Should Investors Buy Apple?
- Jan 14, 2005
- admin
- Investing
YOU’VE SEEN THAT MOVIE BEFORE.
The one where Bill Murray wakes up every morning,
only to have to relive the exact same day over and over again.
At first he doesn’t “get it.”
Instead of using his unlimited 2nd chances for good, he
spends most of Act II trying to win the girl.
Or trying to drive that annoying groundhog off the cliff.
But at the end of the movie he begins to see the light.
He realizes that he has to make some changes.
Changes that acknowledge his mistakes.
Changes that correct the errors of his past ways.
By Act III he finally begins to “get it.”
He feeds the homeless dude.
He plays the piano.
He finally wins the girl.
Well, replace Bill Murray with Steve Jobs…
And Punxsutawney Phil – the-Seer-of-all-Seer’s – with Bill
Gates, and what do you have?
Rise and Shine Campers, it’s the corporate version of…
G-R-O-U-N-D-H-O-G DAY!
But Steve Jobs is still stuck in ACT II.
And in this version of the “movie” investors could get
smacked for much more than an $8 ticket price.
Let me explain:
First of all Steve Jobs deserves a ton of credit.
He’s what they call an “O.G.”
An original.
He was the one to set it off.
Software that actually made personal computers do what you
wanted them to do.
But than he made a mistake.
A mistake so big that even every wet-behind-the-ears M.B.A.
student winced when their teachers explained it.
A mistake so big that in boardrooms around the world, it’s
known as “The Mistake.”
He bet on the hardware.
The actual boxes.
The part of the computer with no brains, no value-add.
The part of the computer that only competes on price.
The commodity part.
And than there was Bill.
The Seer-of-all-Seer’s bet on the other side.
He bet on the brains.
The software.
Even though Steve was better, Bill was smarter.
His bet worked so well he ran with it.
The rest is history.
But now we’re back.
Back to a point in time where Steve Jobs – in typical
Groundhog Day fashion – has been given another chance.
A chance to get it right.
The kind of chance only great talent combined with utter
persistence can get.
That’s because he’s an original.
An original who created the modern day digital walkman,
The IPOD
The IPOD is giving him this second chance.
A second chance to not make the same mistake.
But guess what he wants to do with all the money?
Exactly what he did before:
He’s betting on the hardware.
Sub-$500 machines.
Those no-margin boxes IBM is dumping to China.
The same no-margin boxes that will cost Carly Fiorina her job
when HP shareholders finally wake up from their coma.
The very same no-margin boxes that only a manufacturing whiz
like Michael Dell could profit from.
Yup, Steve Jobs is still living in Act II of Groundhog Day.
It was almost sad to hear really.
To hear – on the day that sales and earnings soared an
astounding 75 percent from IPOD sales – that all that excess
money would go back into the crummy low-margin business of
building boxes.
Think about that for a moment.
In 2002 and 2003 – before the IPOD took off – Apple had
a Return on Invested Capital of close to 2 percent.
That’s compared to 12 percent for the “typical” American company.
That means that for every $1,000 Apple invested into selling
its “high-margin” machines such as the G-4 it only made $20 back
on its money.
That’s it – $20!
Last year (04) that number jumped to 5 percent – or $50 – just because
they introduced the IPOD.
That means that for every $1,000 Apple invested into its business
it got $50 back.
$50 is not much but it’s a heck of a lot better than $20.
So that begs the following question: Why would Apple take all
their excess cash and invest it into sub-$500 machines.
Steve has to know that if they’re only getting back $20 from
selling their top-of-the-line computer than the sub-$500
crowd can’t be greener pastures.
But he doesn’t seem to get it.
Well, I have a suggestion for him.
A simple one really.
Take all that IPOD money and invest into a high-margin businesses.
Forget the sub-$500 crowd, Steve.
It’s over.
Punxsutawney-Bill won.
So just forget about it.
Do what Sony did and keep innovating.
That’s what your God-Given talent is telling you to do.
That’s what I’m telling you to do.
Suprise us consumers.
Keep making products that I’m actually thrilled to own.
Products that people will spend good money for.
Become the kind of company that Tycoon Research subscribers
love:
Companies with:
**Strong Brand Name Products
**High Returns on Capital
**Great Profit Margins
I know, I know – your stock is flying and you can’t do no wrong.
But remember – over the long term, low returns on capital always
= low returning stocks.
And you’re too good for that.
Remember Steve, history is looking at you.
If you don’t change course they’ll be forced to add another footnote
to your name:
Responsible for the 2 greatest business mistakes ever made.
Remember, you are what you read…
–By Dylan Jovine