Wednesday, March 31, 2010

AAPL: Buy Now (Again!)

In late January I posted an advisory suggesting AAPL was trading at a bargain price. The shares had closed the day before at $192.06, concluding the week Apple released its 1st fiscal quarter results and introduced the Apple iPad. In that post I delved into Apple's elimination of virtually all deferred revenue accounting on the iPhone, the strength of the company's balance sheet and the company's  prospects for strong and continued revenue and earnings growth based on the 1st fiscal quarter's results.
Two months later and at today's closing price of $235 per share, AAPL is no less of a bargain than it was at the end of January. Earlier this month I posted my new 12-month price target for AAPL of $384 per share. As we move closer to Saturday's release of the Apple iPad, that price target becomes all the more reasonable of an expectation.
In a much-referenced report from Morgan Stanley's Katy Huberty, the firm estimates each 1 million iPods sold will add $.25 to Apple's earnings per share. I expect Apple to sell in the area of 8 million iPads this calendar year. If Morgan Stanley's earnings estimate is accurate, the iPad alone could add $2.00 to eps in the remaining nine months of the calendar year. At today's p/e multiple of about 23 times trailing 12-month earnings, that's an additional $46 in share value from the iPad by January 2011. 
Mac sales reportedly remained strong in the March quarter and I expect year-over-year unit sales growth of no less than 35% with only slightly lower revenue growth from Mac sales due to more aggressive pricing on both the iMac and MacBook Pro lines. 
The iPhone, with or without the on-again, off-again rumors concerning Verizon, remains the champion in the smartphone market. For all of the hype surrounding the Droid and the Nexus One, the Android-based smartphone market will continue to the lag the iPhone in app development and easy accessibility of content for the foreseeable future. 
Comparatively, Android-based phones have obsolescence built into the handsets. It's been almost three years since the release of the original iPhone and those first iPhones are running the same OS as a 3GS iPhone purchased today.  The Android handset market is hardware fractured (different phones with different hardware specs) and this is a decided challenge for developers seeking to embrace the platform. The iPhone OS offers developers access to multiple generations of the iPhone and iPod touch as well  as the new Apple iPad. In addition to robust iPad sales, the new device will have a halo effect on the sales of other Apple hardware products and assist in attracting more developers to the iPhone OS platform. The difference between the iPhone OS and the Android OS eco-systems will become more apparent in the months to come now that the initial hype and media attention surrounding the first big wave of Android handsets has faded.  
In the end it's content and its accessibility that sells devices. Hardware specs become a factor when it diminishes or limits access to content people desire. There's a reason publishers are flocking to the iPad and the iPhone OS eco-system. The addressable market is better defined and its growth can be more easily forecast. With content comes customers. Watch for some surprises in the crowds outside Apple retail stores on Saturday. It will be more than the Apple faithful waiting to buy the iPad. These new customers will be a factor in Apple's revenue and earnings performance for the next few fiscal years. 

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