Can Apple Take Its Game To The Next Level?

After a smart turnaround, it needs to head for the Net

Upon returning to the helm of Apple Computer Inc. in mid-1997, founder Steven P. Jobs warned that it could take years to convince investors that the company could not only survive but also prosper. Make that 2 1/2 years, to be exact. Thanks to a crop of new products, including the iBook portable, Apple is once more a hot brand and a high-flying stock: On Dec. 7 it hit 117, a record and a 192% gain for the year. Some analysts think it could reach 140--which would give Apple a market cap of $22 billion and a price-earnings ratio in line with top PC makers Dell Computer Corp. and Gateway Inc. "I can't see why they should be trading below those guys," says Kevin A. McCarthy, an analyst at Donaldson, Lufkin & Jenrette Inc.

With all four of its products selling well, analysts now look for Apple's first major revenue growth in years. During the bad years, revenue plummeted from $11 billion a year in 1995, to $5.9 billion in 1998. For the year ended Sept. 30, sales rose just 3.2%, to $6.1 billion. Nonetheless, analysts are bullish on the December quarter, predicting sales growth of 15% to 20%. That should keep the Apple aisles at computer stores full of shoppers. Michael K. Kwatinetz, an analyst at CS First Boston, looks for sales this Christmas to jump to $1.98 billion--the biggest boost in 17 quarters. For fiscal 2000, the company projects a 20% to 25% increase.

Still, the question remains: Is Apple really back for good--and ready to start rebuilding its shrunken market share? But the comeback so far has been built on a relatively insecure base: selling snazzy designs to hip consumers. "The strategy is like a Milan fashion show: This year's wardrobe has to hit to succeed," says International Data Corp. analyst Roger Kay.

To achieve its goal of 20%-plus annual revenue growth and live up to that lofty stock price, Apple will need to keep cranking out hit consumer products and eventually rebuild a following in the small-business markets where it's actually losing ground because of a lack of software. Yet with the Internet chipping away at Microsoft Corp.'s software dominance, Apple is well positioned to come out with new noncomputer products--so-called Internet appliances.

In PCs, some analysts say, Apple might even be able to restore its market share, which peaked at around 10% and now stands at less than 4%. "I don't see why they can't return to double-digit shares over the next couple of years," says McCarthy. Jobs, who declined to talk to BUSINESS WEEK for this story, said last summer that Apple could rebuild share. "What everyone forgets is that we own the second-largest operating system in the world."

E-OPPORTUNITIES. Another factor in Apple's stock rise is its potential as a Net play. While other PC makers have little in-house technology, Apple has Sherlock, a search engine that also does comparative pricing at e-commerce sites. Insiders say Apple is negotiating with e-commerce outfits to get a cut on merchandise sold this way. And many analysts believe Apple is close to capitalizing on its QuickTime multimedia software. While not as popular as Real Network's RealPlayer, Apple is working to integrate it with Mac hardware to make it the best platform for watching video over the Net. Insiders say QuickTime eventually could be spun off.

To be sure, Apple is not out of the woods entirely. The simplified business model that Jobs built to regain profitability may be inadequate as the company grows. With just four products and a handful of distributors to deal with, it's no wonder that Apple has managed to set new records for efficiency. But to keep up with its volume goals, the company will have to sell through more chains and further develop its online store.

Most of all, Apple must keep shoving hot new products out the door. So far, the company has wooed customers with cool design. But rivals are already copying. "If they just stick with making four products in all sorts of colors, Apple won't be the growth story it could be," says Kay. Having saved the company, Steve Jobs now must take it to the next level.

Before it's here, it's on the Bloomberg Terminal.