Click to enlargeApple Inc. (NASDAQ:AAPL) has sent out invitations to the media and analysts to its technology event scheduled to be held in San Francisco tomorrow, September 1st. The company has traditionally used this platform to unveil new products and revamp or refresh its existing products -- particularly the iPod and iTunes lines -- for the holiday season.
Although the company has remained silent regarding the products to be announced, it is widely believed that Apple will use the event to announce major upgrades to its products, which is making the stock price volatile. Following the event, Apple’s shares could move in either direction.
We believe the event will be considerably important as Apple’s new product launches will be a thing to watch out for. The products speculated to be available are summarized below:
Refreshed iPod Line?
New products and services could include an updated or refreshed iPod Touch multimedia device with digital front- and rear-facing cameras and a higher-resolution screen. The refreshed iPod Touch could also include certain iPhone 4 technologies, such as FaceTime video chats over Wi-Fi networks, and may also come with a 3G data connection and prepaid Internet access for video recording capability, according to analysts. Apple could also add new features to its iPod Nano.
Apple’s iPod line (iPod Touch, Classic, Shuffle and Nano) consists of portable digital music players. Although the iPod constitutes a very small portion of its revenues, Apple’s resurgence has been driven by the tremendous success of its iPod portable music and video players and iTunes online store.
Apple's share of MP3 players in the US was over 70% in June 2010 and it continues to gain share in most international markets, including the UK, France, Germany, Italy, Japan, Canada and Australia.
Apple’s iPod remains popular and the company plans to compete fiercely with Cisco Systems’ (NASDAQ:CSCO) Flip Mino, and Microsoft Corp.'s (NASDAQ:MSFT) new Zune HD player through its refreshed and new and cost effective iPod line. The continued mix shift toward iPod Touch is expected to result in an overall iPod ASP increase in 2010 and beyond.
Updated Apple TV?
At the event, Apple could also unveil a new redesigned Apple TV set top box (called iTV by some analysts), priced at $99 (original price $299) and built around its new iOS and the app store. The addition of the iTunes App Store is expected to expand its market share.
Apple TV growth has been sluggish so far, mainly on account of the increasing competition from cable and satellite providers, which began offering DVR services with digital cable in one set-top box for free or at monthly subscription rates that were heavily subsidized and at no upfront costs.
Apple could launch an all-in-one portable model (TV, set top box and connectivity) with a free subscription, offering several TV shows and other programs. According to analysts, the long-term potential of this product is very strong, given that with connected TVs gaining traction software will be a key driver of sales. Moreover, Apple will be able to compete against Google (NASDAQ:GOOG), which is pushing Google TV and its own operating system for getting web content into televisions.
New iTunes Service?
Apple could also unveil updated models of the digital music and media players, including a cloud-based iTunes service. The new cloud-based service for iTunes could also utilize the new data center that Apple has been constructing in North Carolina (but not until the end of 2010). This will help users get access to music, podcasts and videos via a web connection on the go.
Apple’s iTunes store delivered a strong third quarter of 2010, with sales of $1 billion growing 25% year over year, attributable to robust sales of music, video and apps. Apple’s app store continues to be an unparalleled success with more than 225,000 apps (including more than 11,000 apps for iPad) and well over 5 billion downloads to date by iPhone, iPod Touch and iPad users in 90 countries.
Estimates Slowing Down
Despite the impressive first nine months of 2010, which had beaten the analysts’ expectations by a wide margin, Wall Street expects Apple's revenues and earnings growth to slow down over the next few quarters.
Wall Street analysts anticipate revenue growth of 37%, 30% and 16% for the first three quarters of 2011, while earnings per share growth is expected to fall 33%, 16% and 14%, respectively, over the same period.
The current Zacks Consensus Estimate for the fourth quarter of 2010 is $3.96 per share, which is down 1 cent over the last 30 days.
Apple is a leading innovator in the personal computer and consumer electronics market, as well as a leader in the emerging market for the distribution of digital content. Apple’s products carry strong brand equity among consumers, giving it a dominant position in the electronics market.
Apple’s success is driven by its iPhones and increased Mac shipments, and in our opinion, the new iPhone 4 will be another milestone achievement for the company, helping it continue on the growth path. With the release of iPhone to Verizon (NYSE:VZ), probably in 2011, the growth in iPhones will attain new heights.
Moreover, we are highly positive about the company’s iPad launch, which is expected to revolutionize mobile computing and provide a boost to the company’s revenues and earnings.
Although the iPad has created a tremendous buzz on Wall Street for quite sometime, with several new entrants flocking into the market, the competition for iPad is heating up.
Apple’s competitors such as Dell Inc. (NASDAQ:DELL) (Streak tablet), Samsung’s (OTC:SSNLF) (Galaxy Tab), Toshiba’s (OTCPK:TOSBF) (SmartPad tablet), and Lenovo (OTCPK:LNVGY) are rolling out Android and Windows 7-based tablet devices. Hewlett-Packard Company (NYSE:HPQ) introduced a tablet called the “Slate” (launched in January) and Panasonic Corp. (PC) (Toughbook) may also increase competition for Apple’s iPad. Apple also faces tough competition in the smartphone market.
Despite the refreshed line of its iPod and iTunes expected during the September event, we remain cautious regarding the European crisis and near-term supply chain constraints for its iPhone and iPad.
Further, iPod unit shipments could be hurt due to the cannibalization from iPad. Moreover, Apple’s iTunes store could also be up against some stiff competition from Google, which is expected to launch an online music service called Google Music this year.
Given the fair valuation, Apple currently has a Zacks #3 Rank, implying a short-term Hold rating.
Disclosure: No positions