Needham Ups Apple to $104; mini Could be Silver Lining

Citing strong iPod sales and anticipation of Windows users switching to the Mac mini, Needham & Co. analyst Charlie Wolf raised his target price on Apple Computer (AAPL) Thursday to US$104 a share.

"The major driver of the increase in our price target is an explosive growth in music sales," Mr. Wolf told clients in a commentary obtained by The Mac Observer." Apple generated $177 million in sales of songs at the iTunes Music store and iPod accessories in the first quarter, up four-fold over a year ago. Sales at the iTunes Music Store are now at a $450 million annual rate and growing rapidly. In addition, there are over 400 accessories designed for the iPod, which are selling like crazy."

Mr. Wolf raised his target price on Apple to $104 from $83, giving some clear hints that his new price goal is a conservative estimate. Needham also raised its earnings estimates on Apple from $1.85 to $2.05 in fiscal 2005 and from $2.25 to $2.50 in 2006.

Mr. Wolf is forecasting that the classic and mini iPods will maintain a 65% share of the hard drive portable music player market, up from 60% previously. "We?ve also raised our forecast of the Shuffle share of the flash player market to 50% from 40% previously," he wrote. "Together these changes increase our target price by $4."

Mr. Wolfis new forecast for iPod sales comes one day after Apple announced new models of the iPod color and second-generation iPod mini.

iPod owners currently spend around $17 per quarter on music, Mr. Wold said?As a result, music revenues will increase dramatically because of the anticipated explosive growth in the sale of iPods going forward, he predicted.

The old Mac mini "one-two punch"

As for the Macintosh, Mr. Wolf believes Apple now has "a one-two punch" to grow revenues.

"The Mac mini should attract Windows users to the Mac platform," he wrote. "And Apple?s superior software should keep them there."

Mr. Wolf is predicting that 11% of Windows users owning iPods will buy a Mac, but he remains cautious on the magnitude of the so-called ihalo effecti, where owners of Windows-based PCs reportedly switch to the Mac platform after buying an iPod product.

"Anecdotal evidence suggests that the Mac mini is selling at a far faster pace than our model assumes," Mr. Wolf cautioned. "It?s possible, then, that the actual switch rate by Windows users could end up far higher than we?ve forecast. In that event, our new price target could prove to be dramatically low."