Analysts React Positively to Latest Apple Announcements

A day after Apple introduced the iPod nano, the iTunes-enabled Motorola ROKR and iTunes 5, analysts weighed in with largely positive reactions to the news. The Mac Observer obtained research reports issued by Needham & Charles Wolf, Piper Jaffrayis Gene Munster and American Technology Researchis Shaw Wu. Each offered a slightly different take on the latest developments.

Mr. Wolf wrote that "Apple raised the bar in the digital music market" on Wednesday. Noting the existence of over 1,000 iPod accessories and the expectation that 30% of the cars sold in the U.S. in 2006 will offer iPod support, he said that the company has "significantly increased the lock in to its music platform."

Also citing the fact that the nano, which comes in 2GB (US$199) and 4GB ($249) capacities, is "virtually unbreakable," he also said that it "should sell as well as, if not better than, the iPod mini, appealing to new users as well as owners of higher capacity iPods. The nano could even steal some sales from the iPod shuffle."

Referring to the introduction of the Motorola cell phone as "almost as after-though," Mr. Wolf noted that the $250 device is available through Cingular, "the largest wireless carrier in the US with 52 million subscribers." While users can only currently load it with music from their computers, he expects that they will be able to wirelessly buy selections from the iTunes Music Store "when Cingularis 3G network arrives."

Mr. Wolf reiterated his "Buy" rating on Appleis stock, with a 52-week price target of $52, and left his EPS (earnings per share) estimates for fiscal 2005 and 2006 at $1.40 and $1.65, respectively. On the upside, "todayis announcements increase the probability that our estimates will be met or possibly exceeded," he wrote, although "our estimates could be in jeopardy" if "growing iPod sales [do] not provide the boost to Macintosh sales that we are anticipating."

Gene Munster: iNano a Home Runi

Calling the latest addition to Appleis iPod lineup "a home run," Piper Jaffray analyst Gene Munster wrote: "We were surprised that Apple was able to design an iPod that is ~60% smaller than the iPod mini. We believe this will translate into strong iPod sales in the December quarter." That led him to raise his 52-week target price to $60 and maintain his "Outperform" rating on the stock.

With Wall Street analysts estimating approximately 8.5 million iPods sold through December, Mr. Munster left his own number unchanged but said: "Assuming we see volume shipments of the nano in the December quarter, current Street numbers should prove to be conservative."

The analyst also told his clients to "expect a strong replacement cycle: We estimate that 20% of iPods are sold to existing iPod owners ... For iPod owners with disposable income, we think the nano will be a must have."

In addition, Mr. Munster addressed the profitability issue Apple faces by moving from the hard drive-based iPod mini to the flash-based iPod nano. He expects that the 4GB iPod nano adds $60 to $70 in costs by moving to flash media, with an impact on gross margin that will move it from the 20% neighborhood to 10% to 15%. However, he expects the nanois profit margin to reach the iPod miniis historical level "within 1-2 quarters," and "net profitability (absolute profit dollars) should increase in the December quarter based on high volumes."

Shaw Wu: iThe Biggest Surprise Was That There Were No Major Surprisesi

In contrast, American Technology Research analyst Shaw Wu was less impressed than his peers by Appleis announcements. Regarding the Motorola phone, he writes: "We wonder longer term about the competitive threat from cell phones with storage capacities of 2GB and beyond." Mr. Wu believes that Apple charges $5 to $7 per iTunes software client on the cell phones -- with an estimate of sales in the hundreds of thousands, he expects that Appleis profit potential "is immaterial versus [its] current profit of $25 to $125 on each iPod."

Before the iTunes-enabled ROKR was finally unveiled, there was much speculation about carriers being unwilling to offer a product that they couldnit make much money on by selling music to users. Mr. Wu writes: "Most observers will see [it] as a case where Cingular gave carriers a black eye.

"The capitulation to accept a non-revenue generating product and place a subsidy on the equipment is an affirmation that the phone brand is becoming more powerful than the service brand. The brands of power appear to be Motorola and Apple -- not Cingular."

Mr. Wu also expects that the iPod nanois pricing "might give some sticker shock," considering that the 4GB and 6GB iPod mini were previously available at the same price points as the 2GB and 4GB iPod nano. "Despite the higher price," he writes, "we believe customers may be willing to sacrifice storage capacity in favor of color, photo capability, smaller size and icoolness.i"

The analyst maintains his "Hold" on Appleis stock, with a $42 52-week price target, explaining: "Our concerns with high valuation, INTC processor transition, slowing growth and high investor expectations remain. We prefer the risk-reward in the mid-to-high $30s."

A Thursday Forbes article noted that Standard & Pooris Equity Research also reiterated a "Hold" rating on Appleis stock. The firm apparently saw nothing of major significance in Wednesdayis news, simply stating: "Both announcements were logical extensions of the iPod franchise, and pricing is within our expectations."

As of 12:30 PM EST on Thursday, Appleis shares sat at $49.93, up 2.57% for the day. The stock received a large jolt on Tuesday, ahead of the introduction of the new products, before treading water on Wednesday and continuing its upward climb on Thursday.

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