Analysts Still Underestimate Apple

Despite Apple's (AAPL - commentary - Cramer's Take) blowout quarter and Thursday's rally, my sense is that many traditional PC analysts -- long wed to the world of Intel (INTC - commentary - Cramer's Take) chips and Microsoft's (MSFT - commentary - Cramer's Take) Windows operating system -- have little clue what to make of Apple in general, and the Mac mini in particular.

Amongst the larger brokers, there have been very few Apple bulls. Notable exceptions being Merrill Lynch's Steve Milunovich, Andrew Neff of Bear Stearns, and Charlie Wolf at Needham & Co. (formerly of Credit Suisse First Boston and UBS). To their credit, many of the smaller boutique firms have had buys on Apple for quite some time and RealMoney.com contributor Cody Willard also deserves credit for his long-standing bullishness on the stock.

Still, the bulk of the sell-side chatter before Apple's earnings was unenthusiastic, forcing many analysts Thursday to play catch-up with upgrades and raised price targets. I cannot say I am surprised.

Just last year, we heard from PC analysts at bulge bracket firms suggesting that Apple:

Sell itself to Sony (SNE - commentary - Cramer's Take);

Start using Intel chips; and

Put out Windows-compatible machines.

Fortunately, the company laughed off the suggestions.

Even with the introduction of a low-cost Apple PC, I do not expect most of the analytical community to suddenly find religion. This is part of a long-term misunderstanding of Apple by the Street. Many people don't get Apple; they sure haven't been able to figure out Steve Jobs. And since all but one of them work primarily on a Windows machine, they never really understood what all the fuss was about.

Until the iPod came along, that is. Apple created a category killer by engineering a marvelous piece of user-friendly technology made from essentially off-the-shelf components. The secret sauce was their terrific user interface -- software.

So why is Apple -- long known for high-end expensive hardware -- bringing out a sub-$500 PC? There are four keys to this:

It's a simple Windows replacement machine;

It attracts the geek crowd;

It's a possible centerpiece for a home theater system; and

It's a cheap second or third Apple for faithful MacHeads.

We can discuss all of these ad infinitum, but where I want to focus is on the first option -- the Windows replacement cycle: That's where the potential juice is.

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At the time of publication, Ritholtz was long Apple and accounts he manages were long Apple, Dell, and Microsoft, although holdings can change at any time.

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].