It was no less an expert than Michael Dell who forecast the demise of Apple Computer Inc. In 2001, the chairman and founder of the computer company that bears his name said Apple had sealed its fate by failing to build computers that used Intel Corp. microprocessors and software from Microsoft Corp. In sticking with its own proprietary technologies, Apple could not survive. "We know how the movie ends," Mr. Dell, now 39, said. "It's just a question of what happens in the middle."
But three years later, it is Apple — not Dell Inc. — that some say is now the best bet for investors interested in backing a computer maker.
Long an ugly duckling for investors, the Cupertino, Calif., company has been the soaring swan of the market for the past year. Its stock is up 176 per cent in the past 12 months (it closed yesterday at $70.10 U.S.), compared with 13 per cent for Dell. Apple already rivals Round Rock, Tex.-based Dell in manufacturing efficiency, and is poised to beat it on profit margins, earnings and revenue growth. On new product innovation, analysts say, Apple is unrivalled.
The much ballyhooed iPod digital music player has been an important part of Apple's resurrection story; iPod sales went through the roof during 2004's final quarter. But the bigger story may be Apple's resurgence as a computer maker. According to financial results released this week, sales of Macintosh computers jumped 26 per cent compared with the year-earlier quarter — double the growth rate for the rest of the computer business. For the first time in eons, Apple is gaining market share.
"The company could have begun a market share breakout story that could last for the foreseeable future," Steven Fortuna, an analyst at Prudential Equity Group LLC wrote in research note last week.
The turnaround is remarkable because many observers had written off Apple as a serious contender. A year ago, its market share stood at a paltry 3 per cent — despite some terrific products such as the iMac consumer desktop. Some Apple watchers speculated that the company was in secret talks to get the Macintosh operating system to run on Intel microprocessors, suggesting that the only way Apple could survive would be if its software worked on the computers that made up 95 per cent of the market.
The Street's favourite hardware company, overwhelmingly, was Dell, which made and sold Intel-based computers better than anyone. Many analysts still maintain a 'Buy' recommendation on Dell because they expect it to continue to dominate. And why not? For every 100 computers sold in North America, more than 30 are made by Dell, compared with just three by Apple.
Nonetheless, comparing Apples to Dells is a useful exercise, if only because it underlines the transformation that is helping Apple capitalize on what some reviewers are calling near-perfect products. Moreover, Apple finished its most recent quarter with gross profit margins of better than 28 per cent. Dell's margin is about 18 per cent.
The outlook is even brighter. Andrew Neff, who covers enterprise hardware stocks for Bear Stearns and Co. Inc., estimates that through 2007, Dell's revenue will grow by an average of 18 per cent compared with any year-earlier quarter. In an industry where overall revenue growth might be 15 per cent in a good year, that's more than respectable. But Mr. Neff says Apple is poised for an even bigger boom, with quarterly revenue set to grow by an average of 38 per cent through 2007.
"Apple should continue to exceed results from new product efforts where market opportunities are large and untapped, high-growth from leadership in music, and G5-driven product cycles," Mr. Neff wrote after Apple's latest financial results.
