NEW YORK (CNN/Money) – Apple Computer fans are the Trekkies of the technology world -
they even have their own convention. The MacWorld San Francisco trade show began on Monday, and CEO Steve Jobs gave the keynote address Tuesday.
But even though Apple has loyal minions that will be hanging on Jobs' every word, the majority of technology users are not lovers of the Mac. Apple's market share is less than 4 percent of total U.S. computer sales. Sad as it may seem to the Mac enthusiasts, it's a Windows world.
Wall Street doesn't seem to care too much about Apple (AAPL: Research, Estimates), either. The stock fell 32 percent in 2002, and fell slightly on Tuesday as President Bush's address on the economy overshadowed any enthusiasm for MacWorld. And only two of the 14 sell-side analysts that follow the company have it rated a "Buy."
So will Apple's stock continue to decline in 2003, or is it set to bounce back?
Still the innovator
Our advice: Don't bet against Apple. Of course, it's unreasonable to expect the company to overtake the Microsoft-Intel operating system/hardware combo in most computers. But Apple has had a history of pulling a Lazarus on the investing community.
In the mid-1990s, with Jobs no longer running the company and a series of disastrous product launches (remember the Newton?), Apple appeared to be dead. But following the return of Jobs, Apple finally had another hit on its hands with the iMac. As a result, Apple's stock soared 212 percent in 1998 and 151 percent in 1999.
The company then had a disastrous 2000, with the stock falling 71 percent that year. But once again, Apple bounced back with the introduction of the iPod, a portable MP3 playing device, and the stock was one of the few technology success stories in 2001: Shares surged 47 percent that year.
One reason why it's tough to count out Apple is that it continues to be the most innovative of the hardware companies. To that end, in its latest quarter, Apple spent 8 percent of its revenue on research and development, versus R&D spending of just 5.4 percent for Hewlett-Packard (HPQ: Research, Estimates) and 1.3 percent for Dell (DELL: Research, Estimates).
So what's Apple's next big thing? There was speculation that Jobs would announce a new version of the iPod that can be used to view video files, such as movies. "A video iPod fits with Apple's move away from the PC as we know it to a more mobile digital lifestyle and the iPod product has been successful," said Walter Winnitzki, an analyst with First Albany. Winnitzki does not own shares of Apple and his firm has not done investment banking for the company.
However, there was no such announcement on Tuesday and the company was unavailable for comment about whether or not a video iPod is in the works. But Apple did unveil several new software products including a Web browser for the Mac called Safari and graphics software known as Keynote that will compete with Microsoft's PowerPoint. Apple also introduced new two new PowerBooks (one with a 12 inch display and another with a 17 inch display).
Balance sheet sweet as apple pie
Another factor in Apple's favor is its balance sheet. Apple has $4.3 billion in cash and just $316 in debt. Yet, Apple's market value is only $5.4 billion. So with a stock price of about $15 a share, Apple's net cash (the cash minus the debt) is valued at $11 a share. That means investors are valuing the actual operating assets of Apple at $4 a share. And the company has positive operating cash flow as well.
Wendell Perkins, manager of the JohnsonFamily Large Cap Value fund, says that Apple's cash hoard is one of the main reasons he owns the stock. He says he bought it about a year-and-a-half ago and it currently makes up 1.4 percent of the fund's assets.
Perkins also thinks that since Wall Street has been relatively bearish on the stock, the slightest bit of good news could boost the company's shares. "There doesn't seem to be huge expectations for Apple," said Perkins. "So any moderate surprise to the upside should have a powerful effect on the stock."
Apple will announce earnings for its latest quarter January 15. Analysts are expecting the company to report earnings of 3 cents a share and sales of $1.5 billion, compared with earnings of 11 cents a share and revenue of $1.4 billion a year ago.
Winnitzki, who has a "neutral" rating on the stock, is not as optimistic about Apple's prospects because he's thinks the company hasn't been able to convert enough people from PCs to Macs ... even though this Windows to Mac "switch" is the central theme of Apple's current ad campaign. But he agrees that Apple's balance sheet makes it a lower risk than a lot of other technology stocks. "I don't see a lot of downside in the stock. The cash creates a floor," he said.
Michael Mahoney, managing director of EGM Capital, a hedge fund that specializes in technology, media and telecom stocks, also thinks that Apple is probably the least risky investment in the hardware sector.
Mahoney thinks Gateway's days appear to be numbered. And by virtue of being a niche company, he says that Apple probably won't be hurt by a PC price war between market leaders Hewlett-Packard and Dell. Mahoney does not have a position in Apple.
Writing Apple's obituary has become a favorite pastime of many technology and financial journalists. But to paraphrase Mark Twain, reports of Apple's death have been greatly exaggerated time and time again.