Apple Keeps Its Shine

As Neff points out, shareholders are now looking at multiple growth engines. You already know about the accelerating penetration of iPod sales overseas, as well as the new TV, portable video and telephony products.

But the least-appreciated driver of revenue upside is the one that will happen soonest: The thousands of professional designers who use Macs to run design software have been waiting for Adobe to release a new software suite that specifically takes advantage of a new Intel chip-based computer called the Mac Pro. If those users start to buy new computers in droves next month as I expect, you can expect a ton of upside to consensus 2007 and 2008 earnings estimates.

The next biggest surprise will be the iPhone, which has been derided in some circles so far for its high price and dependence on the relatively slow 2.5G wireless broadband network at AT&T Wireless. In reality, Apple is likely to expand the range of iPhones from the $150 price point up to $600 and to reinvent the category much as it did with music devices. Look for a big win here that rattles the naysayers, with the possibility of 8 million units sold in the first year.

Unlike most of its cousins in technology, Apple has beaten analysts' expectations in quarterly earnings reports for the past four years, and I think the Street continues to underestimate the company's potential. As we look forward to the company's report next month on its progress in the first quarter of 2007, we will see estimates rising because of both accelerating sales and profit-margin improvements in the wake of a plunge in memory-chip costs.

Right now, the stock trades at around 18 times my own 2008 estimates, despite annualized earnings growth that is likely to come in at around 22%. That is very attractive. My target is $125 by this time next year, or 40% higher than the current quote. Plug in.

At the time of publication, Jon Markman owned shares of Apple that comprise less than 1% of his total market holdings. He also owned a small position in Apple call options.

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