Quiz: iPod is to Apple as XD1 is to . . . ?
As reflected by its sales and share price history, Apple languished over the past decade as either a decrepit dinousaur or sleeping giant (depending on the metaphorical "spin" you prefer)--until the iPod ignited sales last year:
Year: Sales, Closing Stock Price
1995: $11 bil., $16
1996: $10 bil., $10
1997: $7 bil., $7
1998: $6 bil., $20
1999: $6 bil., $51 (dotcom bubble)
2000: $8 bil., $15
2001: $5 bil., $22
2002: $6 bil., $14
2003: $6 bil., $21
2004: $8 bil., $64
2005: $13 bil. (estimate), $84 (current price)
2004Q3: $2.4 bil.
2004Q4: $3.5 bil.
2005Q1: $3.0 bil. (estimate)
2005Q2: $3.0 bil. (estimate)
Today, Apple is on a roll, with both the iPod and, more recently, the Mini Mac driving accelerating revenue growth.
By analogy, let's have a look at Cray, the supercomputer maker, another (albeit more rarified) "household" name--well-known at least among the scientific community with high performance computing needs. (My exposure to this field came during my graduate school days when I was fortunate enough to have Prof. Ken Wilson on my dissertation committee. Prof. Wilson won the Nobel prize in physics while I was a graduate student in 1982 for his "renormalization group" theory of phase transitions, which has spawned a great deal of highly computational work across a diversity of scientific research areas.)
During the 1980s, Cray was the world's leader in supercomputing, with 40% market share. As the popularity of PCs grew throughout the 1990s, supercomputing was forced into a "back seat" position. Cray gradually fell on hard times and was acquired by Silicon Graphics Inc. (SGI). A few years later, in early 2000, SGI sold the Cray business to Terra Computing, who assumed the Cray name upon completing the acquisition.
Our sales and share price lookback for Cray, then, begins in 2000:
Year: Sales, Closing Stock Price
2000: $120 mil., $1.5
2001: $130 mil., $1.9
2002: $160 mil., $7.7
2003: $240 mil., $9.9
2004: $150 mil., $4.7
2005: $270 mil. (estimate), $3.6 (current price)
2004Q3: $46 mil.
2004Q4: $39 mil.
2005Q1: $54 mil. (estimate)
2005Q2: $65 mil. (estimate)
Cray's sales grew and its share price rose rapidly from 2000 to 2003, but both sales and the share price fell in 2004 as the company received fewer orders from governmental organizations for its X1 "capability" line of supercomputers, which each cost $3 million and up. This sales decline appears to be due largely to the "clumpiness" of governmental funding, rather than any permanent fall-off in demand in this market segment.
Importantly, during 2004, Cray was also transitioning from a single-product company into a three-product company. Today, Cray offers supercomputers to users across a broader range of market segments, in three price ranges:
Product Line (Price to Customer): Market Segment, Addressable Market Size
X1 ($3 mil.+): Capability, $1 bil.
XT3 ($1 mil.+): Enterprise, $1 bil.
XD1 ($50k+): Divisional, $1.5 bil.; and Departmental, $2.5 bil.
(Addressable market size data from Cray's corporate website)
Following their product launches in 2004, sales of the XT3 and XD1 are beginning to rise, as evidenced by the number of press releases reporting new sales contracts:
Quarter: Number of Press Releases for X1, XT3, XD1
2004Q2: 3, 1, 1
2004Q3: 1, 2, 3
2004Q4: 1, 0, 6
2005Q1: 1, 3, 1 (year-to-date)
The new product lines give Cray an addressable market five times the size of its market for the X1. During the next few quarters, we will see just how broad the demand is for the company's more affordable products. The XD1 shows good promise, with recent benchmark tests giving it the highest overall rating among supercomputers in its class. If sales ramp up and rise even incrementally beyond analysts' consensus estimates, the stock price should rebound as well.
Since Cray is still in the early days of setting up marketing channels to reach the anticipated demand among smaller, non-governmental customers for its "bite-sized" XD1 supercomputers, investment in the stock is certainly not without its risks. However, with Cray's well-established name and niche as the only stand-alone company with a business focus solely in the supercomputer area, I believe the downside to be a lot smaller than the upside--maybe 50% downside (sag to 5-year low) vs. 250% upside (return to 5-year high), for a very attractive upside-downside ratio of 5 to 1.
Cray is tiny (market cap of just $300 mil.) compared to Apple (market cap of $34 bil.), and the XD1 will obviously never become a household name like the iPod. However, just as so many people have been racing to their local retailer to plop down a few hundred dollars for an iPod, there are probably a lot of organizations who would be very happy to pay $50k to $100k for an XD1 supercomputer. This potential "untapped demand" for affordable, fast and efficient machines is what can drive Cray's share price over the next year or two with the same explosive growth that Apple's share price saw in its 300% rise over the past year.
(Disclosure: I am long Cray (ticker: CRAY) shares. I also own an old Apple computer, but unfortunately am not enough of a music lover to have "gotten" the iPod story early enough to hop on-board for Apple's share price run-up.)