Analyst Predicts Strong iTunes Download Surge [UPDATED]

by , 12:50 PM EST, December 17th, 2004

Analyst Gene Munster of Piper Jaffray upped his estimates on Apple's iTunes Music Store download totals Friday, predicting the company will sell 68.5 million music cuts in its fiscal first-quarter 2005.

Mr. Munster's estimates break down to 5.5 million song downloads a week or 793,650 downloads a day, as first reported by The Mac Observer on Wednesday.

iTunes downloads

"We are currently modeling for iTunes revenue to account for 3% of revenue in 2005," Mr. Munster said in the report. "Based on yesterday's update, it appears that the weekly iTunes run rate is approximately 5.5m songs per week, up from the 3.5m - 4.0m range in the September quarter. Based on this run rate, we now expect iTunes downloads in the December quarter to reach 68.5m vs. our estimate of 52."

His estimates come two days after Apple announced it had hit the 200 million mark in worldwide downloads from its online music service.

The new estimates are an increase from 52.1 million Mr. Munster estimated in November. If the numbers stay at their current rate, total downloads could hit 474 million in calendar 2005, up from earlier projections of 256 million for the year.

This number is arrived at by taking the December quarter projected sales, 68.5 million downloads, and dividing that by the iPod installed user base to get an average of 7 iTunes downloads per iPod user. He then multiplies that number to the projected, cumulative iPod installed base through calendar 2005 to arrive at projected iTunes sales of 474 million downloads.

Mr. Munster is sticking to his earlier estimate with an 'outperform' rating on Apple stock and a $100 price target, basing both on the increase in iTunes sales, as well as a reiteration of what he sees as the iPod Halo Effect. This is the name given to the idea that some Windows-using iPod users Switch to the Mac. He also took the opportunity to remind his clients that his opinion that the iPod Halo Effect exists is based on a Piper Jaffray survey of iPod users.

Valuation

The final point made in today's report addresses the question of valuation. Mr. Munster's target price of $100 per share is 36 times Wall Street's projected earnings for fiscal 2006 of $185 per share. A 36x multiplier is much higher than Apple's competitors, and has been criticized by some pundits.

In a section titled "Valuation Not Outrageous Based On 3-Yr Historical Average," Mr. Munster said that using his projections of $2.30 per share, Apple's valuation would be at 29x. That multiplier is closer to Dell's current valuation, which is currently trading at 27x fiscal 2005 estimates.

Further justifying his target price, he notes that, "Over the last three years, the average forward P/E multiple for AAPL has been 43x. Specifically, the average forward P/E multiples in CY02, CY03, and CY04 have been 37x, 53x, and 38x, respectively."

To cement his point, he concludes by saying "We believe our CY06E EPS is reasonable given our model reflects a 6.5% 'halo effect,' while our survey suggested 13%."

In other words, the survey of iPod owners conducted by his firm suggests that some 13% of Windows-using iPod owners might Switch to the Mac, while his projections for Mac sales assumes a comparatively more modest, but still aggressive, 6.5% Switch rate.

The iPod Halo Effect

Heretofore, the iPod Halo Effect has not been reflected in actual Mac sales, and Apple actually saw a decrease in Mac sales during the last quarter. There were mitigating factors in that quarter, however, with the biggest being the lack of an iMac model for sale during much of the quarter. In addition, 1/3 of Apple's total iPod sales occurred during that quarter, meaning that the impact of the iPod Halo Effect may simply not have been felt, yet.

Apple will next report numbers in the middle of January for the December quarter, the first fiscal quarter for the company.

Apple closed today at $64.99, down $1.606 (-2.41%) on strong volume of 13,970,686 shares trading hands.

Bryan Chaffin contributed to this story.

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