What the heck is Microsoft up to?

When I wrote that last post, back in January, Apple stock was trading at $84.29. Since then, just as I figured but didn't exactly write, the stock price has dropped.

Here's why.

When Apple announced it was moving to a new chip architecture, all the people who were just about to buy a Mac pulled back. Who would want the old machine, right? So sales dropped. Big time. Then there was the lag between the time Apple announced the new machines and they delivered the new machines. Even if everyone who wanted to buy a Mac and wasn't afraid to commit to a new chip architecture before the inevitable bugs got worked out was able to buy one, there weren't enough machines to buy.

Predictably, Wall Street gleefully wrung its hands, gloating over the demise of Apple. Again.

Here's what Wall Street doesn't get but Apple does: In spite of the fact that every analyst out there is confident that the iPod phenomenon has run its course, their kids still want them. And when their kids graduate high school, every one of them is going to feel entitled to a graduation gift. Some will get cars; others will get iPods.

But here's the beautiful part. Kids need computers for college. No, they don't need Apple computers. In fact, Apple dropped the education ball years ago, otherwise there would be more analysts on Wall Street using Macs. But kids want Apple computers. NOt because of how they perform, but because they look cool. Kids need to impress. They can do that with very few things--cars, shoes, clothes, music, and laptops among them. Now that Macs can run Windows, kids can make a case to their parents for the computer that's more likely to get them laid.

Only problem is, it's more expensive than, say, a Dell.

Ooh. I know. What if every new Apple computer came with an iPod? Junior can have his college computer and his graduation gift all in one, for just about the same amount as a Dell computer and an iPod.

Apple just released it's quarterly sales figures and, wouldn't you know it, they're up by 48%.

Dell, by the way, is heading straight for the toilet. In fact, the entire computer industry is off and yet, somehow, Apple keeps doing better. Because, and if you work as a Wall Street analyst, you might want to read the next bit really slowly so you get it, no other computer maker can bundle an iPod with a computer.

Sure, some of them can offer MP3 players. But they don't have iTunes. iTunes is a critical component of the iPod experience and oh, by the way, a massive profit center for Apple.

Which brings me to Microsoft. Microsoft gets this. And they're putting themselves in a position to do an end-run around Apple.

When Microsoft introduces its version of the iPod, it's going to simultaneously introduce its version of iTunes. It'll sell its iPod thing to consumers, sure. But more importantly, it's going to either co-brand with PC makers or (more likely) strike deals with PC makers to bundle it with their computers. Microsoft has the muscle to do this because, after all, the PC makers have to sell their machines with Windows installed.

So here's my prediction: Microsoft will come late to the party, as usual, and bully its way up to the punch bowl. Look for its stock to surge, oh, six months after it actually delivers product because typical for Microsoft, the first version will be late and buggy. As for Apple, by then they ought to be onto the next phase of their revolution. If we don't have an Apple cell phone by then, as well as a universal remote that truly works with entertainment systems in the home, then I have more faith in them than they have in themselves.

Long term, Microsoft is on its way back; Apple is still moving forward.

Look for Apple stock to continue its decline until it reports its next quarter earnings, at which point it will surprise the analysts--again--who still think Apple is a PC company.

I'm holding onto my Apple stock. I'd buy Microsoft stock (I have some in another portfolio, but that's not relevant here), but I don't have the money right now.

I know, so what makes me think I know what I'm talking about?

Let's just say that in another portfolio--the one with the Microsoft stock--I pulled a 40% profit in two weeks with an option play on Apple, based on exactly what I just talked about.