American Technology Research analyst Shaw Wu has initiated coverage of Apple Computer (AAPL) with a ‘buy’ recommendation, and a 12-month target of US$78 per share. The firm cited Apple’s growing iPod success and the oft-mentioned iPod ‘Halo Effect’ that could boost Mac sales as reasons for optimism.
“We believe (Apple) is well-positioned to capitalize on the large digital music opportunity with arguably the industry’s most complete and integrated stack of hardware, software, and service,” reads the report.
iPod
As with all of the recent bullish recommendations from Wall Street analysts in recent months, ATR focuses much of its attention on the iPod. The report that accompanied the recommendation advises clients that “the key fundamental thesis long-term investors need to address is whether the iPod + iTunes is positioned to be as successful in the digital music space as the Sony Walkman was, even with a similar flood of competitors entering the space.”
The firm believes that Apple could eventually ship as many as 85 million iPods, a 14-fold increase over the 6 million units shipped to date. That number is arrived at as 25% of the 340 million CD and cassette Walkman devices that Sony has shipped since 1979.
From the report: “We believe this 25% assumption could prove conservative as demographics have changed — the world population is over 6 billion today from under 4 billion back in 1979 — and there are more industrialized nations today such as China.”
Apple as innovator
ATR also cites Apple’s long history as an innovator in the computing industry as evidence of the company’s vision going forward.
The report lists some examples of that innovation as: “the first mainstream use of a computer mouse, computer HDD, pictures and icons ‘look and feel’ graphical user interface (GUI), LCD flat panels, mainstream laser printer, FireWire (1394), WiFi (AirPort technology: co-developed with Lucent/Agere), iPod HDD based music player, first successful on-line music download service, and believe it or not � the first platform for Microsoft Word and Excel office productivity software.”
The BMW analogy
A favorite analogy of Mac users is to compare the Mac platform in terms of quality to BMW cars. Mr. Wu makes a similar analogy, but in terms of branding instead of computing quality. According to the report, Apple’s branding power is similar to that of BMW, Sony, and Polo Ralph Lauren, three of the most powerful brand names in the world.
Mr. We feels that Apple’s brand names — including iPod, iTunes, iMac, iBook, and Power Mac — all serve as a barrier to entry for potential competitors, and that this is an advantage that “many competitors do not enjoy.”
iPod Halo Effect
Many people have claimed an iPod Halo Effect whereby some of Apple’s many new iPod customers Switch to the Mac because of their exposure to Apple’s quality and experience. So far, however, there has been little evidence of this in Macintosh sales number, but Mr. Wu believes that all that traffic to Apple’s many retail stores could well have its benefits.
“We believe that Apple’s success in the digital music space represents a good opportunity for Apple to re-accelerate its core hardware business including iMac G5, PowerMac G5, iBook, and PowerBook G4,” the report said. “We believe non-Macintosh users are enjoying the benefits of the unique and easy-to-use Macintosh interface through Windows and iPod versions of iTunes and QuickTime. Moreover, we believe iPod is driving increased traffic to Apple Retail Stores. We believe this combination could lure more users to the Macintosh platform.”
Addressing the critics
As part of the firm’s due diligence, the report addresses what many of Apple’s current critics point out.
For instance, many have said that the vast army of competitors using Microsoft’s proprietary music format will eventually eclipse the iPod. Mr. Wu believes that while the iPod’s lead will eventually be chipped away by those competitors, that the company can still maintain its over all lead. Furthermore, the report said that Apple has room for growth in international markets.
Similarly, the firm does not see any real threat to the dominance of the iTunes Music Store from Microsoft’s Janus subscription service or the other music download services.
“Should the Janus subscription model come to pass,” reads the report, “we believe that Apple would be able to counter by either introducing an iTunes portable subscription service (something we believe Apple could implement within a year if it decided to go that route) or making the iPod compatible with music services other than iTunes.”
Other factors in the report:
- Potential new revenue streams from increasing sales of Xserve, Xserve RAID, Mac OS X server, and SAN file system software.
- Strong balance sheet, which ATR sees Apple increasing through “its strong cash generating capability.”
- Recurring revenue and replacement purchases of iPod and iTunes from a growing iPod user base.
You can find more information on ATR at the firm’s Web site.