Wedbush Morgan analysts Craig Berger and James Schneider sent a note to clients yesterday on portable media chipset maker PortalPlayer (PLAY), cutting their estimates for the company on slowing Q2 Apple iPod Nano sales. Key points from the note:
● We are reducing Q2 and Q3 EPS estimates as channel checks for NAND flash consumption, as well as other commentary, suggest that Apple's iPod Nano shipments are likely to slow further in Q2, negatively impacting PLAY.
One result of slowing orders can clearly be seen in the NAND flash market as spot pricing returns to the low end of the contract pricing range, a sign of oversupply in the market. Based on other checks we expect unit shipments will decline by –10-15% QoQ in Q2, generally worse than investors anticipate. While iPod softness is likely a near-term negative for PLAY, we believe it may present investors an opportunity to work into the stock ahead of a likely sharp ramp in demand and orders in 2H’06. We find PLAY shares compelling at or below $21 per share.
● We have increased confidence that Apple is likely preparing to launch a new iPod with enhanced video capabilities this spring, possibly as early as its 30th Anniversary on April 1.
● We continue to believe PLAY will retain its socket in the soon-to-be-released Video iPod given Apple's design schedule constraints, PortalPlayer's software 'stickiness', likely Video iPod device processing requirements, and the execution risk Apple faces should it change processor suppliers.
● Cutting 2006 EPS estimate from $2.00 to $1.90, 2007 EPS estimate from $1.90 to $1.80, and price target from $30 to $27. (emphasis added)
Regarding the 'enhanced video iPod', the analysts believe it will be
layered in at the top of Apple's existing iPod product portfolio, likely offering a larger size LCD screen, a bigger battery, and high storage capacity to accommodate full-length video, at a retail price point of US$400-$500. We note that Apple's existing device is called the iPod (not the Video iPod), and think Apple retains this device for customers seeking a music playback device, with the Video iPod targeted at video enthusiasts.
PLAY 1-yr chart: