Bear Stearns: Current Apple Weakness Is A Buying Opportunity (AAPL)

| About: Apple Inc. (AAPL)

Bear Stearns analysts Andrew J. Neff, William Hand and Ted Chung sent a note to clients Sunday, downplaying current "investor anxiety" for Apple (NASDAQ:AAPL) in light of reports that falling NAND memory pricing signals weakness in iPod sales. The analysts maintained their revenue and earnings estimates for the Apple. Key quotes from the note:

● While there is concern surrounding demand for AAPL’s iPod and Macs, it appears to us that much of the concern – based on Asian channel checks – reflect already expected seasonal patterns and reductions as component supply has improved. While we are carrying high estimates, we remain positive on the stock at current levels and reiterate our Outperform rating.

● Despite recent channel checks from Asia which imply iPod weakness, we remain positive as: 1) NAND order cancellations may relate to AAPL diversifying its vendor base and over-ordering to avoid supply constraints; 2) ODM production cuts likely reflect rationalization of optimistic targets entering the qtr and AAPL’s anticipated seasonal declines; and 3) our checks don’t suggest slowing demand.

● The sum total of these points suggest that iPod appears to be tracking down about 20-25% seq, which is still better than Street at ~9-10mm and in line w/ our 10.5mm est. While the Intel transition remains a near-term issue, the CPU biz is now only ~35% of revs, Adobe software w/ native Intel support could come by year end, and AAPL-branded software (Aperture, Final Cut Pro) is due by end of March.

● While we’re concerned about multiple reports of order cutbacks, we’re maintaining our ests for FY06 of $2.41 (incl. $0.14 in options) on revs of $22.2bn (up 60% YoY) and for FY07 of $3.01 (incl. $0.24 in options) on revs of $27.1bn (up 22% YoY). For 2Q06 (March), we’re maintaining EPS of $0.55 on revs of $5.1bn and above-consensus iPod units of 10.5mm – guidance is EPS of $0.38 on revs of $4.3bn.

● Given our confidence in demand for iPods (new products, ongoing leadership) and Macs (potential replacement cycle/new users), we see current uncertainty and stock weakness as a buying opportunity, with AAPL's P/E at 16x our CY07 operating EPS est. and 18x on Street oper EPS. Despite negative sentiment, we prefer to own the shares when expectations are tempered and maintain our CY06 target of $103.

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