Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients regarding the implications of Apple's (AAPL) newest products on the Company and its shareholders. Key excerpts:
Positive Change at the Margin. The pending launch of Apple TV in February and iPhone in June has changed the Apple story for the better. Before, Apple launched "insanely great" products, but investors had no idea what, if anything, would come next and when it might happen, resulting in a "hit-driven" story that often pulled back as investors pondered timing and parameters of the next move.
Think Differently About Apple. In contrast, we now have some more visibility about where Apple is going with four "spheres" -- PCs, music, phones soon, and video next year (we think). And each of these spheres has four vectors of expansion -- platforms, wireless, storage, software -- although these spheres overlap with consistent software and user interfaces. We discuss these spheres/vectors below.
Think Non-Linearly. Another challenge is that one must view AAPL "non-linearly," e.g., successor to iPod mini was not a smaller mini but flash-based nano; iPhone was not just an iPod with a phone inside. AAPL leverages curves in technology trends, e.g., music, video. Also, one should not apply "Old Steve" behavior to AAPL today -- think "New Steve." The philosophy seems to be "say little, but do a lot."
Primary Issue: Jobs. Steve Jobs, in our view, is the heart and soul of Apple, which is simultaneously its greatest opportunity and risk -- and not just relative to the option probe.
Maintaining ESTS. We're maintaining post-option EPS for FY07 at $3.25 and for FY08 at $4.10. We're also maintaining 2Q07 EPS of $0.65 on revs of $5.2bn, reflecting a 47% seq decline in iPod to 11.1mm and 13% seq unit drop in Mac to 1.4mm -- guidance is EPS of $0.54-$0.56 on revs of $4.8-$4.9bn.
Maintaining Target. We're maintaining our CY07 target of $130 using a P/E of 28x on CY08 oper EPS and adding net cash/sh of ~$15. In addition to its existing drivers (Macs, iPod), we see AAPL on the cusp of several major growth opportunities that can fuel '07 and beyond.