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Apple Shares Shine On

Katie Dean

Bullish analysts have been raising targets and repeating their buy calls, even as shares are resetting 52-week highs. Since Apple last delivered its quarterly numbers on Oct. 18, the stock has shot up more than 23%. Shares closed Thursday at $91.66.

Analysts are enthusiastically expecting continued share-gains for the Mac computer, strong iPod sales over the holidays and a slew of new products in 2007, some of which will debut in early January at Macworld -- the Apple faithful's annual lovefest.

That could likely mean another leg up beyond $100 for investors.

"The stock's likely going to continue to work," says Shaw Wu, an analyst with American Technology Research, which doesn't own Apple shares. "I would not be surprised to see the stock continue to see upside into January."

UBS analyst Benjamin Reitzes upped his price target to $108 from $95 on Tuesday, "given higher estimates and higher conviction in new product releases in 2007."

Interestingly, despite the stock having doubled in just over a year, by historical standards the shares are still relatively cheap. As of Thursday's close, Apple was trading at 33.6 times the forward 12-month Thomson First Call consensus earnings estimate. According to Richard Stice, an equity analyst with Standard & Poor's, the P/E ratio has averaged 42.2 on a monthly basis over the past two years.

And with solid near-term growth prospects ahead, valuation seems like a slighter concern.

"We still believe a 30+ forward price-to-earnings multiple is warranted for Apple, given prospects for sequential revenue acceleration in the fiscal first quarter of 2007 and year-over-year revenue reacceleration throughout fiscal year 2007," wrote Reitzes. He is long the stock and his firm has provided Apple with nonsecurities services.

Growth in Macs will be an important catalyst in the coming year, observers say. For its fourth quarter, Apple surprised the Street with its robust Mac sales, which grew 30% year over year to 1.6 million units.

"I would expect for them to continue to gain share," says Stice, who has a buy rating on the stock. "Over the next 12 months, we think it's really Mac sales that will help drive earnings growth going forward."

Worldwide, PC shipments are expected to be up 10% this year, says Stice, and Apple has been growing at an even-faster clip. In addition, Apple has less than 5% of the PC market worldwide. "I think that's something that they could easily double over the next couple of years," he says.

"Because they have such a small portion of market share (for PCs), that's where you have a lot more incremental upside," Stice says. He recently raised his 12-month target price to $110. He does not own shares, and his company doesn't do banking.

Needham analyst Charlie Wolf, who boosted his price target to $115 from $90 on Thursday, noted that previous survey results on rates of Windows-based PC users switching to Macs were conservative.

"Evidence that Windows switchers played an important role in the growth of Mac sales even before the introduction of Boot Camp indicated that our previous assumption -- that no Windows user would switch to a Mac in the absence of its ability to run Windows -- was unrealistic," Wolf wrote. Wolf is long Apple, and his firm makes a market in the company.

Those Mac share-gains also are important, Stice says, when it's likely that iPod sales growth will eventually decline with increased competition, like Microsoft's(MSFT) Zune, in the MP3 player market.

But even that effect isn't likely to happen anytime soon.

"Our checks indicate continued strong demand for Macs and iPod, implying further potential for revenue and EPS upside," Bear Stearns analyst Andrew Neff wrote in a Wednesday note. "Strong initial uptick and popularity of [the] iPod shuffle could drive iPod unit upside, although lower-end mix could result in lower [average sales price] and mitigate the magnitude of revenue upside."

However, even purchases of the cheaper iPods can pay off for Apple, as it can be a gateway to more spending later, says Think Equity's Jonathan Hoopes.

"The more people you get exposed to the Apple experience, I think, the better," Hoopes says. "It's all about getting people in the stores. The real earnings power for the Apple stock is a function of CPU (desktops and notebooks) share gains."

Hoopes does not own shares of Apple and his firm doesn't do banking.

Yet it's the presence of new products -- or lack thereof -- that might go a long way in determining the fate of Apple shares after the new year. Neff noted that in the first parts of 2003, 2004 and 2005, Apple shares were driven by significant product announcements and outperformed the market.

But absent major product releases in early 2002 and 2006, Apple stock underperformed the market in the first half of those particular years.

Early indications are that 2007 will deliver: The company's rumored iPhone, the Leopard operating system, new video iPods and iTV, which will allow people to wirelessly access music and videos stored on their computer on their home entertainment systems, are all expected to appear sometime next year.

After a meeting with several Apple executives, Neff wrote that while the company did not give specifics, "it highlighted that iTV fits within Apple's vision of the digital living room and desire to simplify consumers' use of content.

"To that extent, it appears that iTV's impact on video could be similar to what iPod was for music."

If that happens, a share price of $100 may soon seem like one of Wall Street's great bargains.