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Tuesday, July 11, 2006, 11:00 am PT (02:00 pm ET)

JMP initiates coverage on Apple with "Strong Buy" rating

JMP Securities on Tuesday initiated coverage on Apple Computer with a Strong Buy rating and a $70 price target, which represents 20 percent upside from the company's current share levels.

In a research note released to clients, analyst Ingrid Ebeling said Apple represents JMP's most favored "consumer friendly" technology stock and that the firm believes the company has established concrete benchmarks that it will be able to maintain moving forward.

"Just as Google has become synonymous with 'search,' the iPod brand has become synonymous with portable digital audio players, or MP3 players," Ebeling told clients.

Although Apple retains over a 70 percent shared of the digital music player market in the United States, its worldwide market share stands at just 26 percent, Ebeling noted. Additionally, she believes the digital music player market is still largely under-penetrated, especially outside the United States.

"During Walkman’s reign, Sony sold over 340 million devices, and the overall MP3 player market is expected to exceed 1.1 billion units from 2005 to 2010, according to IDC," the analyst told clients. "To date, there have been approximately 190 million units sold, leaving a market that is only 17 percent saturated."

Over the next 18 months, Ebeling expects the market to be driven by strong demand for upgraded and replacement players, likely increasing Apple's overall market share to 33 percent in 2007.

In the near term, she expects Apple to continue to release new form factors and add features to its iPod family, which may potentially include Bluetooth- or WiFi-enabled players ."As more video content becomes available through the iTunes store, one of the products likely to be released is an iPod video with a larger screen," she said.

However, Ebeling believes there is more to the Apple story than just iPods, as evidenced by the company's rejuvenation of its core computer business.

"We believe the consumer segment of the PC industry will experience a three-year compound annual growth rate (CAGR) of an approximate 15 percent and that our assumption that Apple’s market share will increase from 2.4 percent to 2.6 percent
in 2007 could prove conservative given Apple’s new Intel strategy and the revived popularity of Mac with consumers," she said.

Ebeling also recognized another strong point in Apple's arsenal: its retail segment.

"Mac stores have become a 'destination location' not only for loyal Mac users, but iPod customers, 95 percent of which are likely PC users," she said. "An approximate 50 percent of customers who buy Macs are first-time Mac buyers, according to a survey conducted by Apple."

If Apple is able to maintain its current revenue rate of over $24 million per store, per year, the analyst said the segment could account for $3.5 billion in sales this year, up 25 percent from 2005.

"We believe Apple shares are attractively valued," Ebeling added. "The stock has pulled back significantly since the end of 2005 and is trading at 20.7 times our calendar year 2007 estimate. Over the past five years, Apple has been trading at an average price to earnings ratio of approximately 35-40 times."

JMP Securities' price target assumes a multiple of 25 times its calendar year 2007 estimate, which the firm believes "is consistent with its average growth rate over the next two years."