Two Firms Out Positive on Apple

Morgan Stanley is out positive on Apple (NASDAQ:AAPL) this AM saying they continue to believe new product announcements and margin expansion will drive AAPL shares higher in 2008. In the near-term, unit expectations need to come down as the product line transitions to higher ASP offerings (iPhone, iPod Touch) But, strong Mac shipments and Apple’s ability to leverage favorable component pricing, leave their CY08 above consensus EPS unchanged.

Beyond industry checks, the firm would point to a 34% YoY increase in R&D and 170% YoY increase in Steve Jobs’ airplane expense in the December quarter as signs Apple is preparing for meaningful product launches.

Apple’s 10-Q shows surprising margin leverage outside the US and a comparison to other retail brands confirms that International expansion tends to be a positive influence on revenue growth, operating margins and valuation. In the near-term, they highlight favorable component pricing that will put upward pressure on gross margin.

Notes AAPL shares already trade at firm's 12-month bear case scenario and they like the risk/reward here (12% downside/55% upside to $185 target).

Reiterates Overweight.

Piper Jaffray's Gene Muster is also out positive on Apple (NASDAQ:AAPL) this morning noting that while it is way too early to make a definitive call on March qtr iPod units, they have analyzed the first month of NPD data (Jan.) for the quarter and found that it suggests iPod units of 9.5m-10.3m.

Street consensus for March quarter iPods is 10.8m, representing a 2% y/y increase;the midpoint of the 9.5m-10.3m range suggests a 6% y/y decline.

Firm sees this data point as a slight positive, given recent Street chatter of a very weak iPod number for the quarter, and notes that the monthly contribution they have factored in for Feb. & March may be prove to conservative given the iPod shuffle price cut on 2/19, leading to a more back-end-loaded qtr for iPod units.

Reiterates Outperform, Alpha List status and $250 target.

Notablecalls: Can't believe I was actually right, calling it a short last Thursday following disappointing data from iSuppli.

Yet, now I think it's all priced in here @ around $120. I think people are just looking for a reason to buy this stock and MSCO may have given them the reason to do so.

Now we have 2 positive/supportive calls on AAPL this morning. My conviction regarding the near term bounce thesis grows. I think the slowdown in iPod's has been fully priced in here.

Should this be Actionable? In a way, yes.

Comments

[TanToday:]

All this emphasis on the nuts and bolts. Sigh.

What is driving this firm now is customer loyalty, it is a cult of sycophantically devoted consumers and early adapters.

With over 200 retail locations, AVERAGING over $4,000 per retail foot in sales annually { double the next nearest retailer } you have to understand this is WAY WAY past the iPod and iTunes phenomena.

When you deal in FACTS, not speculation, you see that the last quarter sales were up over 50% from one year ago, sure the components making up that number will and have varied over time, the day of the iPod toy is less a factor now, and the switchover to the SYSTEM is what will drive things henceforth.

You have EVERYTHING feeding into this now, from music, to TV, to college classes online for free, to free downloads for trial of all software, to clubs, and the other matters that make this firm { to paraphrase Steve Job's } INSANELY GREAT, one that has only begun to show how to dominate, literally dominate the world of fashion cum hardware cum lifestyle cum personal expression.

For those that REALLY want to see where the rubber meets the road, I suggest they watch this video of the opening of the newest store in NYC, I ask you, can you envision THIS happening at the opening of a Lenovo store, an HP store, or even TOSHIBA store?

ifostore.cachefly.net/...

Put your thinking caps on here, and translate this emotional committment to a firm and it's products into a long term financial strategic move.

Every time I see some ANAL-yst bemoaning the sales of the $50 iPod shuffle slowing down, and IGNORING the exponential growth of the $2,000 machines, I seriously have to think, they just don't understand economics or scale. How can one IGNORE the Tsunami of converts over to the VASTLY superior OS X operating system, that works, just works, and just blows VISTA out of the proverbial ballpark?

NO, this goes far FAR beyond merely selling some kiddie a few rap songs on her $50 ipon, this is the harbinger of BUSINESS that needs reliablity, predictablity, and a company that they can trust to make products that work, support those products, and GET THE WORLD TO NOTICE.

Don't discount the hype machine they have now. Every MacBook Air { disclosure I have one } that gets the oohs and the aahs everywhere I go, to the massive new releases of fully professional software, running everything from medical, to engineering in a manner and style unheard of in the WinDOZE world.

{ disclosure, I own Apple stock, and and will buy buy MORE as the rubes dump it in favor of some financial institution losing billions. }

Oh, did I mention the 18 BILLION in cash Apple is sitting on right now?

2008 Feb 26 08:43 AM

[Rob L:]

It's just a matter of time before Apple takes off again. We may have to wait until the next earnings call since people seem to be freeting over just about everything, but those earnings are going to calm the fear and we are going to back to $200 later this year.

2008 Feb 26 08:54 AM

[digivision:]

well I just ordered 2 refurbished macbooks $999 each and an iPod classic 80gb that should help to clear inventory :-)

2008 Feb 26 09:32 AM

[digivision:]

I need to point out I had to try several times because the servers are so busy it wouldn't take my order

2008 Feb 26 09:36 AM

[Tom B:]

"What is driving this firm now is customer loyalty, it is a cult of sycophantically devoted consumers and early adapters. "

TanToday: I like your post, but disagree with one point. Apple claims they sell half their Macs to NEW users. They may be inflating/fudging a bit--who knows?-- but it points out that the customer base is not all "fanboys" from the 1980's (like me).

2008 Feb 26 09:54 AM

[TanToday:]

>>>>but it points out that the customer base is not all "fanboys" from the 1980's (like me).<<<

I was actually a VERY RELUCTANT "revert" having owned one of the original Apple II's so long ago. I kept thinking I needed WinDOZE for my business applications, so when Apple switched over to Intel, and third party folks came up with dual application support, I jumped in for the unbelievably sexy and efficient desktop iMac 24" { great for old farts like me with older eyes } interestingly enough, in two weeks I said, the heck with WinDoze programs, everything I want to do is BETTER in native Apple written programs, and I took off the dual programming kludges.

Loved this sucker so much, I have switched over completely to the Mac world, have two iPods, a desktop, the new and incredibly sexy MacBook Air, and have ordered the new wireless backup and router/server, that will ship from China in the next few days.

EVERYTHING worked right out of the box, EVERYTHING connected without any hassles whatsoever, and NOW I understand, this is ZERO problem computing, no virus protection, and with the 99 buck annual subscription to dotMAC, I have ten gigs on Apples servers and my pictures, web, and movies are uploaded for others to see, with ONE click of a mouse!

If you can't see what is going on here, and focus in ON the NITS of the unit sales, of the CHEAPO STUFF, like the little iPods, you are missing the entire point. This is a wave of loyal, committed, and cashrich customers with money to spend, HIGHER MARGINS than anyone, that love, adore, and are never going to move off the Apple bandwagon as long as they consistantly deliver as they have done these past few years.

EVERY SINGLE Tuesday of this year, Apple has released a new product, package, or machine. This morning alone, they upgraded FOUR of their desktop machines to faster, better, and leading edge.

Who else is on this kind of speedwagon in the computing world?

And this ALL translates into loyalty, cashflow, and repeat business.

2008 Feb 26 10:59 AM

[dithers:]

Last night, I agreed to try to fix a friends Windows XP laptop.
There is nothing wrong with the physical machine, (well its ugly and thick and heavy and underpowered) but it only runs Windows.....
Within 10 minutes, I was actually shouting at the machine in sheer frustration.
I downloaded a 'driver' and had to wait for it to 'install' it. Then it wanted to install it again, then it wouldnt connect, then it installed it a third time.

At no point had I any idea what the hell was going on, and I have been in computing for over 25 years, ex-programmer and do understand what goes on.

I gave up. I could not handle the stress of using a Windows machine. It said I was connected to the network, but I could not get on the web.
It started a Firewall without asking me.
(I had to download the wi-fi driver on my MacBook Pro, then write it to a USB disk, then install it on the Windows machine. No built-in wifi. I couldnt believe it.

My kids asked what was going on - (we all have Macs) - they were laughing at all the silly messages and ugly graphics.

Apple shares? I wouldnt worry - as the news grows that the Apple OS is so much better, in every possible way, the shares will be back up again.

Those who use Windows, ordinary consumers, will ALL eventually switch.

2008 Feb 26 11:16 AM

[michiganjake:]

The beat goes on. Best quarter in the history of the company, the usual low bar approach concerning future earnings for the spring quarter, the whole market drops, and the big boys sell their high flyers to secure profits to start the year. Naturally it takes apple, rim, and google down. They then sell them all short making money on the way down, and when the bottom comes, they will all start buying them back. Nice move for the market makers--they make it on the way down and then again on the way back up! The faithful hold and know great companies will come back and so it goes. I'm in it for the long haul and for long term gains, not short term gain playing! How about you?

2008 Feb 26 11:36 AM

[TA:]

dithers - you're hilarious

Here I am getting more and more bored with my network admin job because nothing ever breaks anymore and you are fighting with an elementry driver problem

My last few large tasks:
SQL 2005 upgrades - boring
Exchange 2007 migration - very boring, 2 minor issues - fixed
Sharepoint 2007 upgrade - had a few problems due to the customization programer's mistakes, otherwise nothing
Windows XP upgrade many years ago - incredibly boring
Office 2007 - ditto

I actually miss the old days when I'd get stressed with a problem or someone would call me

2008 Feb 26 03:49 PM

[Tom B:]

Blah: do you have varied machines or one vendor only?

2008 Feb 26 04:58 PM

[TanToday:]

>>>>I actually miss the old days when I'd get stressed with a problem or someone would call me<<<

Hehehehe, the Maytag man has retired, you should put in for the job, seems you have all the qualifications!

2008 Feb 26 05:46 PM

[TA:]

Thomas: All Dell - support costs are too much for Enterprises to have multiple vendors. HP and IBM do an good job too(in fact most servers from IBM, HP, and Dell are equally excellent) but I got into Dell when Compaq, HP and IBM were making huge mistakes in the 90s and I just stick with it now.

2008 Feb 26 09:42 PM

[Tom B:]

"Thomas: All Dell - support costs are too much for Enterprises to have multiple vendors"

That's probably why you are not tearing your hair out-- one set of quirks to deal with. Dithers was helping out a buddy on a random PC.

2008 Feb 26 10:45 PM

[dkhkch:]

AAPL down after NC's call, and that being with Tech strong after IBM's news. BEST PLAY: Just do the opposite of what NC says.......

2008 Feb 27 06:14 AM