Merrill Lynch Reiterates "Buy" on AAPL; Sees Mac Market Share Growth in 2005

December 22nd, 2004 at 2:00 PM - Apple Stock Watch by Bryan Chaffin

Steven Milunovich of Merrill Lynch reiterated his "Buy" rating on Appleis stock Thursday, as well as his US$78 per share 12 month target price. In a research note to his clients obtained by The Mac Observer, Mr. Milunovich offered a variety of anecdotal notes that indicate that Appleis current quarter continues to go well, and said he expected Apple to gain market Mac market share in 2005.

iPod

Merrill Lynch modeled 4 million iPods sold when forecasting results for the December quarter, but the report said "an optimistic scenario would be 4.5-5.0 million." This is based both on limitations of the number hard drives produced during the quarter, 4.2 million, as well as another 1.4 million drives that were already in inventory.

Mr. Milunovich wrote that Appleis brick and mortar retail stories still have iPods available, though other retailers, such as Amazon, are back ordered. Several stories citing iPod shortages have been published throughout the US in the final days of holiday shopping.

Overseas, he said that Apple could "exit the quarter with some backlog." For instance, he wrote, "at the new store in London there was a line of 110 people waiting to pay last Saturday. The Sony store nearby was relatively empty."

He also noted that the iPod is the hottest seller at Japanese consumer electronics chain BIC CAMERA, which he called the Japanese equivalent of the Best Buy chain. At the same time, "local consumer rankings for HDD Sony Walkmans are quite low."

Competition

One of the most interesting aspects of the report deals with competition and market share. According to Mr. Milunovich, Apple is in no short-term danger of losing market share to the myriad of competitors using Microsoftis Windows Media format. Far from that, he believes that Apple is actually gaining market share.

"Itis investorsi nature to think countertrend, so there is concern that competitors will erode Appleis share," Mr. Milunovich wrote in the report. "So far, however, Apple has gained share. And the company should soon be entering the flash player market, which roughly doubles the available revenue opportunity. Although competition likely will have a long-term impact, the near-term variability may be to the upside."

Macs

Mr. Milunovich expects Apple to have strong iMac sales during the current quarter. Looking forward, he expects Apple to gain market share in the computer business during 2005 based on the iPod Halo Effect, "especially where Apple competes (above $500)."

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