UBS analyst Maynard Um bumped his 12-month price target for shares in Apple Inc. to US$510, up from $495, based on the potential of Apple’s newly announced, but as yet undefined “iCloud.” The analyst believes that iCloud will include a music streaming service that will be easier to use and more “seamless” to customers than competing services from Amazon and Google, and that it will help make Apple’s ecosystem even stickier than it already is, helping to sell more Macs, iPads, and iPhones in a broad halo effect.
The halo effect represents the lion’s share of why Mr. Um raised his price target. By offering a seamless cloud experience to users for their music and possibly video media, and by increasing the usefulness of what we currently know as MobileMe, the analyst believes that Apple’s iCloud will help drive more customers into Apple’s ecosystem, where they will buy more Macs, iPads, and iPhones.
Accordingly, the analyst bumped his fiscal 2011 Mac estimates to 15.6 million units, up from 15.3 million, and his fiscal 2012 Mac shipment estimates to 17.6 million units, up from 16.6 million. In addition, he raised fiscal 2012 iPad estimates to 40.2 million units, up from 37.9 million, and fiscal iPhone shipments to 92.8 million units, up from 89.4 million. The new estimates combine for increased earnings estimates of $25.11 per share in fiscal 2011, up from $24.81, and $28.91 per share in fiscal 2012, up from $25.82.
“In our view,” he wrote, “consistency of features, user interface and functionality across the Mac and mobile OS will likely accelerate the ‘halo effect’ driving more Mac sales.”
He added, “We believe the majority of value created from such a service would be in the continued improvement of the Apple ecosystem value proposition rather than driving material profits by itself. Apple has consistently stated that it does not make large profits from selling content on its iTunes platform and generally runs the business at or just above break even. Apple wants to sell hardware at high margins, and the company has been successful at doing so over the last decade in part because of the high value proposition it offers consumers with services like iTunes. Significant enhancements to that ecosystem spur the sale of more hardware to consumers.”
To illustrate his point, Mr. Um developed a chart mapping out the halo effect that iPod and iPhone had on Mac sales.
The Apple Halo Effect – iPod, iPhone, & Mac
Click the chart to see a much larger and more readable version
Source: UBS
He further quantified said halo effect, comparing Apple’s actual Mac sales from 2005 to 2010 (52.7 million units) to the rate of industry growth. If Apple has been in line with the broader PC industry, the company would have sold only 39.3 million Macs during the same period. “The difference of roughly 14.5 million units, in our view, could be attributable to the ‘halo effect,’” Mr. Um wrote.
Other tidbits from the research note include the suggestion that Apple offer application hosting to its developers as a way of further developing its ecosystem. He believes that Apple could have such a plan in mind for the massive data center the company is building in North Carolina.
Mr. Um maintained his “Buy” rating on AAPL.
Shares in the stock have been all over the map Wednesday, though staying mostly in positive territory. As of this writing, AAPL was trading at $348.51, up $0.68 (+0.20%), on strong volume.
*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.