Apple Computer Inc.

Case Analysis

Julianne Carrido, Sami Hakimeh, Kyle Hayes, Frankie Lau

Thursday, May 31, 2006
Apple Computer Inc. is an American computer technology company. It leads the industry in

innovation with its award-winning desktop and notebook computers, OS X operating system,

iLife and its range of professional applications. Apple also spearheads the digital music

revolution with its iPod portable music players and iTunes online music store.

Apple played a major role in the introduction of the personal computer in the 1970s,

which eventually kicked off the personal computer revolution. It’s first big hit, the Apple II, was

introduced in 1977 and was a very popular with home consumers. Being the innovator that Apple

is, it introduced the first graphical user interface (GUI) to the commercial personal computer.

This technology is used on all of today’s major computer operating systems such as Windows

XP as well as Unix-like systems. Since then, the company has revolutionized the way people and

computer companies think about aesthetic design of computers and consumer electronics alike as

well as the security and operability of the operating system. In addition, Apple’s unmatchable

success with it’s iPod mp3 player and revolutionary iTunes music store has left many companies

struggling to keep up with the new wave of giving consumers the simplicity they desire in

technology.

The recent announcement along with the release of new Apple computers using the Intel

processor, rather than the faithful IBM PowerPc processor, has allowed the company to enter

into an entire new realm of needed compatibility with it’s desktop and portable computers. The

Intel chip allows the new machines to run the Windows Operating System natively as well as OS

X on the same drive. With the correct setup of virtualization software, these two operating

systems may even run at the same time, and a couple of key commands would be able to

instantly switch between operating systems. This development in technology now encourages
users to switch to the very desirable Macintosh community without completely sacrificing the

often thought needs of the PC.

Strengths:

Apple Computer Inc. is one of the oldest hardware manufacturers that control over the

product by manufacturing both computers and their operation system. It is known that Apple has

a high Quality product which makes Apple different than its competitors. Apple creates its

product with unique designs to attract the consumer’s eyes and increase its market share because

Apple success is based on fulfilling customer’s desires. Apple has one of the top brand names

within the technology industry all over the world, and 54% of their profits are from foreign

markets. Apple is dedicated to develop new products which will make the use of technology

easier and more efficient. Apple always provides easy-use product to the hand of the consumers.

Most of its products are light, small, and easy to carry around which make them more

competitive. One of the great things about Apple is product diversification; Apple has a large

number of product lines to target everyone in the world. In addition, there are a huge number of

consumers who are loyal to Apple even though the prices of Apple products are higher

comparing to its competitors. The attractiveness of Apple’s products has created a brand of

distinction in the computer industry. In 2005,

Apple had reported a net income of

1,335,000,000 which equates to an

increase of almost 400% from its net

income in 2004. So far, the company has done

quite well in 2006. There was an

increase in quarterly earnings growth of 41.4%. Its stock price is the highest in the personal

computer industry. Apple is financed mostly by its equity. In fact Apple does not have any debt,

so investors would bear less risk by holding Apple’s stocks. The company is loaded with extra

cash that is ready to acquire any firm that could help enhance the value of the company.

Weaknesses

Apple had difficulties on some of its products quality control. Some consumers reported

faulty screens in the iPod Nano. When Apple first introduced the iPod, consumers faced

problems with faulty batteries. Apple is ranked fourth by sales of hardware, and it is focusing on

internal engineering more than the market. They must continue to impress the market with new

products. This puts huge pressure for Apple to maintain its position as one of the industry leader.

The computer industry is a fast-changing type industry where old products are constantly

replaced by newer and more improved innovations. For Apple to remain profitable, they must

invest huge amount of money in their product R&D which has been increasing steadily every

year.

Even though Apple may seem so financially strong, its lack of debt may just be a fatal

weakness. Apple is very vulnerable to a major stock acquisition by other groups or companies. In

addition to the debt/equity issue, Apple has not issued any dividends to its shareholders for many

years, which may cause the investors to lose their confidence in this company.
 COMPUTER HARDWARE (US) RANKED BY SALES
Market

Company Symbol Price Change Cap P/E

International Business Machines

Corp. IBM 80.14 0.45% 124.25B 15.65

Hewlett-Packard Co. HPQ 32.27 -0.31% 91.27B 34.89
Dell Inc. DELL 24.3 0.50% 56.06B 16.66

Apple Computer Inc. AAPL 64.33 1.56% 54.71B 32.46

Opportunities

Apple is known for its innovative thinking. They have developed a product line that is

both functional and attractive. Their product line has recently expanded to another level. Their

iPods will soon be able to communicate with specially designed Nike running shoes where you

could receive data such as calories burned and distance ran. This project can benefit both

companies and boost the demand for iPods. Apple’s iPod line will have a clear advantage over

all the other mp3 players in the market. In addition to Apple’s integration with other products,

many cars models from all major automakers have equipped their new models with iPod

connectivity.

In regards to their desktop and notebook sectors, Apple has developed new lines that are

less expensive while maintaining its high quality standards. These less-expensive computers

should help increase sales in the future. Apple has also changed its chip supplier from IBM to

Intel. This change would make Apple more compatible with other systems. It enables Apple to

run the Windows operating system, which gives the user more flexibility.
Threats

Apple faces pressure from its competitors such as Dell and HP. Dell’s low budget

computers have given them the largest market share in personal computers. According to the

available data, HP leads the industry with gross revenue of 88.89 billion dollars but Dell has the

highest net income. Even though Apple’s stock price is higher than both Dell and HP, the

difference in market share and revenues are far behind them.

DIRECT COMPETITOR COMPARISON

AAPL DELL HPQ MSFT Industry

Market Cap: 54.05B 57.24B 92.04B 241.97B 640.18M

Employees: 14,800 65,200 150,000 61,000 1.80K
Qtrly Rev Growth (yoy): 34.40% 6.20% 4.60% 13.30% 13.60%
Revenue (ttm): 17.31B 56.74B 88.89B 42.64B 4.09B
Gross Margin (ttm): 28.60% 17.50% 23.76% 83.40% 17.50%
EBITDA (ttm): 2.39B 4.63B 8.39B 17.51B 66.28M
Oper Margins (ttm): 12.27% 7.45% 6.56% 38.69% -0.16%
Net Income (ttm): 1.73B 3.40B 3.17B 13.47B -195.51K
EPS (ttm): 1.982 1.417 1.097 1.262 N/A
P/E (ttm): 32.06 17.51 29.66 18.80 32.06
PEG (5 yr expected): 1.40 0.98 1.16 1.51 1.40
P/S (ttm): 3.16 0.99 1.03 5.68 0.66

The substitution effect is another threat for the computer industry. Since technology

changes at such a rapid rate, the iPods and iMacs can possibly be replaced by other devices.

However, this change would not result in the collapse of the company but it would certainly

change the kind of role that Apple has in the industry. Apple will be forced to develop new

products to keep this from happening. If another company comes out with a better product,

Apple would lose its market share to that company.

Another threat for Apple would be the exchange rates which can cause shifts in supply

and demand. Since Apple has a huge international market, their revenues from foreign countries

are directly related to exchange rates. The depreciation of US dollars could cause a decrease in
their net receivables. On the other hand, an appreciation in US dollars would increase net

receivables but decrease future demand since price would increase.

Future Goals and Expectations

Apple can definitely expect a prosperous future especially in the near future. Over the

past five years, net sales have been steadily increasing with almost a 200% increase from 2004

and 2005. Correspondingly, net earnings have been increasing as well. Apple owns over 80% of

the market share with its iPod product. With such favorable trends, it is reasonable to assume that

Apple will continue to increase in its sales, earnings, and market share just as long as it keeps

developing and acquiring new strengths. For example, Apple has established its name as one of

the leading, innovative forces in the computer industry that has a much diversified, high quality

products that appeal to many markets. Competitors will find it difficult to compete against the

company if Apple continues to strive for innovation, as it is its mission, continuing its well-

developed marketing plan, further developing more high quality products, and taking advantage

of its opportunities. Thus, the threat of product substitution and high levels of competition

would be decreased.

However, although it seems that Apple is not in a position where its favorable future

outlook is threatened, it is best that Apple works on its weaknesses so as to further increase its

sales and decrease the possibility of losing its customers to its competitors. For example, Apple

is known for its high quality products, which puts them into a competitive advantage. However

some components of its products such as the iPod batteries and the iPod Nano screens are of

lesser quality. Apple must increase its R&D efforts to really minimize the number of products
with faulty components. Thus, customers would not be lost and customer loyalty would be

maintained.

Another weakness that must be addressed is the high prices of its products. For example,

the iPod nano ranges from $150 to $250 depending on the size, the iPod ranges from $300 to

$400, and a Mac desktop is at least $1300. Such high prices discourage potential customers from

purchasing Apple’s products. The solution to this weakness is to decrease the prices to the point

where profits are still increasing. Likewise, the cost of sales should be decreased but only to the

point where the quality of the products is not sacrificed.

Another weakness that should be addressed is the lack of paying dividends. Although

other computer companies do not pay dividends, they will eventually start paying dividends.

Apple have not paid dividends since 1995 and because of its increasing earnings, the company

has the ability to pay off dividends. Starting as soon as possible will put Apple in a better

competitive advantage because it will definitely improve stockholder loyalty as well as allow for

an increase in shares.

With its already well-established name brand and its positive sales/market share growth,

Apple will without a doubt continue to increase their earnings and market share. However, by

working on at least some of its weaknesses through minimizing the number of faulty components

in its products, decreasing its prices, and paying dividends, Apple can tremendously gain a

competitive advantage over its competitors.