Apple Computer: Mac Momentum?
Shares of Apple Computer (AAPL) have had a big week, surging 10% since last Friday's close. Company officials stirred up excitement on Tuesday with the unveiling of yet another big product development -- this time, the much-anticipated Intel-based Macs. They also had some good news about holiday sales, indicating that overall revenues in the quarter were stronger than expected, as consumers snapped up iPods and crowded Apple's retail stores.
Apple confirmed last spring that it planned to start using Intel chips in its Macs, but analysts hadn't been expecting to see it happen so soon. The company plans to complete the transition from PowerPC chips to Intel chips this year.
Apple's stock, which has risen 11-fold since the spring of 2003, is trading near its all-time high. And the latest news has given some analysts confidence that the stock can head higher still. In fact, Bear Stearns analyst Andrew Neff, who had downgraded the shares to "peer perform" in mid December, switched back to "outperform" (the investment firm's highest rating) on Thursday and raised his 12-month price target to $105.
Neff views the accelerated Intel schedule as a promising sign. Analysts had been worried that consumers would put off buying new Macs until the Intel models were available. And in a research note published on Tuesday, UBS analyst Benjamin Reitzes notes that Mac sales in the past quarter do appear to have been slower than he expected, based on comments by company officials. It's a concern, Reitzes says, but he figures customers were waiting for the Intel models.
Neff also raised his earnings estimates for fiscal 2006 and 2007 significantly, to $2.53 and $3.14, respectively (factoring in stock-based compensation expense). He's counting on strong sales of iPods, better Mac sales in 2007 than he previously thought and the company's ability to achieve a profit margin of 27.5%, which he says is in line with its long-term goal.
Neff likes what Apple has been able to accomplish so far with its digital-music players and computers. Analysts generally recognize that Apple's momentum depends on its ability to introduce innovative hit products, and Neff notes that Apple often surprises the market with products that are "unexpected and yet address key consumer needs." He points to several new possible products on the horizon, including more iPod accessories, Apple cell phones and the transformation of Macs into "media hubs."
"To us," he says, "Apple is at the center of the digital lifestyle revolution and is best positioned to capitalize on it owing to its long history of product innovation."
But he also acknowledges that the stock is no sure thing. The transition to Intel-based computers is less risky than it was before this week, but problems could still arise. And the digital-music business continues to develop, with competition heating up. Plus, although the popularity of the iPod does appear to be boosting Mac sales, future market-share gains are not a given.
Apple is scheduled to release its fiscal first-quarter earnings next Wednesday. Neff says Apple is likely be conservative with its forecast for the upcoming quarter.
At $84, shares sell for 40 times the $2.13 per share that analysts, on average, expect the company to earn in the fiscal year that ends in September.