Investment Banks See Strong Growth for iPod
May 30, 2006 5:00 AM PT
Some of the world's leading investment banks are bullish on the future of Apple Computer's iPod -- even though an array of competitive MP3 players continue to come to market.
The future growth of the iPod is looking exceptional, according to Credit Suisse First Boston analyst Robert Semple. "We believe Apple is still in the early stages of its product expansion and that the company can grow its iPod units at least 20 percent for the foreseeable future," Semple said in a report to clients, a copy of which was provided to MacNewsWorld.
His prediction is based on the relatively low penetration rate for the iPod, now at just about 10 percent of PC users, or an "active installed base" of about 40 million units across the globe.
Semple sees Europe as ready for further growth. "Europe remains the biggest opportunity for Apple, in our opinion, based on its penetration rate of only 7.1 percent and similar demographics and buying patterns to the U.S.," he said.
However, the company has only demonstrated a moderate inclination to compete in the region. "[Apple has] opened only six retail stores in the UK and nowhere else in the region, choosing instead to leverage reseller partners," said Semple.
The iPod has had 486 percent growth over the past twelve months, generating a gross margin of approximately 20 percent. Semple reckons Apple's iTunes and iPod accessories businesses, despite generating lower revenue figures than the iPod hardware, will also help to drive Apple's profits. He believes this will offset lower gross margins associated with Apple's shift to consumer products including iMac, Mac mini and iPod.
The research and investment firm said it expects the iPod to continue to deliver strong growth, but its position as the leader in both flash and drive-based digital music players will eventually be limited by the growth of the music player market.
The momentum has been building for some time. Apple sold 8.4 million iPods in 2004 -- a market share of over 30 percent, according to a report released by In-Stat. "That has increased dramatically," the firm reported.
Most interestingly, demand for iPods is stimulating demand for other Apple products. , Once they become attached to the iPod, many consumers are dropping PCs in exchange for Macintosh computers. The iPod "halo effect" will make a difference to Apple for a while to come, said Eugene Munster, Piper Jaffray senior research analyst.
Credit Suisse First Boston recently upgraded Apple's stock from "neutral" to "outperform" on the belief that the company's next major sales increase will come from its success in the PC market. Apple has just completed its second consecutive quarter of share growth.
However, in the PC market, Apple's 2 percent share has significant upside opportunity regardless of market growth, Semple said. "Until the Jan. 11th release of Mac mini, we estimate Apple only addressed 22 percent of the desktop PC market excluding its niche-focused eMac," Semple said. "Today, Apple's portfolio reaches almost 100 percent of the market."
Semple also anticipates that the Mac OS X 10.4 Tiger will be Apple's most popular OS X iteration to date. "Apple has broken records with each of its two previous updates -- Jaguar and Panther -- with Panther recording revenue of US$60 million in its first quarter, which we expect Tiger to easily surpass," the analyst wrote in his report.
The investment bank upgraded Apple to "outperform" and raised its price target from $40 to $45. It also raised its fiscal year 2005 and fiscal year 2006 earnings-per-share estimates to $1.36 and $1.61, respectively, from $1.32 and $1.52.
"Apple is currently trading at 22 times our fiscal year 2006 EPS [earnings per share] estimate, its lowest multiple on forward earnings estimates since its earnings miss in June 2002," the firm said. "Dare we say it," Semple said. "Apple is cheap."