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First on TMO - Analysts Agree: Apple's 'Halo Effect' Might Be the Real Deal
by , 9:00 AM EDT, April 14th, 2005
Following Wednesday's announcement of a six-fold increase in fiscal second quarter profit, Wall Street analysts remain bullish on Apple Computer (AAPL) and are warming to the idea that customers who buy iPods are also buying Macs.
Announcing it sold 5.3 million iPod digital media devices in the quarter, Apple also said it sold 1.07 million Macintosh computers, up from 749,000 a year ago. It was the second-straight quarter in which Apple sold more than 1 million Macs.
Those numbers alone are enough evidence for Piper Jaffray & Co. analyst Gene Munster to conclude "our confidence in the 'halo effect' has increased."
The 'halo effect' has been synonymous with Apple for over a year now. In basic terms its definition is customers who buy an iPod, become hooked on Apple's products and their ease of use, and then buy a Macintosh as their primary or secondary PC. Apple has done much to push the premise of such an effect, but has given little evidence to prove it, such as survey results or customer demographic data.
But analysts now believe two straight quarters of growing Macs sales together with Apple's number one position as portable music player leader are enough proof to confirm the existence of the 'halo effect'.
"It appears that (the halo effect) phenomenon has begun to take effect," Mr. Munster said in a Wednesday commentary to clients obtained by The Mac Observer. "We expect the halo effect to accelerate in 2005 as the total installed base of iPods increases from 10.3 million at the end of calendar year 2004 to an estimated 35 million by the end of calendar year 2005. Our Mac estimates reflect the assumption that iPod buyers who are PC owners will increasingly move to the Mac platform."
One such piece of evidence: Mr. Munster estimates Apple sold 138,000 Mac mini systems in the March quarter, despite Apple refusing to release results of sales on the company's newest Mac model. Mr. Munster had estimated the company would sell 50,000. "We believe the Mac mini is benefiting from iPod carry-over," he concluded.
"There is quantitative proof of the halo effect," said Merrill Lynch analyst Steven Milunovich in a Thursday report to clients obtained by The Mac Observer. "Mac revenue increased by 29% year over year, clearly gaining share in a PC market showing little dollar growth. iPod is bringing new users into the tent, benefiting not only Mac sales but also peripherals and software."
Bear Sterns analysts Andrew Neff is also on the halo effect bandwagon, telling clients Wednesday the strong Macs sales figures are "more compelling evidence of a 'coattails effect' in Macs."
Moving forward
Most analysts who have reacted to Wednesday's strong earnings results are bullish on Apple's short term outlook, although somewhat cautious in agreeing with Apple executives that growth in the company's iPod business can't stay at the levels they have been at for the last two quarters.
"Apple's domination in digital music is a critical piece to the story, but we do not believe that iPod is the only potential growth avenue for the company," Mr. Munster said. "Indirectly, we expect iPod to continue to be a foundation for growth in other parts of Apple's business, and we expect that by the end of calendar year 2005 more than 35 million iPods will have shipped, providing Apple with a greater scope of awareness for various products."
Mr. Munster believes Apple is gaining share with both Mac and iPod and he expects those market-share gains to continue. As evidence, Mr. Munster is predicting total iPod shuffle sales for the March quarter to come in at approximately 1.8 million.
"The big story on Apple is its more balanced growth, driven by the combination of Macs and music," said Mr. Neff. "We expect continued engines of growth in the June quarter with Mac OS X 'Tiger' and the expected refreshes of PowerMac, iMac and eMac lines."
Bear Sterns and Piper Jaffray set an 'Outperform' rating on Apple stock, with a price target of $52.00.
Merrill Lynch has set a price target of $51.00 with a 'Buy" rating and increased their fiscal 2005 estimate of earnings from $1.05 to $1.30. "Apple’s earnings growth could have upside surprises due to Apple’s emerging strategic position in the digital home," Mr. Milunovich commented.
If you are interested in Apple's stock, join our forum members in the Apple Finance Boards, a moderated forum for Apple Investors and people who are interested in Apple's financial dealings. For other stories regarding Apple's stock activity, visit our updated Apple Stock Watch Special Report.
Observer Comments
Thu Apr 14, 2005 10:37 am Subject: My iPod led to an iBook G4
Hey, I was one of the people the article referred to! 
I bought an iPod and then 9 months later bought my very, very first Mac! It's all shiny and new and works so good! (Way better than Winblows)
Haha! I'm also talking to my boss about using it at work instead of the Dell Hell I'm subjected to every day... 
Our systems at work are all UNIX so it should be a natural shoe-in!
Thu Apr 14, 2005 10:37 am Subject: Clueless on Wall Street
AP reported today that "Apple declined 4.5 percent, or $1.86, to $39.18 after the computer maker's quarterly profits jumped more than sixfold thanks to its iPod music players. The results soundly beat Wall Street estimates...." Now, would someone kindly clue me in as to why Apple's stock fell so much after their sales & earnings figures just blew away all expectations???? Apple's cautious outlook for the next quarter as being the reason doesn't seem to fit logic, because when some other company *fails* to meet expectations and then they go on to predict a marvelous next quarter, that usually doesn't have nearly as much an effect as the lossy current quarter. Please, I need a clue.
Thu Apr 14, 2005 10:47 am Subject: Apple Stock Drops 6% Today On Poor Revenue Results
QuoteRealityCheck wrote:
Investors aren't all iLemmings, despite modest increase in Mac units of 2%, the big drop in Mac revenue of 7% and 16% decline in iPod revenue means a declining Apple business.
Who is this dude? Everyone in the investment world knows that good news means easy selling for investors. Smart investors sell on good news. Apple's business plan has never been better. If I had some extra cash, I'd buy stock today. But that's just me.
S.
Thu Apr 14, 2005 11:18 am Subject: Someone swat that fly
RC, you make me feel really great that I'm in the Mac camp. Wanna know why? Cause your desparate struggle to come up with stuff to bash the Mac platform is so weak, so incredibly stupid, that if this is all you've got to say, then you just reinforce my opinion of which is the best platform (as if I needed you to help me with that).
You don't get me fired up like you do some of the posters here. I know what you're doing. But you are quite an annoying a**-h***.
Thu Apr 14, 2005 11:38 am Subject: You're forgetting (rather conveniently) the holiday factor.
QuoteRealityCheck wrote:
Investors aren't all iLemmings, despite modest increase in Mac units of 2%, the big drop in Mac revenue of 7% and 16% decline in iPod revenue means a declining Apple business.
Geez I've trolled some posts in my time lol, but not as long as this guy! What did Apple do you mate?
Don't insult Royal Crown Cola by comparing it to this bozo.
Sure, it lost the beverage wars, but at least "it" leaves a good taste in your mouth.
QuoteGuest wrote:QuoteRealityCheck wrote:
Investors aren't all iLemmings, despite modest increase in Mac units of 2%, the big drop in Mac revenue of 7% and 16% decline in iPod revenue means a declining Apple business.
RC: Please show another computer or MP3 maker with smaller drop or increases from the prior (Xmas) quarter that bests Apple. As a prior poster pointed out, your selective numbers don't hold up when compared with other PC companies. Can anyone honestly beat the X-mas buying season in the next immediate quarter. The fact that they did it with Macs is absolutely amazing and tied directly to the way cool way cheap Mac mini and the fabulous iMac G5. Too bad you don't have one RC. Sad, Sad little man. Reboot your Windows 3.1 Packard Bell and wait 10 minutes to calm down--maybe watch tv, have a snack, clean up your mess before your mom comes home from work...
Also, a selloff is predictable on these good results, and is just a small blip in the overall trend upward.
RC=Royal Crown cola, a clear winner in the beverage market
Quotetuscmat wrote:
I'm starting to think RC is a member of the TMO staff designed to engender controversy. How about it TMO? If he isn't, than RC is a putrid pathetic little troll who still wears diapers and cries for his momma when his feelings get hurt.
In any case his pattern seems to be to say something obnoxious for each significant article and then not post again. He's very effective - I doubt he's a TMO staffer - but he certainly has people on the defensive in every single article. No need to defend macs or put him down - he's winning because you're talking about him.
That's how celebrities get press. Ignore him and he'll go away. Im not sure he reads the complaints about him - most of his posts tend to be off topic any way.
QuotePerfectIrony wrote:
Hey, I was one of the people the article referred to!
Haha! I'm also talking to my boss about using it at work instead of the Dell Hell I'm subjected to every day...
Welcome to the Mac!
QuoteRealityCheck wrote:
Investors aren't all iLemmings, despite modest increase in Mac units of 2%, the big drop in Mac revenue of 7% and 16% decline in iPod revenue means a declining Apple business.
No...it means Apple cut prices. It means Apple is selling more stuff (about 750,000 more iPods), but is making less money because prices are lower overall. During the last quarter, Apple cut prices on PowerBooks, iPod Photos, and iPod minis. During the quarter, Apple released two new low-end, fairly inexpensive products: Mac mini and iPod Shuffle.
Average price of a Mac end of Q1: $1764
Average price of a Mac end of Q2: $1610
Average iPod price, Q1: $409
Average iPod price, Q2: $256
And on top of that, Apple beat their revenue guidance by about $300 million.
You're amusing, you know that. Your lack of common sense never ceases to amaze me.
Thu Apr 14, 2005 8:57 pm Subject: Just a reminder …
… Apple has always had a history--except for last quarter--of a market price decline after good results.
What really amazes me is the sheer number of trades: 100M shares changed hands today … and for every seller there is a buyer … the big question here is to determine which is the smart one !
Fri Apr 15, 2005 5:26 am Subject: Re: And PS to RC
QuoteTiger wrote:
Did you note, that even after all the profit sharing and the stock has dropped for Apple, it is STILL $1.50 per share higher than Dell's?
DOH!
The absolute price of a stock means very little--almost nothing, in fact. A company with 1000 shares at $100 wouldn't be "better" than a company with 1,000,000 shares at $90. What is important are things like price-to-earnings ratio and the trends in the stocks over moderat to long periods (minimum of 3 months). Don't try to make sense of day-to-day changes. There are a lot of reporters who try to guess why some stock went up or down. Guess is the right word, though: they have very little, if any, way of really knowing what went on in the minds of traders. Almost no one keeps track of what analysts recommend and how their recommendations would have faired.
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