Comeau: Buy Apple, Sell Best Buy
Apple
(AAPL) - Get Report
announced Wednesday that the iTunes music store is now the top music retailer in the United States, a statement based on data from market research outfit NPD. This is a particularly impressive achievement in an age where consumers have largely become accustomed to getting music for free via a peer-to-peer file-sharing service like Limewire.
Most immediately, the ongoing success of iTunes is a clear negative for retailers like
Best Buy
(BBY) - Get Report
and
Circuit City
(CC) - Get Report
, who are already seeing their sales of physical media like CDs decline.
Why Apple's the Mac Daddy |
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Clearly, the aforementioned pirated music issue is a big obstacle for CD sales as a whole, but on top of that, people who actually are willing to pay for music are buying from iTunes. And of course, Apple is also seeing success hawking movies and television shows and is extending to areas like video games.
In addition, sales of mp3 players, including the almighty iPod, are slowing after mega-growth in recent years. One reason for that trend is the emergence of mobile phones with increasingly sophisticated built-in music players, the biggest one being, of course, the Apple iPhone. This is a major problem for Best Buy and Circuit City because, as it stands now, the iPhone is only sold at Apple and
AT&T
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stores in the United States.
So they're getting hit by the iPod slowdown, but not getting anything from the emergence of the iPhone, which is taking the iPod's place.
Apple appears to be moving into an unusually strong, vertically integrated position when it comes to music. It makes the PCs used to download music (legally or illegally), the iPod and iPhone used to listen to the music, and it operates the iTunes music service for those actually willing to pay for the music. And in the past couple of years with the boom of the Apple store, it's gaining even more control over the supply chain.
So at the end of the day, Apple is rapidly gaining market share in both PCs and mobile phones, and the latter could be boosted, especially in Europe, by the emergence of the eagerly awaited 3G iPhone.
Deutsche Telekom's
( DT) T-Mobile just slashed the price of the iPhone to 99 euros from 399, which is a possible sign that inventory is being cleared ahead of a 3G version. And now, Apple is sitting on top of the music business without a single competitor likely to topple it.
Apple is completely focused on churning out hot products, benefiting from the sea change in how people consume content, while the traditional electronics retailers with their oversized stores continue to suffer from the decline of music at retail. So the stocks are an easy choice -- buy Apple, sell Best Buy and Circuit City.
In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for
, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;
to send him an email.