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Jul 21, 2010

JP Morgan Slaps A $400 Price Target On Apple (AAPL)

After reading Wall Street's view of the effect, let's take a look at the cause.

After Apple's earnings blowout and big guidance, JP Morgan analyst Mark Moskowitz is slapping a $400 price target on the stock.

The Street is going wild for Apple today, but this is the most bullish thing we've seen yet. Moskowitz says the earnings will bring the message back to Apple's amazing financials and away from Antennagate. Here's his bullet points for why Apple will soar:

  • Big results should focus investors back on the model. For F3Q10, Apple reported record revenue of $15.7 billion and EPS of $3.51, versus Street consensus estimates of $14.75 billion and $3.16. Our estimates had been $14.81 billion and $3.11. Gross and operating margins came in at 39.1% and 27.0%, versus our estimates of 38.6% and 26.2%. Apple generated cash flow from operations of $4.4 billion.
  • Gross margins come in well above prior guidance. Gross margins for F3Q were 39.1% and 310 basis points above guidance. We believe F4Q guidance of 35% gross margins is conservative as the ramps of iPad and iPhone 4 platforms should achieve greater economies of scale. We do not expect the gross margin guidance to be a topic that carries much risk as the iPad and iPhone 4 should ride the cost curve just a few quarters out.
  • iPad roars out of the gate. Apple reported 3.27 million iPad unit shipments from 10 countries in the quarter, versus our estimate of 3.75 million units. At this point, we do not think the iPad will cannibalize sales of other Apple products as some fear. In contrast, we think another “halo effect” could be in the making, whereby sales of the iPad drive customers to purchase other Apple products, such as the Mac for home use while the iPad is used on the road.
  • We reiterate our Overweight rating and increase our Dec-11 price target to $400, from $390 previously.Apple is also on the J.P. Morgan Analyst Focus List. While the media-driven frenzy over the iPhone 4 antenna issue is not likely to fade yet, we believe Apple's quarterly performance should restore focus back on the model's high-growth stature. At 13.9x our revised C2011 EPS estimate, versus the peer group average of 12.6x, we believe Apple is trading like a value stock and not as the high-growth story in large cap equities.

Cause Drivers on Apple Growth
  • Digital Libraries - Apple owns customers often for life. iTunes is their collection of music and video. The AppStore is their collection of purchased apps. iBooks is their collection of purchased e-books. MobileMe is their effort to manage user contacts and photos. As long as users buy Apple products, these libraries move seamlessly with each device purchased.
  • Repeat Purchases - Battery powered products have a built-in obsolescence, usually 12 to 24 months depending on how you discharge/charge your batteries.
  • Stickiness - The net effect is that customers buy and stay with Apple products regularly and often for life.
With 70% dominance of the digital music through iPod owners, why would anyone be surprised that Apple would eventually gain the same dominance of smartphones, all mobile phones, and mobile tablets?

Why are Mac purchases accelerating? Millions of developers are required to buy the latest Macintosh and Snow Leopard to develop for iPhone, iPad, and iPod. Why has Wall Street missed this cause-effect relationship?

Keep in mind that AT&T and Verizon are not even in the top ten among global mobile services. Anecdotal observations from the USA about the pissing battle between Verizon and AT&T is like the blind men with the elephant. The market view needs to be global.

Remember that Apple's share of phones is still growing; smartphone share of all phones is growing; and mobile phone use dwarfs PC use by billions. Already, the iPhone share of global, mobile acccess is 70% or higher, far greater than their small share of smartphone ownership. This means that iPhone users are the only mobile users who actually use their phones to surf.

Despite large numbers of Android sold, their users seem to behave like the even larger numbers of Nokia users in the world, which is little use of the phone for web access. That's not a good sign for Android.

What are Apple competitors doing to catch up?
  • Android is free, thus selling lots of phones. But, the platform is suffering from fragmentation among OEM and carrier initiatives, thus making it difficult to build any cohesive user experience. No one company manages the total user experience.
  • Microsoft and Nokia lack the customer loyalty and market credibility to match Apple's success. They have failed too often in this space.
  • RIM, Motorola, and HP/Palm might have a chance to build the same kind of customer relationship with a large audience, but they need to innovate faster.
Global Brand Among Billions

The real message for Apple is global dominance like the Coke brand. Does that justify Apple becoming the highest market value company in the world? If you don't believe their yuppy image, then watch their earnings growth.

It's a matter of time.

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