by , 2:20 PM EDT, September 14th, 2005

Needham & Company's Charles Wolfe, who continues to rate Apple's stock "Buy," raised his 12-month target price from US$52 to $57, citing a more profitable iPod financial model thanks to the iPod nano, more profitable software revenue than previously thought and a larger free cash position. Piper Jaffray's Gene Munster surveyed 20 Apple stores and found strong demand for the iPod nano, including zero availability of the black 4GB version. Both analysts on Tuesday issued Apple research reports obtained by The Mac Observer.

While Mr. Wolfe saw a nominal increase in Apple's share of the MP3 player market as a result of the iPod nano's introduction, he believed that its release "signaled that Apple should be able to maintain materially higher average selling prices on the iPod than we previously assumed." The analyst also created a new category, which he calls high-capacity flash MP3 players, that he expects will take share from both the hard drive-based players and the low-capacity flash players.

His expectation is that the nano will "far outsell" both the full-size iPod and the iPod shuffle, and as a result, he has increased his iPod sales forecast by 4%. He currently sees the full-size iPod selling 11.72 million units this year and 15.55 million units next year, with production topping out at 17.29 million in 2008 and declining to 12.68 million in 2014.

As for the nano and the shuffle, he sees sales of 5.17 million and 8.62 million units, respectively, this year and 18.01 million and 12.55 million in 2006. He forecasts iPod nano sales to steadily increase to 60 million sold in 2014, while the iPod shuffle should experience a less-steep upward trend to 25.65 million sold the same year. Mr. Wolfe expects Apple to sell 25.51 million iPods in 2005, with that number leaping to 46.11 million next year and steadily climbing to 98.33 million in 2014.

Over the short term, Mr. Wolfe sees Apple maintaining the same price points for the full-size iPod and iPod nano, albeit with increased capacity over time, while the iPod shuffle will "experience significant price erosion." This stability in iPod pricing led Mr. Wolfe to increase iPod revenues by 17% over the next ten years, with the value of the iPod family moving from $15.48 per share to $17.11.

Stronger Software Revenues

The enhanced financial position of the iPod line-up also led Mr. Wolfe to revise his expectations for Apple's software revenue. He continues to assume an 11% switching rate among Windows-using iPod owners, with a 90% retention rate after that. His Mac revenues forecast thus increased by 4% as a result, although Mr. Wolfe was careful to note that his numbers don't include computer owners who switch because the what he calls "the malware epidemic" in the windows world. He wrote: "We've excluded malware switchers from our forecast because we could discover no way to rationally model it."

For 2005, Mr. Wolfe expects revenues from Windows switchers buying Macs to reach $388 million, climbing to $858 million next year. He has also increased Apple's overall software sales to $952 million this year, with $87 million of that contributed by switchers. While he sees sales to long-time Mac users remaining steady, he expects software revenues contributed by Windows switchers to hit $229 million in 2006, climbing to $1.901 billion in 2014.

Finally, Mr. Wolfe noted that Apple has added over $1 billion to its cash reserves over the past two quarters. That led him to revise his estimate of Apple's free cash generation over the next ten years to $7.385 billion, a 14% increase over his previous number.

iPod nano Off to a Fast Start

Piper Jaffray's Gene Munster, who maintained his "Outperform" rating on Apple's stock, with a $60 price target, on Tuesday surveyed 20 Apple retail stores to check on iPod nano availability. None of them had black 4GB models in stock and all of them responded to inquiries with such comments as "They are very popular and went really fast." Mr. Munster noted that Apple's online store currently quotes a one-to-three-day ship time.

While the iPod mini was tough to find last holiday season, Mr. Munster expects that Apple has learned from past mistakes and will meet the demand this year. He wrote: "This is based on comments from Apple in which they said their manufacturing partner has dedicated a facility solely to nano production. Thus, going forward, we believe that if the lead time of the iPod nano increases, Apple would likely be selling more iPod nanos than their initial aggressive expectations."

As a result of the iPod nano's success, Apple held all 10 spots in Amazon.com's list of top-selling MP3 players, as well as 16 of the spots in the Top 20 list. Mr. Munster uses Amazon's charts as a barometer for overall sales, although he noted that the computer sales lists can be volatile: Apple had five and nine spots in the Top 10 and Top 20, respectively, on Sept. 12, but three days earlier, the company occupied seven and 12 positions on those lists.

On Amazon's Top 10 and Top 20 lists of all electronics sold, Apple has four products in the former and seven in the latter, all iPods. "We believe this further supports Apple's stronghold of the MP3 players market," he wrote.

iPod nano Release Fuels Apple Site Traffic Spike

To further gauge the public's general interest level in Apple, Mr. Munster turned to Alexa.com, which tracks Web site traffic. "Apple's 'traffic rank' has recently spiked to all-time highs, having a ranking of 39 on Sept. 12 vs. a ranking of 64 on June 30," he explained in his research note.

As expected, the publicity surrounding the launch of the iPod nano, "and to a lesser extent, the unveiling of Motorola's ROKR phone," has fueled the spike in interest observed in the Web traffic data. Apple's reach, which Alexa.com defines as the number of visitors per million, was 12,900, which translated into 1.29% of all Web browsers visiting Apple's site.

As of 2:18 PM EST on Wednesday, Apple shares were selling for $50.48, a 0.67% decrease for the day.