TMO Reports - Goldman Sachs Says AAPL Should 'Remain in Neutral,' But 'Business is Healthy'

by , 4:10 PM EDT, May 27th, 2005

Goldman Sachs on Friday advised its investors that Apple's stock "should remain in neutral," but the company's "business is very healthy." In the report, a copy of which was obtained by The Mac Observer, analysts David C. Bailey, Laura Conigliaro and Min Park write: "We had an update with AAPL management and, while there was no breaking financial news, our meeting reaffirmed a number of our own checks and conclusions."

Specifically, the three see Mac OS X v10.4 "Tiger" as "a meaningful incremental contributor" in the current quarter and note that there are "numerous second half opportunities on both the iPod and iMac sides." Their model for the current quarter sees a gross margin decline driven by "a higher mix of K-12 education sales, a full quarter of iPod price reductions and recent iMac price cuts." Tiger, which shipped earlier than the analysts originally expected, will offset that decline, leading to an extra US$0.03 earnings when Apple reports its financial results in July.

On the iPod front, Mr. Bailey, Ms. Conigliaro and Ms. Park think that Apple's current strategy "leaves room for newer models in addition to further penetration of current markets. Our sense is that Apple still has plenty of running room to innovate its way into newer adjacent iPod markets and further penetration of existing ones despite its current 65% market share of hard drive-based mp3 market and 43% share of flash-based players. The most immediate of these is probably the Motorola phone with iTunes and further integration of iPods into car stereos."

Regarding a possible video iPod, which Apple has said it's not interested in producing, Goldman's analysts note: "Some of our own checks at the supply chain level suggest more interest."

Like other analysts, the trio believes that with "Mac share still coming up from depressed levels and comparisons easy through September, Apple should continue to gain share." They note that the company has now reached 2.3% of the overall market. Each additional 1% of market share is worth approximately $2 billion annually, they estimate.

Finally, Mr. Bailey, Ms. Conigliaro and Ms. Park agree with the company that it should stay with its current ownership strategy in its online iTunes Music Store, "although Apple wouldn't dismiss subscriptions if the market moved that way." They point to iTunes' 70% share of that market as proof "that consumers still want to buy, not rent, music. Apple seems convinced that Yahoo's current subscription pricing is artificially low and will move higher over time."

In light trading ahead of the Memorial Day weekend, Apple's stock ended Friday down .27% to $40.63. The company's shares dipped in recent weeks as Yahoo's entry in the online music business worried investors that Apple's iPod/iTunes dominance would end, but it jumped this week when news broke of a potential partnership between Apple and Intel. Some believe that the Mac OS running on Intel chips would result in cheaper Apple computers, but there could be other reasons for such a working relationship. The Mac Observer is working on an article that covers one such possibility.

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