Two More Analysts Respond Positively to Apple's Financials

Piper Jaffray analyst Gene Munster and American Technology Research analyst Shaw Wu on Thursday issued reports in response to Appleis better-than-expected fiscal 4Q06 financials, which were announced on Wednesday. Looking at the data, Mr. Munster observed: "The formula is working. The 68m iPods sold in the past five years (39m of those were sold in the last 12 months) are translating to the resurgence in the Mac platform with worldwide Mac market share increasing from 2.1% in March of 2006 to 2.8% today."

He added: "We believe in six months the halo effect will expand beyond a simple iPod-to-Mac correlation into a four-way relationship with iPod, Mac, iPhone, and iTV benefiting from each otheris success. If this plays out, Appleis growth rate should accelerate in 2007."

Looking at the current quarter, which marks the start of Appleis 2007 fiscal year, the analyst noted: "We view December as the irubber hits the roadi quarter for Mac, given December will not benefit from as much pent-up demand from the Intel transition." While he didnit offer a Mac sales estimate for the fiscal 1Q07 quarter, he did say that he expects Apple to sell 14.7 million iPods through the holidays, a jump over last yearis 14 million sold, despite the fourth quarter of 2006 having one less week than the fourth quarter of last year.

Mr. Wu sees Apple selling 14 million iPods and 1.8 million Macs during the December quarter. Appleis guidance calls for revenue of $6-6.2 billion, bellow the Wall Street consensus estimate of $6.44 billion but above the analystis $5.7-6.1 billion expectation. Mr. Wu increased his December quarter revenue estimate to $6.1 billion. He noted: "Our hope is that sell-side peers follow AAPLis revenue guidance more carefully and make more reasonable forward assumptions."

Looking into next year, Mr. Munster expects Apple to release an iTunes-capable cell phone "in early 2007, possibly at the Macworld event in January. We estimate that the average price of music enabled handsets currently available to U.S. mobile phone subscribers (before rebates, etc.) is $317. We believe the iPhone will need to be priced around $300 to gain significant traction. As a benchmark, we estimate that the average price of all HDD iPods sold to date is $324."

As for iTV, which Apple CEO Steve Jobs offered a sneak peek at during the introduction of new iPods last month, the analyst wrote: "This product is the first in what will be a multi-year strategy by Apple to target the living room as a new leg for the companyis growth story. We consider the living room as one of the key, untapped consumer electronics markets. We believe that Apple, with more than 50 million iTunes users, maintains the pole position to convert/upsell iTunes users into Apple living room customers (since they will purchase Apple hardware and content through Apple). While the impact to numbers wonit start until the March quarter of 2007, we consider the move into the living room to be significant given it represents Appleis third major addressable market.

"If Apple sells about 200,000 iTVs when they ship during the Mar-06 quarter at the announced price of $299, they will add about $600m to revenue. Simply put, we anticipate that the iTV will be enough to move the needle."

Mr. Wu echoed Mr. Munsteris bullish outlook on the company, adding: "We believe the biggest surprise in the quarter was that AAPL was able to report full financials despite the ongoing options investigation while most other companies with options issues have reported only limited financials. We view this as a vote of confidence that the current management team is likely not liable of wrongdoing (if any)."

He also observed: "The gross margin came in at 29.2% (vs. guidance of 28.5% and our 28.7% view) helped by favorable component pricing as well as a favorable product mix. We find the gross margin upside impressive in light of AAPLis aggressive iPod pricing ($50 reduction on vPods, double nano storage, cut shuffle to $79 from $99) further demonstrating AAPLis supply chain strength and leverage."

Mr. Wu increased his target price from $91 to $92 and kept his "Buy" rating. Mr. Munster left his $99 price target and "Outperform" rating intact. At 1:34 PM EDT on Thursday, Appleis stock was selling for $78.97, up 5.96% for the day. It had pushed close to $80 early in the day, before declining slightly.

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