TMO Reports - Merrill Analyst: iPod A $1 Billion Biz; No "One-Hit Wonder"

by , 12:00 PM EST, March 2nd, 2004

The iPod portable music player could effectively be a US$1 billion business for Apple Computer by the end of this year and US$1.6 billion by September of 2006, according to the predictions of Merrill Lynch analyst Steven Milunovich. He further predicted the iPod is not a "one-hit wonder," and that Apple will see some Windows users switching to Macs as a result of the portable player. His comments were part of a research report released by the firm Monday and obtained by The Mac Observer.

Mr. Milunovich said the success of the iPod "shows that Apple could become relevant again thanks to its tech know-how and strong brand."

Milunovich estimated revenue from Apple just from the iPod will jump from an expected US$915 million this fiscal year to US$1.6 billion by the end of fiscal year 2006.

"iPod could be almost a (US)$1 billion business this year," he wrote.

Combined together with song sales from the iTunes online store, Mr. Milunovich believes Apple will reap a US$1 billion revenue stream this fiscal year, contributing US15 cents to per-share earnings, US$1.5 billion in fiscal 2005, and almost US$2 billion in fiscal 2006, adding US25 cents to the EPS.

Mr. Milunovich calculated the real value of the iPod to Apple's bottom line, and concluded as a separate company, the iPod's value is almost three times sales and 26 times earnings. "Depending on the valuation method, iPod is worth (US)$4-7 per share this year," he wrote.

In terms of its effect on Apple's stock price, Mr. Milunovich targets its value at around US$29 a share this year. "We sometimes ask ourselves what the next 25% move in a stock is more likely to be, up or down. Our gut reaction is that it's more likely up in Apple's case," he wrote.

At the close of the NASDAQ market Monday, Apple stock was at US$24.02, up 10 cents.

"We're more optimistic in believing that iPod is not just a one-hit wonder that will be knocked off," he concluded. "We also think there will be some Windows-to-Mac switching as iPod creates a halo effect that it's okay to buy Apple."

Other important points in his report included:

- Mr. Milunovich calculated the average iPod user downloads seven songs per quarter. "We expect that ratio could rise over time," he wrote.

- Apple will retain its 31 percent MP3 market share and 55 percent revenue share "longer than many think" and that "share loss should be partly offset by market growth."

- Mr. Milunovich predicts a "Photo iPod" is a "natural follow-on" product, but gave no time frame prediction.

- Song revenue could rise to almost US$200 million in fiscal 2005 and US$350 million in fiscal 2006, Mr. Milunovich predicted.

-"We believe that some (US)65 cents of every (US)99 cent song goes to the music companies," Mr. Milunovich wrote, and said "our guess is that Apple books about a dime of gross profit for every song it sells."

- "Apple gave up on the Newton prematurely, in our view," he wrote. "Soon after Newton was deep-sixed, Palm solved some of the technical issues and handhelds took off."

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