Analysts Still Underestimate Apple
By Barry Ritholtz
RealMoney.com Contributor
1/13/2005 1:11 PM EST
Despite Apple's (AAPL:Nasdaq - commentary - research) blowout quarter and Thursday's rally, my sense is that many traditional PC analysts -- long wed to the world of Intel (INTC:Nasdaq - commentary - research) chips and Microsoft's (MSFT:Nasdaq - commentary - research) 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:NYSE - commentary - research);
# 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.
We all read of the headaches home PC users have had with Windows vulnerabilities -- virus infections, critical dll files getting deleted or corrupted, spyware, crashing machines. I suspect that many users would be thrilled to have a low-maintenance, easy-to-use alternative.
A perfect example: Shirley, my 80-year-old mother-in-law, had her PC crash last month. It just won't boot up anymore. It's a few years old, and it's not really worth spending a few hundred bucks to fix. I was considering getting a Dell for her, but for about the same price point, she could get a Mac mini; Shirley already has a mouse, keyboard, printer and monitor. For $499, she can get a fast, reliable machine that would be far easier for her to use. And, with the purchase of a $15 dongle (USB to PS2 Active Y Adapter), her older (non-USB) keyboard and mouse will work just fine.
Before the Apple mini, Needham analyst Charlie Wolf was looking for a 4% switch rate from Windows-using iPod owners. Since the introduction of the new Mini, he's raised that switch rate to 11%. Wolf estimates that Apple can increase its domestic PC market share 100% over five years -- from 2% to 4%. Other people have been less conservative, forecasting (off the record) that Apple market share could actually go much higher and more quickly, too.
I imagine that same sort of discussion is taking place across the country. A replacement cycle of malware-infested Window machines is huge. Capturing even a small percentage of this market by Apple is potentially worth billions of dollars per year in sales; that could lead to lucrative OS upgrades, software sales, even more iPod sales, and purchases from the iTunes Music Store.
Indeed, Wolf noted the "one-two punch" of the mini: "The cheap price catches them, and the terrific software keeps them. OS X Tiger and iLife are both phenomenal software, once you use them, you are hooked. It's a killer," he wrote.
One of the original Apple bulls, Wolf first got positive on the stock with the introduction of the first generation iMac years ago. He lowered his buy rating to a hold in December, and then went back to a buy before yesterday's earnings call. To the best of my knowledge, he's the only Wall Street analyst who uses a Mac as his primary office computer -- and has been doing so for years. Prior to Apple's earnings release Wednesday evening, Wolf raised his target price on the stock to $83.
There are risks to Apple: There might be some cannibalization of its higher-end machines. But Mac buyers have long overcome the sticker shock associated with the brand, and seem willing to pay more for the elegant design of Macs. Windows users, who have shown themselves to be price sensitive -- note the rise to dominance of low-cost provider Dell (DELL:Nasdaq - commentary - research) -- could easily find themselves enticed by this new machine.
For investors, that switch rate is a data point well worth watching -- and not just for Apple shareholders. Potentially, this new machine could impact Dell, Hewlett-Packard (HPQ:NYSE - commentary - research), Intel, and yes, even mighty Microsoft. |
