Take a Bite Out of the New Apple

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.

Comments

[Dan Poarch]

This analysis is pretty mature. Really, I couldn't have said it better myself. I think their target is a little high but only because I would expect the price to deflate the moment there's some sort of bad news about Apple. I'm convinced, still, that the Street can comprehend a company that innovates. There's too many college graduates involved in the everyday machinations of the market for there to be a good understanding of true entrepreneurialism.

Concerning Steve's departure: I would actually anticipate it. Remember that his salary is based on the stock. Thus, it would be foolish for him to allow the company's performance to be based solely on his health or, shall we say, "legal status." He was very sick a couple years ago and made plans for his departure citing health reasons. Thus, a plan has already been in the works for Life Without Steve. If he caught everyone off guard by stepping aside and returning as a consultant it would serve everyone's agenda.

[Tom B]

Eric Schmidt, a very un-clueless (clue-ful?) dude, and a member of the BOD, would be a fairly good replacement, IMHO. I also would NOT rule out a merger.....

[Tom B]

The iPod is a great story and a great device, but for me, Apple is about the Mac. The exposure the iPod generates is wonderful because there several things the broader market has failed to fully comprehend:

1) the Intel switches really DOES mean you can have "two computers" for essentially the price of one. There is NO need now to avoid the Mac because there's one game you can't get on the Mac, or one key Windows-only accounting program the boss makes you use. Moreover, games are increasingly less critical, because one can easily get a game "fix" on a console-- a PS3 or a wii or an XBox COROLLARY: the perceived Mac/PC price gap is likely to further erode due to Vista's system requirements.

2) Security really IS much better on the Mac.

3) TCO really IS MUCH lower on the Mac. A recent study showed that 12 hr/month were spent by home users fixing PC problems. Macs are far from perfect, but I'd be surprised in the average Mac user spends more that 1 hr/month on maintenance. I spend about that, and its mostly routine back-up. When you do need service, I have found the Apple store "genuises" to to be helpful an courteous-- and not in some call center 6000 miles away in India.

Dangers:

1) the stock probe could lead to prosecution of Jobs (EXTREMELY unlikely, based on everything I've read so far. Other scenario: Jobs could have health problems.
2) Vista could pick up major steam. Could happen. Inertia is a powerful force; people stick to what they know.
3) The iPhone could flop through competition (unlikely); or product deficiencies (fairly unlikely; hands-on reviewers have liked the Macworld prototype); or because people aren't willing to switch carriers (likely-- just don't know how big the issue is going to be yet). In any event, Apple doesn't NEED the iPhone, really.
4) 10.5 could flop. Unlikely-- Apple's releases have been pretty "solid" in recent years.
5) the EU, or at least Norway, could ban the iTunes music store. Somewhat likely, but they would totally piss off a lot of music lovers in the EU if they went through with that. Moreover, Apple makes more on the hardware than on the songs, anyway. And, presumably, competitors (Plays-for-sure) would be equally savaged by run-amok EU prosecuters.