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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Apple (AAPL) |
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Selected Analyst Coverage (Target): Credit Suisse — Outperform ($120) Citigroup — Buy ($105) Prudential Equity — Neutral ($100) |
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AAPL Closed at $89.07 on 2-23-07 |
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Released 2-24-07 |
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Apple (ticker: AAPL) is a consumer electronics company that sells laptop and desktop computers, computer accessories and peripherals, portable digital music players and online music and video. Apple has also recently announced it will produce a combination audio-video cell phone (the iPhone) and a computer-to-television synchronization device called Apple TV (formerly iTV) that makes strides towards the creation of the “Digital Home”. · Apple’s most well-known device is undoubtedly the iPod, the undisputed leader of the digital music player market with an overall share of 62%. Although the digital music player market has seen increasing competition, including Microsoft’s offering (the Zune), iPod unit sales remain strong, although average selling prices (ASP) are on the decline. The decline in ASP is largely due to a shift in product mix from higher-priced iPods to the mid– and entry-level Nano and Shuffle variations. Looking forward, we feel the digital music player may becoming saturated with offerings and product penetration, resulting in slowing sales growth. Because iPod sales comprise over 40% of Apple’s current revenues, any such slowdown would likely have a considerably negative impact on profitability and stock price. · The most anticipated new product release is for the Apple iPhone, which Apple believes is the first step on the path to convergence for media devices. The phone is being sold through Cingular Wireless (part of AT&T) and will have two versions; one retailing for $499 and another for $599. The more expensive version will have a larger hard drive enabling the storage of more music. Our concerns regarding the iPhone center on the high initial pricing and sole licensing agreement, which will likely limit the early potential market. Although Apple normally targets the high-end of the market, the challenge will be bringing the iPhone to the mainstream rather than allowing it to become another Apple niche product offering. The lack of a keyboard and enterprise email a la Blackberry is also likely to exclude business users, who may be more able to afford the cost of the phone. We question whether the market is sizable enough and the pricing power high enough to allow for this product to “move the needle” on Apple’s intrinsic value. One fear we do not have is that iPhone sales will “cannibalize” iPod sales, because the significantly higher price of the iPhone combined with relatively lower-functioning music playback abilities make it unlikely that a typical iPod owner will buy an iPhone. · Mac desktop sales remain relatively flat, and we see that trend continuing in the coming quarters. The primary driver of computer sales growth is from the laptop line, where growth is expected to be approximately 35% annually for the next two years. · For the time being, we anticipate Apple TV will be a largely niche product and constitute a low-single digits percentage of revenues. The technology is ahead of its time, although Apple could gain a noticeable first mover advantage if consumer awareness of synergizing television and computer video grows significantly, and Apple is closely associated with that market. · Given Apple’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for AAPL is $81, putting Apple shares as being overvalued by approximately 10% based of Friday’s closing price of $89.07.
Disclosure: The analyst has no position in Apple stock or its derivatives. |
