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Thursday, January 19, 2006, 07:00 am PT (10:00 am ET)

Needham ups estimates, expects \"actual\" video iPod in \'06

New Apple product introductions should accelerate in 2006 as Apple transitions to an all-Intel Mac lineup, continues to build out the iPod platform, and launches its long-anticipated invasion of the digital living room, says Needham & Company.

In a note sent to clients this morning, the investment banking and asset management firm raised its fiscal 2006 earnings per share estimate for the iPod maker from $1.95 to $2.05 and its 2007 estimate from $2.40 to $2.50. 

The firm believes Wednesday's earnings announcement was anticlimactic because Steve Jobs had already reported the key metrics of Apple’s December quarter at Macworld on January 10.

"The company reported non-GAAP earnings (before stock-based compensation) of $0.68," wrote analyst Charles Wolf. "However, the stock swooned in after-hours trading apparently because of a 'pause' in Mac shipments near the end of the quarter, and guidance for the second quarter that was perceived as subdued."

However, with iPod and music related sales representing a growing fraction of Apple’s total revenues (59% in the first quarter of 2006 compared to 41% a year ago), Wolf believes seasonal fluctuations in revenues and earnings will inevitably increase.

"The good news is that Apple began its transition to the Intel processor platform almost six months ahead of schedule with the Macworld introductions of the Intel iMac and MacBook," the analyst wrote. "We anticipate that the iBook will migrate to Intel this spring followed by the PowerMac sometime in the summer." 

Wolf believes Apple's move to the Intel platform has the potential to "materially increase Mac sales" once the transition is completed. In addition to new Intel Macs, he expects the company will introduce the "actual” video iPod in the first half of the year. The analyst also notes that Microsoft’s Windows Media Center software has failed to establish "even a beachhead in the living room" because of its complexity. "Apple represents a far better bet to succeed in its effort," he wrote.

Finally, Wolf said recent comments by Steve Jobs and other actions suggest that an iPhone featuring an iTunes music player might be in the planning stages, but is not likely to surface this year.

"Apple remains by far the most exciting story in our universe. Unfortunately, the company’s share price has risen faster than our fair price, which now stands at $71," Wolf wrote in summary. "However, new revenue streams yet to be announced could trigger an upgrade at some point in 2006."

Needham & Co. maintains a "hold" rating on Apple shares.