Apple Inc (AAPL)

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Apple's reinvention transforms stock's valuation

http://biz.yahoo.com/rc/040708/bizfeature_tech_apple_1.html

Thursday July 8, 10:57 am ET
By Duncan Martell

SAN FRANCISCO, July 8 (Reuters) - The more than 50 percent rise in Apple Computer Inc.'s stock price this year has mirrored the brisk sales of its market-leading iPod digital music player and growth at its retail stores.

In the view of some analysts, the share price's ascent also reflects a transformation in the way investors are willing to value the Cupertino, California-based company, innovator of the first operating system to make personal computers friendly to everyday users.

Once seen as a value play that traded at little above its cash value, Apple's stock is now attracting long-term and momentum investors sold on Chief Executive Steve Jobs' vision of the company as a high-margin style-setter at the hub of an emerging "digital lifestyle."

Momentum investors typically look at trading patterns of stocks and the amount of money flowing into and out of them, while value investors tend to look for companies that are undervalued relative to their competitors.

Apple (NasdaqNM:AAPL - News) has sold more than 3 million of its market-leading iPod digital music players since their introduction in October 2001, and the company is approaching the 100 million mark on the number of tracks purchased on its iTunes online music store at 99 cents each.

"Longer-term investors are looking at it right now and saying Apple's got these great products out there and more coming and we trust them," said analyst Shannon Cross at Cross Research, while noting that there are now likely a sizable number of momentum investors in Apple.

The stock took a hit last week when the company announced plans for a next-generation iMac desktop computer, but said that it would miss its own internal schedule and won't ship the new one until September. The resulting sell-off took the shares down from their highest levels since 1999 and analysts reiterated their "buy" ratings, urging clients to take advantage of the price dip.

Even though the company's share of the PC market has been declining steadily in recent years and is now at about 2 percent worldwide, the company has built two sizable businesses in the past three years: the iPod franchise and its retail stores.

"It's a different kind of company you're buying today than you were four years ago when you were buying this PC company that you hoped would be able to reverse their losses in PC market share," said Dan Niles, chief executive of Neuberger Berman Technology Management, who owns Apple shares.

Niles said that Apple's 80 stores now account for $1 out of every $7 the company generates, and the stores boast gross margins of 40 percent. "It could be one of the biggest profit generators in the future," Niles said.

The maker of the Macintosh computer and iPod digital music players in its most recent quarter reported net income that more than tripled and gave a forecast that was above even the most optimistic expectations at the time.

Also, for the first time, the company sold more iPods in a quarter than its signature Mac computers, and iPod sales for that quarter even surpassed sales during the quarter that included the holiday shopping season.

Shares of Apple now trade at a lofty 50 times the fiscal 2004 per-share estimates of 61 cents a share calculated by analysts polled by Reuters Estimates. The stock trades at 37 times estimated fiscal 2005 per-share profit estimates and 34 times fiscal 2006 estimates.

Apple's stock is trading at about $30.25, down from a high above $32 in late June but still up sharply from a low near $19.70 in December.

"Part of it is betting on Steve Jobs," said technology analyst Tim Bajarin of Creative Strategies, of the stock's rise. "Even though the Mac size of the business has not grown rapidly, he keeps pulling interesting rabbits out of his hat."

While the stock may appear overvalued given its strong performance this year, some investors believe the shares are likely to end the year still higher.

"You can make the argument that the valuation looks like it's getting stretched, but there are some very large upside possibilities in the third and fourth quarters," Niles said.

Since the introduction in January of the iPod mini, Apple hasn't been able to keep up with demand, but Niles said production will ramp later this summer as supplies of the tiny 1-inch drives the mini uses increase.

"The stock's had a nice run but we haven't taken our buy off the stock because we think there are still legs to the Apple story," Cross said.

Jobs agrees.

"We think that strategy still has a lot of legs," Jobs said in a recent interview, referring to the digital lifestyle. "If investors are catching up with us, that's terrific and hopefully they'll continue to follow us."