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Wednesday, October 06, 2010, 11:00 pm PT (02:00 am ET)

JP Morgan: Apple's fourth quarter revenue estimate raised to $18.71B

Citing strong sales momentum for the iPad and iPhone, J.P. Morgan raised its revenue estimates for Apple's fourth fiscal quarter of 2010 from $18.13B to $18.71B, reiterating the company's price target of $400 by December 2011.

J.P. Morgan's positive revision of its revenue estimates extended out to the end of Apple's 2011 fiscal year, with an estimated revenue of $81.53 billion for Apple next fiscal year, up from a previous estimate of $78.84 billion. The report, issued by J.P. Morgan analyst Mark Moskowitz early Thursday, reassured investors that there's "plenty of growth" left for Apple. Checks with primary research contacts by the analyst revealed that the iPhone and iPad were still gaining momentum through the end of Apple's fourth fiscal quarter of 2010 on Sept. 30.

The report does not include a Verizon iPhone in its estimates for the 2011 fiscal year, though the partnership "appears to be coming" as soon as early 2011. According to Moskowitz, a Verizon iPhone could add as much as $2.00 in incremental Earnings Per Share next year.

The analyst sees recent media speculation and supply chain indicators as pointing to a CDMA-based iPhone. He expects "the introduction of a CDMA iPhone first with Verizon in early 2011 and then China Telecom in early to mid-2011."

Apple's gross margins are expected to return to the 40 percent range relatively soon. The analyst upped the September quarter's gross margin estimate from 39.2 percent to 39.5 percent, noting that the "potential cross-over point" to 40 percent margins could come as early as the end of next quarter. Declines in component pricing, especially HDD, DRAM, and NAND flash, are anticipated, counteracting offsets from education discounts and the free iPhone 4 bumper program.

Moskowitz believes that the iPad's "competitive prowess" will surpass that of the iPhone, despite several competitors' plans to bring competing tablets to market.

"We are skeptical, however, of the competition exhibiting a similar adoption curve as the iPad’s," he said. "In contrast to smartphones and the need for apps, we believe the content (movies and TV shows) is the key to tablet adoption, and here, Apple has the content."

The analyst views tablet cannibalization of Macs as nothing to worry about. J.P. Morgan does expect up to a 50 percent cannibalization of netback sales, but "back-of-the-envelope" math points to approximately 5-10 percent cannibalization of the total PC market.

The iPad could actually help sales of Macs, the analyst noted. "We would not be surprised to see another “halo effect” whereby iPad sales drive purchases of Macs as the central command center for content creation and sharing in a household, and then the iPad offers the ultra-portable experience," said Moskowitz.

J.P. Morgan's estimate that Apple sold 4.7 million iPads in the most recent quarter is higher than Bernstein Research analyst Colin McGranahan's estimate of 4.5 million iPads sold. McGranahan caused a stir Tuesday when he noted that the iPad has had the fastest adoption rate of any non-phone electronic product.

Apple will publish its quarterly earnings report on Monday, Oct. 18, at 5 p.m. Eastern, 2 p.m. Pacific.

JP Morgan Estimates