The firm raised its earnings-per-share estimates on the iPod maker for the 2006 and 2007 calendar years by 28 and 50 cents to $2.07 and $2.57, respectively. However, near-term iPod expectations could prove aggressive due to a lack of supply, the firm said.
"We continue to believe demand outstrips supply for iPods and that Apple is doing the best it can to supply both its own and traditional retail stores," analyst Rebecca Runkle wrote in a research note released to clients on Friday. The analyst recently conducted a survey of 2,500 US consumers and found that they plan to buy more iPod and related products than any other electronics category.
"To hone in on this point, more people plan to buy an iPod this holiday season than a cell phone," the analyst said. "Also interesting, more people plan to buy iTunes gift cards this season than non-iPod branded MP3 players."
Of all the consumers planning to purchase an iPod this holiday season, only 4- percent said they would purchase another brand of MP3 player if a store was out of their desired model.
"We think this speaks wonders on iPod brand loyalty and ultimately ties consumers into an expanding portfolio of Apple products," Runkle said. The analyst notes that: "Of the current MP3 player owners planning to buy an iPod this holiday, 40-percent currently own a non-iPod MP3 player -- a sign of additional iPod market share traction."
The survey also revealed that consumers are showing a demand shift away from simple iPods like the shuffle and towards higher function players like video iPod. "We believe this provides evidence that management of digital content in the living room is important to consumers and could drive incremental demand this coming year," Runkle said.
Still, only 8% of US households own iPods and 5% own Macs. Morgan Stanley sees this sub-10% penetration as key to additional retail expansion opportunities for Apple within the US.
"Apple management agrees its US retail footprint isnt maxed out at the 135+ stores today," Runkle said. "While market demand, product execution and competitive dynamics will all impact the rate of growth and ultimate number of Apple retail stores, an analysis of similar retail chains suggests a number in the 300-400 store range is a fair target."
As further evidence that the iPod brand is drawing consumers to the Mac, the survey also revealed that iPod owners are three times as likely to seriously consider the purchase of a Mac as non-iPod owners.
Looking into Apple's product portfolio, Morgan Stanley said the company's supply chain is pointing to notebook shipments that could materially increase with the new Intel-based Macs that appear set to begin shipments in first quarter of 2006. The firm also sees the Mac mini and Front Row software moving into the living room, and an Apple-branded iPhone product sometime in the next 12 months.
"Apple hasnt confirmed its phone strategy (or even acknowledged that one exists), but at our recent meeting management did suggest a) handset makers will eventually get an MP3 offering right and b) Apples strategy is to be an innovation leader," Runkle wrote.
Morgan Stanley maintains an Overweight (or Buy) rating on Apple shares with a price target of $90, up from $70. The firm is "sticking with" its 10.2 million iPod estimate for the quarter ending December 31st.