Goldman Sachs analysts David Bailey and Laura Conigliaro initiated coverage Tuesday on Apple Computer (AAPL) stock with an "in-line/neutral" ranking, targeting fiscal 2005 earnings of US$1.51 per share and fiscal 2006 earnings of $1.85.
Mr. Bailey and Ms. Conigliaro wrote to clients that they see the Apple iPod and other music-related offerings "contributing over 80% of Appleis top-line growth in fiscal 2005 and 90% in fiscal 2006." The Goldman analyst also said that for the first time in three years, the installed base of Macintosh PCs should start to grow with unit shipments rising 10% in calendar 2004.
In the report obtained by The Mac Observer, the analysts wrote, "In calendar 2005, stronger sales of Appleis recently refreshed iMac and Power Mac desktops, (will) pull from the popularity of (the) iPod, and the continued shift to notebooks should fuel unit growth of 10% compared to our industry growth estimate of 9%."
The firm also said Appleis retail and online sales strategy is working: "Apple has taken a decidedly different distribution approach than any other tech company while at the same time developing a direct relationship with its customers that is second only to Dell."
Goldman Sachs sees 3 key drivers to Appleis future growth:
- iPod and music-related offerings. These should contribute 71% and 59% to Appleis overall revenue growth respectively in fiscal 2005 and 2006.
- Software, services, and peripherals. Fueled by the re-emergence of Mac unit growth as well as higher attach rates driven by increasing direct sales, these areas should contribute 11% of total revenue growth in FY05, increasing to 31% in FY06.
- The next big thing. Virtually inevitable will be new products from Apple, probably increasing its leadership position at the intersection of technology and entertainment. This is not yet in our model.
Other areas targeted by the firm include Appleis distribution model. Appleis direct sales will become an increasing part of the companyis revenue, according to the analysts, and this affords the company a relationship with its customers that is "second only to Dell."
The report also compares Appleis ability to execute to Dell, calling Apple "an execution machine rivaling industry-leader Dell and improving Appleis balance sheet and cash flow. Over the past few years, Apple has strengthened virtually every aspect of its operations, driving improvements in its cash conversion cycle and cash flow."
Despite all of the high marks given to Apple, the report also cautioned investors against chasing more gains on the stock, in part because Appleis Price to Earnings ration (P/E of 90.07) is higher than the firm would like to see.
"AAPLis strong outperformance YTD has pushed its valuation well above our other companies and to the high end of its historical ranges (except for P/E), leaving little room for appreciation based on multiple expansion alone," reads the report. "Given the hyperactive state of the stock, we would not look to be chasing the stock with new money at this point, favoring entry points when the companyis and the stockis 2005 outlook can be assessed more rationally after mid-January."
Appleis stock is trading down in midday trading at 63.84, down 1.94 (-2.95%), on strong volume.