Firm ups Apple target, predicts enterprise moves in '07

ThinkEquity Partners analyst Jonathan Hoopes told clients the Cupertino, Calif.-based Apple stands to benefit from "accelerated back-to-school CPU share gains," retail store traffic and beyond-the-box unit shipment momentum, software-related revenue and earnings upside surprises in the first half of 2007, and a move into the enterprise during the second half of 2007.

"Our checks indicate Apple's Back-To-School (BTS) season was healthy. Moreover, the new Beyond-the-Box (BtB) devices that were recently announced at Apple's 'It's Showtime' product event are expected to hit the shelves in time to drive increased visitor traffic through Apple's retail stores during the holiday selling season," the analyst wrote in a research note. "We believe Leopard and iLife software refreshes and the launch of iTV in early [calendar year 2007] and success in the enterprise later in '07 will boost revenues, increase earnings power, and expand valuation multiples."

Hoopes said Apple is positioned to meet or beat his fiscal fourth quarter earnings estimate of 48 cents a share on revenue growth of 25 percent year-over-year to $4.6 billion when it closes out the quarter later this month. "We are projecting Apple CPU unit shipment growth of 27 percent year-over-year in September," he wrote. "We firmly believe that Apple has passed through an inflection point, and we expect demand from 'switchers' to accelerate."

According to Hoopes, Apple may also benefit near-term from pent-up demand in thirsty European markets following the conclusion of the World Cup event. "We believe the distraction created by the FIFA World Cup soccer tournament — with major purchasing power countries such as U.K., Germany, France and Italy playing through the final rounds — will yield strong quarter-over-quarter growth in this region," he wrote.

Meanwhile, new product introductions such as the refreshed iPods and iTunes 7 movie downloads should help drive significant increases in retail store traffic during the holiday shopping season, the analyst said. He noted that Apple sold an average of 114 Mac systems per week in each of its retail stores during the June quarter, a 7 percent increase from the year before. For the September quarter, he predicts Apple will report a 31 percent quarterly increase in per-store Mac system sales, slightly higher than the 25 percent increase the company experienced between the June and September quarters in 2005.

During the first half of 2007, Apple will release a major operating system upgrade in Mac OS X 10.5 Leopard. Hoopes said recent improvements in iTunes and the impending iTV set-top box will likely serve as catalysts for Mac OS X users to upgrade to the new version.

"At Apple's Leopard preview event, management stated that the active Mac OS X user base is around 19 million large," he wrote. "Out analysis suggests that there is potential for up to $400 million (or over $0.40 per share) in contribution profits from Leopard in the 12 months after its release. However, we expect Apple to invest much of this financial bounty into marketing and R&D to drive additional PC share gains and accelerate the BtB product roadmap."

Hoopes is forecasting Mac unit sales to increase 28 percent year-over-year in 2007, which is over 2 times the current projected PC market unit shipment growth rate of 12 percent. At the same time, he notes that IMS Research has forecast the worldwide set-top box market to grow at a six-year compounded annual growth rate of 13 percent to 200 million units by 2011, and that he expects Apple to be integral in this growth category starting with the launch of its iTV set-top box in the first quarter of 2007.

"Never in the history of the PC has a company been better positioned for share gains, in our view," Hoopes told his clients. "We encourage investors to focus their 'Look At The Core,' as we believe Apple's software holds the key to additional share gains and margin expansion."

The analyst reiterates a "Buy" rating on shares of the Mac maker.