- The completion of the Intel transition, hefty store traffic, and successful Mac advertising could continue to spur momentum in the Mac business. Hence, investors should expect Mac share gains accelerating.
- In the September quarter, Apple’s share gains began to gain significant momentum, with Mac shipments growing 30% versus market growth of 7%.
- Although the Apple stores will continue to play a key role in capturing new users for the Mac platform, management has said that the expansion of third-party retail distribution for Macs could be a critical incremental growth driver as well. Relationships with Best Buy and Circuit City appear to be going well, and I believe these relationships will expand rapidly in coming quarters as Apple releases more quality stuff. i.e. iPhone
- I believe that the new widescreen video iPod and the Apple-branded cell phone will be launched in early 2007, providing a sustainable boost to the iPod story, especially if its unlocked.
- AAPL's management said that incremental growth is likely to come from Mac share gains, iTV, and “new product categories.” In fact, management mentioned unnamed new products as a key driver of growth.
- 2007 could mark an important rebound in product innovation from AAPL & I believe the widescreen video iPod and the Apple-branded cell phone aka iPhone represent two of the most likely new products for the upcoming calendar year, and of course, there will likely be some other unexpected products as well.
Key takeaways from UBS's meetings with management include:
(1) While other tech companies may be worried about a potentially sluggish holiday season (e.g., Vista pause), Apple didn’t seem too worried at all. Apple continues to be upbeat about its share gain potential in Macs, especially as it adds 40 more retail stores in FY07 (from 174 currently).
We believe Mac demand continues to be strong and the company continues to roll out new products such as the new MacBook Pro units featuring Core 2 Duo processors announced on October 24.
(2) While providing no details, it is clear that Apple has a robust pipeline of new products expected for 2007. The flow of new products is likely to start at Macworld in January where we will also see another glimpse of Leopard, Apple’s OSX Operating System, and iTV, Apple’s answer for the digital home.
(3) Margins were a key discussion point as Apple recently reported GAAP gross margins of 29.2% (70bps above our estimate) due to benefits from higher margin Mac sales offset by declining iPod pricing and iPod mix. For 1Q07, Apple currently expects GAAP gross margins of 28.25% (-90bpsq/q) due to the impact of continued iPod strength, a full quarter of shipping the new iPods with lower ASPs, and contribution from the $79 iPod shuffle, which will be on store shelves November 3.
While Apple obviously did not reveal any new products, management still seems very confident in its market position and its ability to drive the “multiplier effect”—the longterm tone was very upbeat with confidence in the product roadmap.
- UBS believes that Mac sales will benefit near term from the delay of Microsoft’s Vista and strong acceptance of new Intel Macs. In FY07 and beyond, we expect new software from Apple (Leopard) and Adobe (CS3) should stimulate further growth in Mac sales.
- UBS continues to expect new video iPods (new media players) with bigger screens and more content deals, pretty much like the rest of Wall St., for films to come in the upcoming months; however, we still do not expect any new video iPods until early 2007 after Macworld.
- These devices are included in our assumption for 51 million iPods to be sold in FY07, but we are not expecting a significant amount of this product in the 11.6 million we expect for 2Q07. If this product ships in bulk before March, there could be upside to these estimates as long as nano sales remain robust.
- In the UBS report there were details about how they expect iPhone to boost Apple's share and revenues. Due to its length I'm unable to post though I'll try to do so ASAP. Stay tuned
In the end, I continue to believe solid Mac sales will drive margin expansion throughout fiscal 07 and investors should remain confident in the company’s ability to generate solid growth from iPods and music accessories.
6 comments:
In addition:
1) Having looked at Vista, albeit briefly, it's a yawner.
2) An increasing number of "must have" software components are filling in the gaps on OSX. There are still some holdouts like Intuit and other financial software providers but it's just about all there. Plenty of people are still brainwashed about Windows being the "compatibility" choice but it will fade with time.
3) Apple is a brand. Zune might be a decent product but people want Apple. Yesterday I went to several NYC electronics stores and the Apple store at 59th and 5th. All I can say is Wow! (I have pictures which I will post later.) In contrast to an absolutely overrun Apple mecca the Zune appears in deserted aisles in cages so you can only touch them, not pick them up. No positive buying environment there.
Apple still has plenty to do and not all of it will be easy but all the momentum is with them. It's theirs to lose at this point.
Great analysis. I was looking at Apple's market share issue today. Need less to say your post makes me even more bullish on Apple.
The Mac world is abuzz with speculation about the coming iPhone. Here's my take.
I've got zero interest in a regular cell phone with a welded-on iPod nano. Isn't that pretty much what Motorola tried and failed with? I don't have any interest in a hammer that has a screwdriver on the other end either, and for similar reasons.
When Apple came out with the first iPod there were already a boatload of competitors in the mp3 player market. Apple was the only one that saw the need for a really spiffy high-end mp3 player with large capacity and long battery life. The press greeted the first iPod with hisses and boos, called it overpriced, and dismissed it rather abruptly predicting an early demise.
I see a parallel in the smart phone space (with keyboard please). The current big players have names like Treo and Blackberry. There really isn't anyone in Apple's league in terms of engineering and product design capabilities. That's the way it was with mp3 players when iPod happened on the scene.
There is a problem with the current telephone offerings that Apple might see as an opportunity (as they did with iTunes). First of all you have the Cell Phone service providers who like big monthly subscription style payments, long term contracts, and high priced per minute usage charges. At the same time you have the emergence of Internet phones, WiFi phones, and much much much much more attractive and flexible pricing. Services like Skype and Jajah lack the 'anywhere accessibility' of regular cell phones but they do present a compelling set of economics. iChat could be extended to become a Skype competitor.
Who better than Apple to simplify the rate/pricing picture and to integrate internet phones, cell phones, and computers using a smart phone device as the portal?
There is a further rumor that there are two phone models in the works.
When they introduced the first iPod it was pretty basic. Pictures and video came much later. The real beauty was the iTunes integration. Remember how late they were getting out a Windows version of iTunes too.
Like the iPod, the first product introduced may not be the ultimate. The question is what sort of a road map will they show us?
Think about what's wrong with the current offerings:
1. PDA's keep track of your calendar, to do list, and notes but isn't that too limited for something you have to buy and carry around?
2. Cell phones are really great devices except for one thing: The pricing models really suck with high monthly charges and per minute pricing.
3. Internet phones like Skype and Jajah are really super in terms of cost and reach but you have to be on your computer, have the application running, be connected to the Internet or at a WiFi hotspot
4. Using your laptop with WiFi is really great but pricing is a royal pain for temporary access. Pull out your laptop at the Airport in Paris and you can connect but they want $10 for a few hours of connect time.
Put together a system that solves those four problems and you have a winner even it there is a $1000 up front hit.
WiMax is coming which means WiFi like Internet access over about a 30 mile radius. A smart phone is really a computer with a cell phone attached.
Would I pay $500 or $1000 for a smart phone? Yes but only if it could wean me from T-Mobile, Verizon, etc. and their monthly plans. Give me a device and a supporting network that would pay for itself by giving me better telephone economics. I think Apple could have a big impact if they could do that.
We'll soon see what they've been up to.
Dave Small
David and Kris-
Thank you both for your insightful comments.
I've been confident in Apple ever since I bought in at $72 a share. My plan is to remain bullish and long term, however, we are very extended here in the 90's. Apple hasn't had a sustained pullback for some time now. I think it's coming, and I'll be looking to add to my position during this phase. It's inevitable, profits will be taken, but there are those on the other side waiting for the weakness as a buying opp. See you in the green.
-CalTrader
Awesome BLOG. Found it on TheStreet.com.
I had been about as against Apple as anyone could be for a long time. I've been a Windows network engineer, developer, etc. for many, many years. I've used a Mac maybe twice. I saw very little value in Apple other than good hardware and a better image...but the pricing and compatibility made it a poor choice for business (and in my opinion...pretty much anywhere). My mind has changed drastically over the past couple of years.
I can't abandon Windows because all my clients use it, but for web development and personal use, I've made up my mind that my next purchase will be a Mac (probably a laptop). Yeah, Mac has had fewer options when it comes to ALL the software out there, but do we really need ALL the software out there? It's just simpler, and I think we've hit a saturation point where people are overwhelmed by choices, people want to be able to do stuff and enjoy their computers...not fix them...and most things are moving to a web-based application model...so Windows isn't really going necessary, and there is also a lot of demand and support for open source: Unix, apache, and php (which run native on the Mac). At the same time, all the latest hardware and software seem to have everything built in and require less components and setup. People are tired of so many vendors.
Still, the comfort of knowing I can run Windows on a Mac - that's a winner...a computer I can use for business and pleasure.
I am starting to use less of the Windows features and more things like Firefox - they're just better.
My wife and I both own iPods, which are like sculpture that just happen to play music and movies and podcasts. I can only see this improving as they add more content.
My kids will start using a computer soon, so combined with all the new gadgets that are out there and soon to be developed...why not start them out on Apple - easier, less viruses, better hardware.
Everything else is a commodity, and the commodity play for technology and life has run its course. Windows IS boring. It is not capturing people's imaginations. Outside catalysts are driving more interest in Macs. It is a brand. It is a high-end purchase, and people want that. People are willing to spend more on computers these days if they consider it as a part in a sum of goods that play movies, music, make phone calls, record TV programs, etc. Everything is becoming one system...and nobody does it better than Apple.
Hollywood makes Apple sexy - nobody in the movies uses an HP, Windows, or some random MP3 player. So who do you think will get the distribution? Who already has a nice grasp on the distribution already?
I think a good bit of the support in the stock and some of the future potential is based on increased market share for the Mac, which I don't think anybody ever expected would happen. Apple's margins are better, too. They have such a small share right now...why couldn't they double it in a few years? Wouldn't that be nice for the stock?
iPod sales are still strong and will maintain their strength for quite some time. There are still a lot of people out there that don't have iPods and will get them. There are also a lot of people out there who think their current MP3 player stinks and will switch. The iPod is the leader. It is the Windows of it's class.
Nobody else is in a position to take advantage of the Internet/TV/Phone/Entertainment revolution that is underway either. Once people see EVERYTHING Apple comes out with and how it all works together - I think there will be an epiphany.
Finally, the iPhone. I know very little about it, but I've been expecting Apple to make a phone play for quite some time. I just figured it would be a phone with an iPod or something. Maybe a little bit more.
I've been dying for a reason to dump my crappy cell phone and service. There are no good plans out there...and I don't want to talk to my computer...I want to use the phone. I considered buying a Treo or Blackberry, but I simply don't need all the features. However, if Apple could come out with something that had those features PLUS iPod, internet calls, and have some sort of integration with their other multimedia products...I'd buy it.
There definitely is a void in the phone space, and I hope Apple fills it. I don't know what the impact would be on their core business, and I don't know what they're chance of success is, but they usually don't do things unless they're ready, and they're product is perfect.
So circling back the long way, what's the stock worth? I started buying in the low 50s back a few months ago. I expected the stock to be around 82 by the end of the year. I raised my expectations...figuring it would be mid 90s towards the end of January...maybe 100. Then I figured there would be some profit-taking at the time. I actually took a little off the table already, but I made my last purchase at 82. I still think it's a buy though.
It's not much higher than it was earlier this year...and it is a far more attractive company than it was then. Was it overvalued then? It is definitely a sexy stock that everybody wants to get into. I also think it is a good long term investment - face it...there's not a lot of big tech names out there people want to buy hand over fist. Obviously, the upside goes down as the stock goes up.
I believe that a lot of the current catalysts, good news, holiday bump, and expected earnings for the next quarter or two are pretty much built into the stock (or at least will be in a few points).
With this momentum, I could see Apple easily at 120 in a year...a good investment.
I'm just curious about what next year will bring. Some nice catalysts could run the thing up to 150.
I just wonder when it becomes too expensive...and where it's market cap can go. How much of the recent buying is due to the iPhone...which has always been an "urban legend" as some people say.
With increased rollout of sexy gadgets (especially overseas), I think they can also gain market share in all their products/services internationally, which would be nice.
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