. With the iPod offering music and photo capabilities, speculation has grown that Apple could be on the verge on releasing a video-playing version of the iPod. The Wall Street Journal reported that Apple has held discussions with the major recording companies about selling music videos through the iTunes music store. Such a move would necessitate the release of a new iPod that plays videos. Analysts have said that Apple’s iPod probably has about six months of growth ahead of it before the MP3 market begins to show signs of maturity and reaches a plateau. The company, according to those analysts, will need a new hit product by early next year.
Comparison – Dell v. Apple
Dell, Inc. is a computer-hardware manufacturer based in Round Rock, Texas. The marketplace perhaps associates Dell Computer most with the personal computers it designs, manufactures and sells for home and office use, but Dell also operates in the enterprise computing market with servers, data storage devices, network switches and computer cluster lines. Personal digital assistants, software and peripherals (including printers) round out Dell’s product offerings.
As of 2005, Dell, Inc. had become one of the world’s most visible companies. In February of 2005, Dell appeared in first place in a ranking of the “Most Admired Companies” published by Fortune Magazine. Dell incorporated as a Texas corporation in 1984 with a capitalization of $1,000, the minimum allowed by Texas law. Dell stock trades on the Nasdaq stock exchange in New York under the symbol DELL. As of 31 December 2004 the company had a market capitalization of $104.69 billion.
In its fiscal year ended 28 January 2005 Dell made a net profit of $3.32 billion on revenue of $49.2 billion. These figures represent 26% and 19% growth respectively over the previous fiscal year.
Dell Financial Ratios
Ratio
Short-Term Liquidity
Current Ratio
Acid Test
Days Sales in Receivables
Operating Performance Ratios
Operating Profits to Sales
Net Income to Sales
Dell sells all its products, both to the consumer and to corporate customers, using a direct sales model. Unlike Apple, Dell neither operates retail stores nor sells products through other retailers or resellers. Dell Inc. does, however, showcase its consumer-oriented products at kiosks in major malls. The sales staff at the kiosk may assist customers in ordering a product for shipment to their home. The Dell direct business model, which eliminates the middleman, has a reputation for its speed of sale-to-delivery of the company’s products. Dell builds computers to order and this keeps its inventory costs low. Customers pay for product items before Dell builds those items, and this gives Dell a negative cash conversion cycle.
Dell currently ships Windows XP as the operating system (OS) of choice for most of its new computers, but it also offers Red Hat and SUSE for servers. Certain computers get sold “bare-bones” with a FreeDOS disk included in the box. On Dell’s Windows machines, the manufacturer bundles a large amount of software. Some have accused Dell of shipping spyware and claim that its technical support team have instructions not to support its de-installation. Dell openly supported offering Apple Computer’s upcoming Intel version of its Mac OS X operating system, but to this point Apple has stated the OS will only run on Mac machines.
Dell advertises heavily on television, on the Internet, in magazines and in newspapers, using constant “special offers” to encourage sales. A popular, widely parodied television and print ad campaign in the U.S. In the early 2000s featured young actor Ben Curtis playing the part of “Steven” – a cocky, and lightly mischievous blond-haired kid, who comes to the assistance of bereft computer purchasers. Each television advertisement usually ended with Steven’s phrase: “Dude, you’re gettin’ a DELL!” During the past few years, Dell commercials have featured three “Dell interns” who learn about the company and show off Dell products, services and employees.
The PC industry operates on much thinner margins, which is why it takes so long to imitate. While Dell spends one percent of revenue on Research & Development (R&D), Apple spends four to five percent on R&D. Apple has a lot more capacity built into its business model to play with industrial design and to get it right than a Dell or a Gateway.
Profitability
Over the long haul, this company has posted results that are some of its industry’s best, although the company’s net profit margins – another key profitability measure – have been average compared with other companies in its industry.
Apple Financial Ratios
Ratio
Short-Term Liquidity
Current Ratio
Acid Test
Days Sales in Receivables
Capital Structure & Long-Term Solvency
Net Worth to Total Debt
Net Worth to a N/A2
Net Worth to Total Assets
Return on Investment
Return on Total Assets
Return on Equity Capital
Operating Performance Ratios
Gross Margin Ratio
Operating Profits to Sales
Net Income to Sales
Asset Utilization Ratios
Sales to Cash
Sales to Accounts Receivables
Sales to Working Capital
Sales to Total Assets
Market Measures
Earnings per Share
Average Price/Earnings Ratio
Through the 1990s, personal computers based on Microsoft’s Windows operating system began to gain a much larger percentage of new computer users than Apple. As a result, Apple fell from controlling 20% of the total personal computer market to five percent by the end of the decade. The company was struggling financially under then-CEO Gil Amelio when on August 6, 1997 Microsoft bought a $150 million non-voting share of the company as a result of a court settlement with Apple (Microsoft has since sold all Apple stock holdings). Perhaps more significantly, Microsoft simultaneously announced its continued support for Mac versions of its office suite, Microsoft Office, and soon created a Macintosh Business Unit. This reversed the earlier trend within Microsoft that resulted in poor Mac versions of their software. However market share continued to decline, reaching three percent by 2004.
In October 2001, Apple introduced the iPod, a portable digital music player. Its signature was the incredible amount of storage space, initially five GB, enough to hold approximately 1,000 songs, compared to the 20-30 songs of Flash-based players of the time. Apple has since revised its iPod line several times, and on October 26, 2004, Apple released a color version the iPod which, can not only play music, but also show photos. As of November 2004, the iPod boasted a 87.3% market share among hard-drive-based players, according to NPD Group. On April 29, 2005, Apple released Mac OS X 10.4 “Tiger” to the general public.
In October 2001, Apple introduced the iPod, a portable digital music player. Its signature was the incredible amount of storage space, initially 5 GB, enough to hold approximately 1,000 songs, compared to the 20-30 songs of Flash-based players of the time. Apple has since revised its iPod line several times, introducing a slimmer, more compact design, Windows compatibility (previous iPods only interacted with Macintosh computers), AAC compatibility, storage sizes of up to 60 GB, and easier connectivity with car or home stereo systems. On October 26, 2004, Apple released a color version of their award winning iPod which can not only play music but also show photos. As of November 2004, the iPod boasted a 87.3% market share among hard-drive-based players, according to NPD Group.
Apple has revolutionized the computer and music industry by signing the five major record companies to join its new music download service, the successful iTunes Music Store. Unlike other fee-based music services, the iTunes Music Store charges a flat $0.99 per song (or $9.99 per album). Users have more flexibility than on previous online music services. For example, they can burn CDs, including the purchased songs (although a given play list can be burned to CD a limited number of times), share and play the songs on up to 5 computers, and, of course, download songs onto an iPod.
The iTunes Music Store commercial model is one-time purchase, which contrasts with other commercial subscription music services where users are required to pay a regular fee to be able to access musical content (but are able to access a larger volume of music during the subscription). The iTunes Music Store was launched in 2003 with 2 million downloads in only 16 days; all of which were purchased only on Macintosh computers. Apple has since released a version of iTunes for Windows, allowing Windows users the ability to access the store as well. Initially, the music store was only available in the United States due to licensing restrictions, but there were plans to release the store to many other countries in the future.
In January 2004 Apple released a more compact version of their iPod player, the 4-GB iPod Mini. Although the Mini held fewer songs than the other iPod models at that time, its smaller size and multiple colors made it a difficult find on store shelves after its debut. In June 2004 Apple opened their iTunes Music Store in the United Kingdom, France, and Germany. A European Union version opened October 2004 (actually, a Eurozone version; not initially available in the Republic of Ireland due to the intransigence of the Irish Recorded Music Association (IRMA) but eventually opened Thursday January 6, 2005.) a version for Canada opened in December 2004. On December 16, 2004, Apple sold its 200 millionth song on the iTunes Music Store to Ryan Alekman from Belchertown, Massachusetts. The download was the Complete U2, by U2. Just under three months later Apple sold its 300 millionth song on March 2, 2005. On May 10, 2005, the iTunes Music Store was expanded to Denmark, Norway, Sweden and Switzerland.
The iTunes Music Store was launched in 2003 with 2 million downloads in only 16 days; all of which were purchased only on Macintosh computers. It is a one-time purchase, which contrasts with other commercial subscription music services where users are required to pay a regular fee to be able to access musical content. Apple has revolutionized the computer and music industry by signing the five major record companies to join the iTunes Music Store. Unlike other fee-based music services, the iTunes Music Store charges a flat $0.99 per song (or $9.99 per album). Users have more flexibility than on previous online music services. In January 2004 Apple released a more compact version of their iPod player, the 4-GB iPod Mini.
On January 11, 2005, an even smaller version of the iPod was announced, this one based on flash memory instead of using a miniaturized hard drive. The iPod shuffle, like its predecessors, proved so popular that it sold out almost immediately, causing delays of up to four weeks in obtaining one within a single week of its debut. This is despite the fact that critics had gawked at the lack of LCD screen in the Shuffle, a norm in almost all current flash memory-based mp3 players. As of May 2005, it has captured a majority of the flash-player market, nearly 60%.
Future Performance recent development that could have a large impact on shareholder value is the report that Apple is in talks to use Intel Corp. chips in its computers. Wall Street was buoyed by the report because such a change could be the biggest shift in the Mac’s makeup since it came out in 1984, and could make the machines less expensive. Apple and Intel have held talks in the past about coming together on creating a personal computer, but this recent report stated that Apple will agree to use Intel chips in Macintosh computers at some unspecified date, a development that was viewed with a healthy dose of skepticism by veteran industry analysts who have heard this rumor before. The largest obstacle between Apple and Intel is the incompatibility between the two different chip architectures in their current products. Apple’s Macintosh computers are based on the PowerPC instruction set developed by current Apple supplier IBM and former supplier Motorola. Intel’s chips use the x86 instruction set, which has provided the operating orders for Windows-based PCs since the 1980s. Software developed for one architecture does not run on the other architecture without a software emulator that usually slows performance dramatically. Therefore, if Apple were to switch to using x86 chips, it would have to get all of its Mac-friendly software partners to port their applications to a version of Mac OS based on the x86 architecture.
Apple’s main motivation for moving to x86 chips would be to lower its costs or gain access to technology that it doesn’t think IBM will have in the near future. And since Apple is unlikely to compete directly against Dell anytime soon, it’s more likely that the company is worried about IBM’s road map. A more likely scenario would involve Apple and Intel getting together to build a video-player iPod based on one of Intel’s
XScale processors. The software development involved in moving the iPod product to XScale would not be as difficult as a PowerPC-to-x86 transition.
Apple appears to be moving forward with its stable of products. Earnings for 2004 were vastly improved over the two previous years and results for 2005 have indicated that this trend is continuing.
Quoting Merrill Lynch analyst Steve Milunovich in response to the threat posed by Yahoo!’s introduction of a subscription-based music download service, “the Apple story is about more than iPods. Although we think the iPod franchise is safe for at least the next year, the driver of the stock increasingly will be Mac sales. Management sees more evidence of the halo effect. We model a conservative 15-20% sustainable growth rate for Mac revenue.’ Mr. Milunovich concludes by reiterating his Buy rating on the stock, with an objective of $51 per share.” Certainly Apple seems to be posed to take advantage of its product line and grow the company because of its strong financial position.
As well as the transition to Intel microprocessors, 2006, or shortly thereafter, will see the arrival of Apple’s next version of Mac OS X, Mac OS X v10.5 “Leopard.” This is expected to provide for a smoother transition to the Intel chips, although they will run on present day PowerPC processors as part of their intention to continue PowerPC support for some years to come. Steve Jobs also stated during his keynote address at the World Wide Developers Conference 2005, that the use of Mac OS X will continue well into the next two decades.
Recommendation
Apple appears to be moving forward with its stable of products. I would certainly invest in this company. The liquidity ratios are excellent and there is no long-term debt. Earnings for 2004 were vastly improved over the two previous years and results for 2005 have indicated that this trend is continuing.
The operating ratios could be better, but they are improving. The product line is outstanding.
Apple’s growing iPod success and the oft-mentioned iPod “Halo Effect” that could boost Mac sales as reasons for optimism. Apple is well positioned to capitalize on the large digital music opportunity with arguably the industry’s most complete and integrated stack of hardware, software, and service.
The iPod + iTunes is positioned to be as successful in the digital music space as the Sony Walkman was, even with a similar flood of competitors entering the space. Apple could eventually ship as many as 85 million iPods, a 14-fold increase over the 6 million units shipped to date. That number is arrived at as 25% of the 340 million CD and cassette Walkman devices that Sony has shipped since 1979.
Apple’s long history as an innovator in the computing industry is evidence of the company’s vision going forward. Apple pioneered the first mainstream use of a computer mouse, computer HDD, pictures and icons “look and feel” graphical user interface (GUI), LCD flat panels, mainstream laser printer, FireWire (1394), WiFi, AirPort technology (co-developed with Lucent/Agere), iPod HDD-based music player, first successful online music download service, and the first platform for Microsoft Word and Excel office productivity software.
Apple’s success in the digital music space represents a good opportunity for Apple to re-accelerate its core hardware business including iMac G5, PowerMac G5, iBook, and PowerBook G4. Non-Macintosh users are enjoying the benefits of the unique and through Windows and iPod versions of iTunes and QuickTime. Moreover iPod is driving increased traffic to Apple Retail Stores. This combination could lure more users to the Macintosh platform.
Many analysts have said that the vast army of competitors using Microsoft’s proprietary music format will eventually eclipse the iPod. While the iPod’s lead may eventually be chipped away by those competitors, the company can still maintain its overall lead. Furthermore, Apple has room for growth in international markets.
Similarly, there is little threat to the dominance of the iTunes Music Store from Microsoft’s Janus subscription service or the other music download services. Apple would be able to counter by either introducing an iTunes portable subscription service, something Apple could implement within a year if it decided to go that route, or by making the iPod compatible with music services other than iTunes. In addition, there are potential new revenue streams from increasing sales of Xserve, Xserve RAID, Mac OS X server, and SAN file system software.
Apple has a strong balance sheet, which Apple can increase through its strong cash generating capability. Although some analysts see a slowdown in the computer industry, Apple should continue to thrive because of its product mix. “Though demand is still healthy, computer makers have to overcome aggressive pricing in the second half.” She has issued a “hold recommendations on… Apple Computer. Our recommendations reflect the relatively favorable industry fundamentals we project for the second half of 2005, as well as our price-to-sales and discounted cash flow analyses.” There are also recurring revenue and replacement purchases of iPod and iTunes from a growing iPod user base. In short, I would definitely give Apple a buy recommendation.
Bibliography
Apple Computer, Inc. . Cupertino, California: 2005.
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All figures from Apple Computer, Inc. United States Securities and Exchange Commission: Form 10-K. Cupertino, California: November 30, 2004.
No long-term debt.
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