iPod Hi-Fi and software to help offset Intel transition woes

"We think volatility from data points out of Apple’s component supply chain and point-of-sale data is overblown at this point," analyst Rebecca Runkle wrote in a recent research report that was sent to clients. "These data points don’t take into account a broader supplier base, channel inventory fill off a low base in early January, new products and additional products in the pipeline for April. "

Referring specifically to February figures release by NPD last week, the analyst believes this data does not reflect Apple's strong initial shipments of the MacBook Pro and/or sell through of the new Mac mini. Based on prior product cycles, Runkle said March could account for as much as 40 - 45 percent of the company's first quarter revenue, compared to the typical 38 percent.

"On iPods, NPD points to continued share gains," the analyst wrote. "While a simple back of the envelope sell-through calculation using NPD data points to roughly 8 million iPods this quarter, we caution investors not to overlook the 2 weeks of inventory build off of very low levels in late December [which] could add 1 million plus to Apple shipments this quarter."

While the Intel transition will continue to present volatility in supply chain/channel data, MorganStanley continues to believe long-term investors should look through near-term chatter and focus on the secular growth story. "We expect new products as early as April with another round in late Summer/early Fall," said Runkle. "In particular, we look for a large screen video iPod, full length feature film content, additional Intel-based Macs and an Apple-branded phone."

Over the next 18 months, the analyst also believes desktop virtualization could present meaningful opportunity for Apple to target an even broader consumer market if its Intel Macs indeed gain the ability to run multiple operating systems, such as Windows XP in addition to Mac OS X.

Pointing out some of the reasons to own Apple shares, Runkle noted that iLife ’06 and iPod accessories sales should help offset the Intel Mac transition risk during the current quarter, while new products such as Intel iBooks, full length films via iTunes and possibly a 2nd generation video iPod could help boost sales in the following quarter. She also believes there may be some potential earnings-per-share (EPS) upside despite the perceived Intel transition woes.

MorganStanley is maintaining its estimates of $4.67 billion in revenue and 39 cents EPS for the current quarter. However, the firm is tweaking its model a bit to account for a downshift in Macs from 1.2 million 1.1 million units. It's also adjusting iPods estimates from 9.9 million to 9.0 million units, but at a higher average selling price due to an improved iPod mix that includes some of Apple's pricier players.

The firm, which maintains an "overweight" rating and $90 price target on Apple shares, believes further upside to its estimates may exist if Apple management can hit its guidance on gross margin and operating expenses.