The Company:

Apple Computer might be a computer, but then again it might be a music player or maybe a music store, but for sure it's digital communications. The company has always built products for creative types and let the pc makers go to work for the suits.

If it's an Apple computer, it's likely to be designed for consumers (iMac and iBook) or professional users (PowerMac and PowerBook). The operating system (OS X) is proprietary.

Recently, the company's very successful music-related products are the iPod digital audio (music) player and iTunes online music store. The 5th generation iPod (2006) play videos.

The market capitalization has grown to $62 billion from about $7 or $8 billion three years ago.

Trend in the marketplace:

There has always been a digital systems market for creative types. Since they tend to be a demanding customer base, the company has architected unique solutions that have met their needs, but cost a little more than pc systems.

The marketplace, however, tended to want inexpensive solutions based on open-systems technology. Consequently, the company was always a niche player in the computer manufacturing industry.

Since its introduction in the early 1970's, Apple Computer has always had to be a clever marketer just to stay in the game. While the customer base was committed, it was always a struggle to build market share. Style (form ahead of function) always differentiated the Apple product.

After being introduced to the iPod inventor, Apple figured out that they could be first to the mass market with a small digital computer that simply played audio or music. The product was not an instant hit. However, by a stroke of marketing genius, an advertising campaign with world renowned musicians hit the market's hot button. In 2004, the sales growth of the iPod was about +150 pct, and soon after Apple was transformed into a "hot" product marketer.

Following the new video iPod, the company will next bring to market the iTV media hub, which will stream data from a Mac or PC into the television, and probably cell phones. So, as I see it, Apple is about marketing exploits rather than architecting technology, which is the case for Research In Motion.

At the risk of being called a naysayer, I say " and I have said this since the early 1970's -- that Apple is all about the hype. For example, iTV is referred to as the Digital Living Room, when all it appears to do is the most straight-forward technical tasks. Isn't this all about a technology looking for a market?

Catalyst that has driven the company:

For many years, Apple was a struggling company until the Board brought back one of its co-founders Steve Jobs. Jobs is the marketing guru at Apple " or at least the individual who appears to be driving the marketing.

The iPod technology was designed by Tony Fadell, an independent designer who offered it elsewhere before Apple accepted. Clearly iPod was the game breaker " but it was the Apple marketing that opened the hole.

Results in the marketplace:

Revenue-wise, Apple has enjoyed exceptional growth in some of its segments, and very good growth across the various products. I think success came to the computer product line largely because there was a new-found corporate image due to the success of iPod.

Computers are definitely gaining market share, but their piece of the pie is still not a significant one.

Total revenues from 2004 (actual) through 2007 (estimated by Morgan Stanley) have grown from $8.2 billion, to $13.9 billion, $19.0 billion and $22.2 billion. Over this period, net income (actual or estimated) is: $290 million, $1.23 billion, $1.85 billion and $2.23 billion. These are excellent sequential numbers.

The sales growth of the iPod is decelerating however, and the PowerMac and PowerBook growth is only fair to middling. The iMac and iBook computers are enjoying solid demand, which is holding up the total computer sales growth.

From 2004 through 2007, computer sales are roughly: $5.0 million, $6.3 billion, $7.1 billion and $8.2 billion, while peripherals were also strong. For iPod, the sales sequence is: $1.3 billion, $4.5 billion, $7.7 billion and $8.6 billion, so you can see that growth is expected to be less than +12 pct Y/Y for 2007.

Unfair advantage:

Now that the iPod has had its run, and numerous similar (and less costly) competitive products are out, I don't think Apple does have an unfair advantage. I think the company is still running on the fumes of its phenomenal growth during 2004 to mid-2006, but that's not likely to last in the economic slowdown facing the U.S.. Moreover, the company has been caught in a management stock options back-dating scandal involving Steve Jobs, so the bloom is off his rose for a while. Traders will be unhappy when Apple fails to report their quarter results this Wednesday on account of questionable accounting.

Opinion on the stock:

Based on my earnings estimate of $3.10 for 2008, and a PE multiple of 25, I have a 12-month price target of $77.50. The stock is presently $75.10, so I feel it's fully priced.

Sometime soon " perhaps this week -- I anticipate a broad-based Bear market to start that will also take down tech stocks. AAPL could fall back to $50 (mid-July level). If so, I'd start to accumulate at that point, carefully writing put options and buying calls, but with an eye on quarterly sales performance across all the product lines.

In this space, I'd prefer to be in Research In Motion (NDQ: RIMM; TSX: RIM US$113.84) " although that stock too is likely headed for a significant tumble before I'd start to accumulate down at $75.

The fun with AAPL is basically in the past. Any negative results and/or guidance will likely result in a pull-back. As I see it, the risks outweigh the rewards.

Apple Computer [GICS 45]
(AAPL: Yahoo Finance file)
(AAPL: StockChart chart)
(AAPL: Investertech chart)
(AAPL: ADVFN Financial Data)
(AAPL: ADVFN Financial Data)