Dow Jones 9007.89 -71.15 11:00 am PST, June 27, 2003  NASDAQ 1627.90 -6.11 For info, visit access.smallcapnetwork.com S & P 500 977.61 -8.21 To be removed, please click here Russell 2000 451.05 +1.15 VOLUME 03: ISSUE 34  Apple Computer: Analyze this. This week, it was confirmed, once again, that analysts don't understand Apple Computer (NASDAQ: AAPL).  We profiled the stock in January and suggested that the eclectic company had turned the corner. Since then the shares have moved from $14.90 to Thursday's close of $19.29 -- roughly a 30 percent return in six months.  Last Friday, a Needham analyst came out with the startling revelation that the iPod was indeed a good product, Apple had sold scads of them and the company's music service was patiently waiting for Windows users to get on board later this year. And of course buy more iPods. Whatever. A brief drive-by of First Call will show that over a dozen analysts still have Apple as a weak hold (3.1 out of 5)--a consensus that hasn't changed in what seems like a millennium. Except for a brief, unsustainable rise to $60 during the tech bubble, the shares have been stuck in a trading range between $15 and $25. The Needham analyst sees the shares moving from here --the $19 level--to a target of $23. Most of the rest of them are still hedging their bets with a hold--Merrill Lynch raised the shares to neutral from sell, Tuesday. What the hell does neutral mean, anyway? Apparently analysts don't like to be left behind, even when they're wrong. Disclaimer I am a MAChead--hear me roar. I've used MACs for well over a decade and would never consider switching to the dark side. I like Apple, the company, and with a few small reservations, think Steve Jobs has done well after a series of CEO's worked hard to nuke the company. Apple has always had a good balance sheet, buckets of cash and product innovation that has kept it a persistent thorn in the side of everyone from Microsoft to Dell. Apple also has seen its market share dwindle from 4-5 percent to 2-3 percent. New software and hardware announcements may help--including the snappy desktop G5, but market share is key. I would like to see that number closer to 6--7 percent, but alas, it seems a long way off, if ever. Certainly the Apple OS is superior, but convincing more to switch is paramount. Apple can sell all the iPods and iTunes it wants; until it delineates exactly the kind of company it wants to be and stops serving every retail master, the shares will likely stay in this trading range. Innovation of products is one thing. Jobs needs to innovate the whole company into a solid niche and milk it. Laptops. IPods and music downloads only? Might be worth a shot. But I have a problem with analysts who jump on the bandwagon after a 30 percent move in a market that by all accounts looks a bit toppy. As well, there was a bit of a scare in mid-April as rumors swirled that Jobs was going to spend a lot of Apples's lovely cash to buy Vivendi's music service. The story proved false, but the volume spiked nonetheless and the shares sold off a couple of bucks as the faithful voiced their betrayal. The cash mountain has always been the Prozac that Apple's shareholders and others have popped to rationalise both the share price and the strength of the company. Without it, the game changes, forever. Apple's music service opened in late April as the answer to the online piracy debate. Over a million songs were downloaded the first week alone at 99 cents a track. Interestingly, since the launch, that weekly number has dropped in half. While a nifty little moneymaker, I suspect that as competitors arrive and the service matures, that number will fall farther. Yes, there will be a spike when Windows users are allowed in the door, but a lot of that is probably already priced into the shares. As I mentioned in January, Apple is once again at a crossroads. To finally crack that upper band in the $15-$25 trading range, Apple will have to further refine its product mix and delineate more clearly exactly what it wants to be as it grows up. Investors are rightly nervous as to the fate of the company's cash, (around $12 a share) which will likely be the catalyst that moves Apple to the next level--or not. The company has always traded on the fact that most of its share price is made up of cash. Indeed, investors view that cash as the share price and assign a premium that represents how they may be currently feeling about Apple's prospects. The problem is that Apple's fortunes depend on 'what's next' rather than a clear vision of the future beyond the next product or initiative. Even that belatedly maverick analyst has bought into the iPod craze, mainly basing his 'buy' rating on the prospect of Windows users downloading tunes on their iPods. If his estimates of 23 cents for fiscal 2003 and 60 cents for 2004 are realised--both at the high end of First Call consensus, by the way-- that throws off price/earnings ratios of 83 times and 32 times respectively. Apple earned 33 cents in 2002. I do believe that Apple can get up into the low $20's, market willing. Would I follow this analyst in after the shares have already moved 30 plus percent? No. Would I look at the shares if Apple decided to spend its cash? Sure, depending on what it buys and whether that finally cements the company into a growth track beyond the benefits of its next product or initiative. Or, I might wait for the shares to back up as the market and the analysts revert to a collective hold.  Wall Street has virtually never rated Apple correctly. However, there is one benefit to all this noise: view the analysts' machinations--as far as Apple is concerned-- as a contrarian trade indicator.  Historically, there's none better. Please send us your questions, comments and feedback here: editor@smallcapnetwork.com Unsubscribe Here D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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