27 December, 2007

Apple shares pass $200, A new Record

Apple (AAPL), is also enjoying a strong holiday as iPods are as popular as ever and the Mac computers continue to well outpace the computer industry in terms of growth, and that's without even mentioning the other "hottest gadget of the year" iPhone. Apple in fact is one of the main culprits of Amazon's (AMZN) sales success as Mac computers and iPod line ups flock the electronics best sellers lists.

Whispers about sales are starting to trickle in pegging iPhone sales around 5Million units for the year, well above of most analysts 3-4Million estimates. Thanks in part to initial success with European launches and the $200 price cut that the device saw earlier in the fall. Considering that Apple's goals were to sell 10Million units by the end of next year it appears the company, for all intensive purposes, is well on its way. And its only the beginning as the device is officially on sale in only 4 countries. Once confirmed news of iPhone deals in China, Japan and the rest of Europe hits, the early sales goals will, in retrospect seem completely low-balled.

Apple's forgotten, and not so well selling device, AppleTV seems to be in the spotlight again as analysts expect an upgrade to the unit as well as the content available for it with iTunes. Apple's famous MacWorld Expo is just on the horizon and it is this event that usually brings with it product introductions, company metrics and newly minted partnerships. The hope is that Apple will bring aboard more movie studios to iTunes and perhaps expand the sales model to also include rentals. Reports coming in suggest that Fox is the first to sign on for the "rental" model and that this will be announced at the Expo. This feature should give the AppleTV some new life and perhaps force an upgrade, including the long wanted HD content in iTunes. Having Rentals and HD Video in the iTunes store come MacWorld would be 2 very big steps in the right direction to not only Apple but the entertainment giants as well.

Digital Rentals are a market that hasn't taken off yet, with many players attempting to make it work but no one dominating. Microsoft, through Xbox is trying, Amazon is trying, NetFlix and Blockbuster were trying too. The verdict, nothing really works well and each platform simply isn't wide enough. But iTunes, with its Billions of downloaded songs, and 100 million downloaded videos may just be that massive machine to get the ball rolling. Much as the demise of the CD caught the music industry off guard the last year or 2, I see a similar fate coming to DVD, with everything going digital. It doesn't help that the next gen HD disc format is in a war that is dividing consumers and studios either. So, should I get a Blu Ray player? An HD DVD player? a combo player just in case?

Too many questions, no real answer, or could there be? 120Million iPods have been sold, iTunes is seemingly on the majority on computers already, HD rentals would take off on this platform within 12-18 months pushing next gen disc formats aside as Digital content truly becomes King, Broadband expansion will make downloads quicker and that hurdle of "downloading time" will be a thing of the past.

When this rental announcement becomes official, more power to the Studios who stepped up, and didn't try to strong arm the one dominant player in the online Music and Movie sales business.

So is there still upside to the Apple story? Yes, but time frames have to be adjusted now. Forward P/E sits in the low 30s and the company is nearing it's marquee event, and its undoubtedly strongest quarterly report in history. So what's that mean for the investor? It means estimates are still too low and price targets will still continue to climb. Remember current Apple estimates only include 10-12Million iPhone sales by the end of 2008, no real clear idea of the revenue sharing model that will become a monthly cash cow for the company, and absolutely no AppleTV income, as the product hasn't sold well yet. Yes iPod growth is slowing, to only about 20% year over year, but Macs are surging to more than make up for that P/E ratio softening.

Bottom line, Apple at $200 is still a very interesting long term story, dips are great opportunities to accumulate, and this one will likely beat the market once again, by this time next year.

Disclosure: Author is long AAPL

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