Analysts Agree: Apple's 'Halo Effect' Might Be the Real Deal

Following Wednesdayis 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 ihalo effecti has increased."

The ihalo effecti has been synonymous with Apple for over a year now. In basic terms its definition is customers who buy an iPod, become hooked on Appleis 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 Appleis number one position as portable music player leader are enough proof to confirm the existence of the ihalo effecti.

"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 companyis 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 icoattails effecti in Macs."

Moving forward

Most analysts who have reacted to Wednesdayis strong earnings results are bullish on Appleis short term outlook, although somewhat cautious in agreeing with Apple executives that growth in the companyis iPod business canit stay at the levels they have been at for the last two quarters.

"Appleis 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 Appleis 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 iTigeri and the expected refreshes of PowerMac, iMac and eMac lines."

Bear Sterns and Piper Jaffray set an iOutperformi rating on Apple stock, with a price target of $52.00.

Merrill Lynch has set a price target of $51.00 with a iBuy" 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.

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