TMO Reports - AmTech Upgrades Apple Stock to 'Buy,' Ups Target Price to $63
by , 12:35 PM EDT, October 17th, 2005
American Technology Research's Shaw Wu, who has had a "Hold" rating on Apple's stock for several months, on Monday upgraded that to "Buy." Mr. Wu cited lessened "concerns with high investor expectations, competition, the INTC transition and even valuation" as the reasons for the move. He also increased his target price to US$63. The Mac Observer was able to obtain a copy of his research report.
"We believe expectations on AAPL have been reset," Mr. Wu wrote, "particularly on the iPod side with unit forecasts now at more realistic levels." He expects Apple to ship 9.4 million iPods this quarter and notes that Wall Street's numbers are in the 10-12 million range.
"If anything," he added, "we are more confident in AAPL's ability to meet or exceed [my] forecast with the introduction of the iPod video. While iPod video has only shipped for less than a week, our checks indicate lead-times stretching caused by high customer interest and strong initial sales." Mr. Wu expects the new iPod, as well as the iPod nano, to give Apple two hit products this holiday season.
The analyst also pointed to adult content, "an alternate use for iPod video that may have been overlooked. We believe this could be a surprising driver."
"From a bigger picture perspective," Mr. Wu said, "we are impressed with AAPL's ability to out-innovate and create new market opportunities. In our view, this is the first time in a long time where leadership in consumer electronics is being driven by an American company." He believes the company could even bring its abilities to new product areas, such as cell phones, flat panel TVs and home entertainment servers.
Perspective on Risks
Mr. Wu also detailed his reactions to the greatest risks currently facing Apple, starting with the fierce competition faced by the iPod and iTunes. While many companies are fighting to chip away at the dominant market share held by both, the analyst notes that Apple "continues to gain share and dominates with about 45-65% share globally (depending on who you ask - we think closer to 50% with room for share gains) and 75% in North America."
With an install base of 28 million iPods, which Mr. Wu estimates could reach more than 37 million by the end of this year, and 100 million iTunes users, "Apple remains the only player that designs its own hardware, software and service," he wrote. He explained that no other company does all three as well as Apple, and the company "continues to out-innovate the competition with industrial design, engineering, and functionality as seen with the most recent iPod nano and iPod video."
Mr. Wu sees Sony as Apple's biggest threat; the company's Sony Connect service will be upgraded in the first quarter of next year. However, "it remains to be to be seen if this new upgrade will be easy to use and as tightly integrated and elegant as AAPL's iPod + iTunes solution. In addition, Sony still has to prove that it can sell beyond low-end 256 MB to 1 GB flash players, whereas AAPL has proven successful in selling all segments (low-end, mid-range and high-end) of the MP3 market."
The analyst expects Apple to move into the cell phone space eventually. "We believe AAPL will likely design its own hardware and software and partner with a third-party carrier for an MVNO (Mobile Virtual Network Operator) service," Mr. Wu explained. "We believe Sprint is the most likely partner much like Boost Mobile has done. We believe AAPL will differentiate itself as the only vendor with an integrated approach - owning the hardware, software, and service - much like in music with iPod + iTunes."
While the Mac doesn't enjoy the iPod's dominant market position, Mr. Wu noted that risks associated with the switch to Intel processors are "nowhere where as big of an issue as we originally thought. Despite the well-known and well-publicized transition to INTC processors from PowerPC, Mac sales continue to be very strong and in the last quarter, actually accelerated." He acknowledged that "no transition is ever smooth," but expects this one to be easier than past moves "due to careful planning by Apple."
Finally, Mr. Wu addressed concerns over the price of Apple's shares as well as the looming specter of higher energy prices. Regarding the former, he wrote: "While AAPL shares may appear expensive versus traditional PC comparables like DELL and HPQ on an absolute basis, we believe Apple is not expensive when taking into account its faster 1-3 year growth rate of 25-30% versus 15-20% at Dell, the benchmark large-cap hardware player."
He added: "Moreover, we believe it is difficult to value a high-growth company with the potential to dominate like Sony did with the Walkman and Microsoft with Windows. In our view, the best comparables may be Juniper, Marvell, Google, and Yahoo!, companies with unique tough-to-defend leading market positions and high valuations."
As for the impact of energy prices on consumer spending, which some fear could take a bite out of iPod sales, Mr. Wu said: "We would argue that the risk of weak consumer spending has been a threat each holiday season, particularly after the bubble burst in 2000, but for at least the past few years, this fear has proven mostly unfounded as the economy has consumed more seasonally in Q4 than any other time of the year."
He added that iPod pricing makes one of the MP3 players "a relatively small purchase at $99-$299." (Actually, the high end for iPods is $399.)
At 12:35 PM EST, Apple shares were selling for $52.94, down $1.06, or 1.96%, for the day.