Merrill Lynch analyst Steve Milunovich on Thursday issued a research note in response to the threat posed by Yahoo!’s introduction of a subscription-based music download service, saying that the company really worries Real and Napster, not Apple.
Similar to recent statements made by Banc of America Securities, Piper Jaffray’s Gene Munster and two JP Morgan analysts, Mr. Milunovich’s comments, a copy of which was obtained by The Mac Observer, spin the development in a positive way, announcing: “We believe the weakness in Apple’s stock is a buying opportunity.”
He notes a column by The Wall Street Journal‘s Walter Mossberg that proclaims Yahoo!’s offering “the new champ among subscription services,” as well as Bill Gate’s statement that the iPod’s success is “unsustainable,” but dismisses them by reiterating his “long-term bullish view” on Apple.
Why? Simply put, Mr. Milunovich thinks Apple “could flick the switch on a subscription model” if it wants, which means that, for now, this latest news is really a three-way battle between Yahoo!, Real and Napster, all of which tout subscription services that aren’t compatible with the iPod. He cites a 15% share of the legal download market for subscription services, with the iTunes Music Store capturing over 70% and “the number of songs being downloaded from the Apple site … accelerating.” Apple, he says, could counter with its own subscription service “if there is evidence of share loss,” but he notes several issues with Yahoo!’s offering, including “the use of ads, user interest in music players employing the Microsoft WMA format and the low pricing phasing out.” The introductory pricing of Yahoo!’s service is US$59.88 per year, or $6.99 per month, less than half the amount charged by its rivals.
Apple is also “working to protect iPod profits,” Mr. Milunovich writes, and “isn’t standing still.” He speculates “that an iPod running video clips could be out for Christmas” and thinks that “the Apple story is about more than iPods. Although we think the iPod franchise is safe for at least the next year, the driver of the stock increasingly will be Mac sales. Management sees more evidence of the halo effect. We model a conservative 15-20%sustainable growth rate for Mac revenue.”
Mr. Milunovich concludes be reiterating his Buy rating on the stock, with an objective of S$51 per share, given that he thinks “investors will be attracted to Apple. Valuation is attractive, in our view, with the stock at 24X our new F2006 estimate.” He sees Apple recording a $1.30 per share profit during the 2005 fiscal year and $1.55 per share the following year.