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Morgan Stanley ups Apple target, Mac sales estimates

post #1 of 51
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In a bullish research report released Friday, Morgan Stanley raised its price target on shares of Apple Inc. to $180 from $150, but said that the stock could potentially surge as high as $225 given the company's operating leverage and the upcoming launch of an ultramobile Mac.

The investment bank -- one New York City's largest and most reputable -- also raised its calendar year 2008 per-share earnings forecast from $5.00 to $6.00, adding that in its "bull case scenario" $7.00 in per-share earnings and a $225 stock price is "increasingly likely" given the Cupertino-based company's operating leverage, faster than expected Mac market share growth, and the best iPod lineup since 2005.

"We continue to believe Street estimates understate the true operating margin potential of Apples business. In the near-term, component costs arent nearly the headwind many feared," analyst Katy Huberty wrote. "Longer-term, Leopard OS launch, increased store revenue, AT&T payments and unit scale/accessories sales on a much larger installed base are all likely to drive margins higher."

Huberty increased her 2008 Mac unit forecast by 900,000 units to 9.3 million units and her Mac revenue share forecast by half a point to 5 percent in order to account for recent Mac outperformance as well as the continued strength she expects in Mac demand. The analyst also believes the iPhone will drive more ancillary revenue than she previously modeled.

"We are now assuming an incremental $150/iPhone payment from AT&T (in addition to $5/month service revenue sharing) and $75 of accessories revenue (vs. $30 in old model)," she wrote.

Furthermore, the analyst said, Mac unit upside and the launch of Mac OS X Leopard in late October should drive at least 80 basis points of gross margin upside to her previous model.

For Apple's recently ended September quarter, results of which are due October 22nd, Huberty said she is now expecting upside to both her $6.3 billion revenue and $0.82 per-share earnings forecast. While she had been modeling the company to sell 1.9 million Macs (20 percent growth) during the three month period, July and August Mac sellout data in the U.S. retail and distributor channels have recently suggested that Apple will best that estimate.

"Furthermore, this data shows that Apple was the only major PC vendor that did not experience a slowdown in unit growth during the month of August," Huberty added. "We believe this is a function of its higher income customer and product that stands out in what is otherwise a commoditized market."



Meanwhile, the analyst's checks on iPod build plans through the quarter pointed to units in the 14 to 17 million range. And while all of those player are unlikely to have shipped into retail stores by the quarter's end on September 29th, she does see "upward pressure" on her 11 million iPod estimate. iPhone units, she expects, will come in close to her 1.2 million forecast.

"We view Apples powerful brand, distribution and customer experience engine as key to driving incremental revenue growth," Huberty wrote. "Operating leverage is central to our thesis, as operating expenses scale over a larger revenue base and Apples retail stores drive improved margins."

More (1, 2) on the ultra-mobile Mac that Katy talks about in her case scenarios.
post #2 of 51
$75 in accessories? That seems a little high.

But aapl can make 200 on increasing mac sales alone.
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post #3 of 51
Actually a solid analysis. Someone actually did their homework.

But where in the quotes does the analyst cite the possibility of a so-called "ultra-portable"? Where?

I don't see mention of it here:
http://aapl.bloggingstocks.com/

Nor here:
http://blogs.barrons.com/techtraderd...target-to-110/

Don't confuse wishful thinking for actual reporting, guys.

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post #4 of 51
Using today's multiple of 47 with the $7.00 EPS scenario, AAPL would be at $329.
post #5 of 51
Split soon? Give me your McAnalysis, McHuman.

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post #6 of 51
Quote:
Originally Posted by SpamSandwich View Post

Actually a solid analysis. Someone actually did their homework.

But where in the quotes does the analyst cite the possibility of a so-called "ultra-portable"? Where?

I don't see mention of it here:
http://aapl.bloggingstocks.com/

Nor here:
http://blogs.barrons.com/techtraderd...target-to-110/

Don't confuse wishful thinking for actual reporting, guys.

MS always does a wonderful job, I must say. And lets not forget they are the only ones to really nail the iPhone specs ahead of release =P

Look at the graphic... it was only mentioned a few places... no details.
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post #7 of 51
Quote:
Originally Posted by Kasper View Post

MS always does a wonderful job, I must say. And lets not forget they are the only ones to really nail the iPhone specs ahead of release =P

Look at the graphic... it was only mentioned a few places... no details.
Best,

K

OK, there are 2 brief mentions of an "ultramobile". More likely are Leopard release and expected updates...speculation of a totally new piece of hardware has no business being in the analysis and is highly unlikely (in other words, the best case scenario should not even factor this in!).

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post #8 of 51
Quote:
Originally Posted by SpamSandwich View Post

Split soon? Give me your McAnalysis, McHuman.


No reason to split.
post #9 of 51
Quote:
Originally Posted by McHuman View Post

No reason to split.

Reasons? More affordable to the average AAPL investor, continued perception of AAPL being on a roll (although it adds no value, it can attract investors, admit it!... when's the last time you picked up a block of Google stock? Google is out of the question for most investors that are not institutions).

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post #10 of 51
Quote:
Originally Posted by McHuman View Post

Using today's multiple of 47 with the $7.00 EPS scenario, AAPL would be at $329.

I get very nervous when Apple sits in the mid 40's for more than the time to the next quarter end.

I feel much better when it's sitting in the mid 30's.
post #11 of 51
Quote:
Originally Posted by SpamSandwich View Post

Reasons? More affordable to the average AAPL investor, continued perception of AAPL being on a roll (although it adds no value, it can attract investors, admit it!... when's the last time you picked up a block of Google stock? Google is out of the question for most investors that are not institutions).

Against the idea of a split is that it's much harder to beat the whisper number by a few cents. As the whisper numbers seem to be what investors are looking at these days, rather than more realistic figures, companies feel as though (often correctly) they have to beat them for the stock to continue to rise.

The more shares, the lower earnings are per share, and the more difficult to fiddle those last few cents.

Who cares who last bought Google shares. Not buying a share because of the price is simply poor investment policy. By the way Googles price is increasing, someone is buying them.
post #12 of 51
Quote:
Originally Posted by melgross View Post

Who cares who last bought Google shares. Not buying a share because of the price is simply poor investment policy. By the way Googles price is increasing, someone is buying them.

Agreed. There are no reasons for splits. Anyone who can't afford to pay $150 for some shares but can afford $75 is not somebody we want supporting our stock. If you have $10,000, buying $500 shares or $5 shares is the same thing.

Second, its the current trend for the big tech boys to be expensive - google, rimm, bidu, aapl. Also makes for less volatile stock and as such, impresses institutions to stay in. Apple is going for a more stable, blue-chip management for their shareholders recently and avoiding the up and down cheap mom & pops that jump in on a split.
post #13 of 51
Quote:
Originally Posted by McHuman View Post

Agreed. There are no reasons for splits. Anyone who can't afford to pay $150 for some shares but can afford $75 is not somebody we want supporting our stock. If you have $10,000, buying $500 shares or $5 shares is the same thing.

Second, its the current trend for the big tech boys to be expensive - google, rimm, bidu, aapl. Also makes for less volatile stock and as such, impresses institutions to stay in. Apple is going for a more stable, blue-chip management for their shareholders recently and avoiding the up and down cheap mom & pops that jump in on a split.

Yes, exactly.

I'll give a little scenario for those who don't understand what happens when a split is announced for shares that are rising.

The split is announced. Experienced investors immediately buy in. The stock begins its run-up to the day of the split.

The stock splits. The inexperienced investors buy in, and the stock prices rises a bit more for a short while.

The experienced investors sell out, taking their profits.

The stock price falls, and the inexperienced investors are standing around going "duh".

The experienced investors buy back in.

After a bit of time, the stock which was rising BEFORE the announcement of the split continues its rise.

The inexperienced investors wipe the sweat off their foreheads (if they didn't sell into the drop), and are convinced the stock is rising BECAUSE of the split.

The same thing happens a few years later if the company is still doing very well (with often the same groups of investors—some people never learn).
post #14 of 51
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post #15 of 51
Quote:
Originally Posted by SpamSandwich View Post

Reasons? More affordable to the average AAPL investor, continued perception of AAPL being on a roll (although it adds no value, it can attract investors, admit it!... when's the last time you picked up a block of Google stock? Google is out of the question for most investors that are not institutions).

Major corporations are finding fewer reasons to split. Google's stock and Warren Buffet's company are two examples that are often cited.

The only thing that a split does is affect its perception of cost. If it weren't for stupid perceptions like that, a stock split really does nothing. I really don't think any major corporation wants the instability of having to deal with people that dumb owning their stock. I think they are exactly the kind of people that buy and sell based on faulty information.

It is possible to buy fractions of a share, so I don't think affordability is a valid reason.
post #16 of 51
Quote:
Originally Posted by JeffDM View Post

Major corporations are finding fewer reasons to split. Google's stock and Warren Buffet's company are two examples that are often cited.

The only thing that a split does is affect its perception of cost. If it weren't for stupid perceptions like that, a stock split really does nothing. I really don't think any major corporation wants the instability of having to deal with people that dumb owning their stock. I think they are exactly the kind of people that buy and sell based on faulty information.

It is possible to buy fractions of a share, so I don't think afford ability is a valid reason.

Good points. Personally I'd like to see apple issue about 130.4 million new shares, making an even 1 billion outstanding, @ 145 a piece to raise some capital(18.9billion). That along with their 10.1 billion cash on hand should give them a good war chest(29 billion total) for future acquisitions.
post #17 of 51
Quote:
Originally Posted by JeffDM View Post

Major corporations are finding fewer reasons to split. Google's stock and Warren Buffet's company are two examples that are often cited.

The only thing that a split does is affect its perception of cost. If it weren't for stupid perceptions like that, a stock split really does nothing. I really don't think any major corporation wants the instability of having to deal with people that dumb owning their stock. I think they are exactly the kind of people that buy and sell based on faulty information.

It is possible to buy fractions of a share, so I don't think affordability is a valid reason.

I agree with many of these observations (mainly regarding the "perception" issue... and Apple being mainly a technology & marketing firm, perception is paramount), but as you are all aware, AAPL has split 3 times previously, once within the past 2 years.

Additionally, as this article raises the point of Apple attempting to meet the challenge of a wider audience for their products, if customers are unhappy, profits suffer and investors become unhappy... So, thinking that dumb people should not have a stake in AAPL is just foolishness. Dumb people are also AAPL customers... see iPhone "bricking" for proof of that.

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post #18 of 51
Quote:
Originally Posted by Atlas720 View Post

Good points. Personally I'd like to see apple issue about 130.4 million new shares, making an even 1 billion outstanding, @ 145 a piece to raise some capital(18.9billion). That along with their 10.1 billion cash on hand should give them a good war chest(29 billion total) for future acquisitions.

Issuing new stock dilutes the value per share. There's less logic in this than in splitting the stock!

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post #19 of 51
Another point has been raised... does anyone here actually OWN any GOOG? I don't.

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post #20 of 51
Quote:
Originally Posted by SpamSandwich View Post

Issuing new stock dilutes the value per share. There's less logic in this than in splitting the stock!

That, and Apple already has a lot of cash. They can seemingly acquire anything and anyone they feel they need to.
post #21 of 51
Quote:
Originally Posted by SpamSandwich View Post

I agree with many of these observations (mainly regarding the "perception" issue... and Apple being mainly a technology & marketing firm, perception is paramount), but as you are all aware, AAPL has split 3 times previously, once within the past 2 years.

I totally missed that split.

Quote:
Additionally, as this article raises the point of Apple attempting to meet the challenge of a wider audience for their products, if customers are unhappy, profits suffer and investors become unhappy... So, thinking that dumb people should not have a stake in AAPL is just foolishness. Dumb people are also AAPL customers... see iPhone "bricking" for proof of that.

The problem is that those investors are likely the ones that increase the volatility. Remember the posters grousing this summer about huge drops after a series of unsubstantiated rumors?

Customers don't have to be share holders, and share holders don't have to be customers. There are some good up sides if Apple's loyal customers are loyal stock holders too, but the unhappy ones probably aren't going to be either for very long.
post #22 of 51
Quote:
Originally Posted by JeffDM View Post

I totally missed that split.



The problem is that those investors are likely the ones that increase the volatility. Remember the posters grousing this summer about huge drops after a series of unsubstantiated rumors?

Customers don't have to be share holders, and share holders don't have to be customers. There are some good up sides if Apple's loyal customers are loyal stock holders too, but the unhappy ones probably aren't going to be either for very long.

I think we essentially agree on the same things. I'll just reiterate that public perception and unhappy customers can also contribute to a volatile stock and are affected by small and large investors... despite attempts to hide the fact that stock prices are as impacted by emotional panic, hubris, etc.... as they are affected by reams of "scientific data" meant to support their decisions to buy and sell.

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post #23 of 51
I think a split would decrease volatility.

Right now a small number Daytraders can manipulate the stock every day with big trades.

If aapl split and we add say maybe 200K more new investors in aapl, more share will be owned by more people. Not everyone who buys dumps their shares at the smallest hiccup.

Look at MS or INTC. Their stock fluctuates very little because there are so many shares outstanding.
post #24 of 51
Quote:
Originally Posted by SpamSandwich View Post

Issuing new stock dilutes the value per share. There's less logic in this than in splitting the stock!

Actually, there is a reason for issuing more shares.

When a companies shares are traded, even if they are going up, the company receives no money from those trades, or the value of the stock, except for what they are holding for compensation of employees, etc.

If the company needs cash for expansion, issuance of new stock, perhaps of a different class, so that other stock is not diluted, or diluted too much, is one way to do it. This way, they don't have to borrow money.

They can also issue bonds, but those have to be paid back with interest.
post #25 of 51
Quote:
Originally Posted by SpamSandwich View Post

Another point has been raised... does anyone here actually OWN any GOOG? I don't.

I did, for about 18 months, starting a month after they went public.
post #26 of 51
Quote:
Originally Posted by g5man View Post

I think a split would decrease volatility.

Right now a small number Daytraders can manipulate the stock every day with big trades.

If aapl split and we add say maybe 200K more new investors in aapl, more share will be owned by more people. Not everyone who buys dumps their shares at the smallest hiccup.

Look at MS or INTC. Their stock fluctuates very little because there are so many shares outstanding.

Over 70% of Apple's stock is owned by institutions. Splitting will not change that ratio. Everyone who owns stock will simply own twice as much.

There's no evidence that cheaper stocks attract investors who are less likely to sell. I believe it's the opposite.

Check Intel's price over the past two years. MS's stock doesn't fluctuate too much, but MS hasn't shown rapid growth in years. The stock reflects investors concerns about that, as well as its money losing businesses. If MS dropped the entertainment division, the stock would shoot up.
post #27 of 51
WOW she is much better than Munster!
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post #28 of 51
Quote:
Originally Posted by melgross View Post

Actually, there is a reason for issuing more shares.

When a companies shares are traded, even if they are going up, the company receives no money from those trades, or the value of the stock, except for what they are holding for compensation of employees, etc.

If the company needs cash for expansion, issuance of new stock, perhaps of a different class, so that other stock is not diluted, or diluted too much, is one way to do it. This way, they don't have to borrow money.

They can also issue bonds, but those have to be paid back with interest.

You do understand that any money gained from a shelf offering (selling more shares to the public) is taken from current shareholders, right? No company can invent another 10% of itself to sell - if you sell 10% more shares, the other 90% own 10% less of the company than they did before. Interest free? Not hardly.
post #29 of 51
Quote:
Originally Posted by cameronj View Post

You do understand that any money gained from a shelf offering (selling more shares to the public) is taken from current shareholders, right? No company can invent another 10% of itself to sell - if you sell 10% more shares, the other 90% own 10% less of the company than they did before. Interest free? Not hardly.

HELLO? but the company holds (owns) 10% more cash. Hence the value of the company also has increased by 10%.
post #30 of 51
Quote:
Originally Posted by Gusman View Post

HELLO? but the company holds (owns) 10% more cash. Hence the value of the company also has increased by 10%.

Yes, and once Apple starts sending out dividend checks to shareholders, that cash pile will matter. Until then, any smart investor would be asking Apple why, with 10 billion in cash, they think they need that much more. It amounts to Apple selling 10% of my holdings for cash that goes into THEIR bank account.

Of course since Apple won't be filing for a shelf any time soon, this is all a pointless discussion. But a growth company's stock does not go up because of cash on hand, it goes up because of earnings per share growth. Diluting EPS by selling off part of MY holdings to someone else is not OK with me.
post #31 of 51
Quote:
Originally Posted by melgross View Post

I did, for about 18 months, starting a month after they went public.

And what was your reason for selling?

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post #32 of 51
Quote:
Originally Posted by cameronj View Post

Yes, and once Apple starts sending out dividend checks to shareholders, that cash pile will matter. Until then, any smart investor would be asking Apple why, with 10 billion in cash, they think they need that much more. It amounts to Apple selling 10% of my holdings for cash that goes into THEIR bank account.

Of course since Apple won't be filing for a shelf any time soon, this is all a pointless discussion. But a growth company's stock does not go up because of cash on hand, it goes up because of earnings per share growth. Diluting EPS by selling off part of MY holdings to someone else is not OK with me.

cameron,

a little off subject but I want to congratulate you on the fact that aapl hit 160 this month. You called it back in July and it happened a month early. Great call.

Where do you see aapl in the next three months?
post #33 of 51
Quote:
Originally Posted by cameronj View Post

You do understand that any money gained from a shelf offering (selling more shares to the public) is taken from current shareholders, right? No company can invent another 10% of itself to sell - if you sell 10% more shares, the other 90% own 10% less of the company than they did before. Interest free? Not hardly.

I'm talking about the advantage to the company. Beside a different class of shares, as I mentioned, can have a very different value, due to voting restrictions, etc. The dilution isn't the same.

But, it does raise money, which can uplift the value of the company if it is put to good use, such as building a new factory to increase production of popular items, R&D, purchase of another companies technology, payment of long, and possibly short term debt, etc.

This will increase shareholder value over the medium term, which a split can't do.
post #34 of 51
Quote:
Originally Posted by cameronj View Post

Yes, and once Apple starts sending out dividend checks to shareholders, that cash pile will matter. Until then, any smart investor would be asking Apple why, with 10 billion in cash, they think they need that much more. It amounts to Apple selling 10% of my holdings for cash that goes into THEIR bank account.

Of course since Apple won't be filing for a shelf any time soon, this is all a pointless discussion. But a growth company's stock does not go up because of cash on hand, it goes up because of earnings per share growth. Diluting EPS by selling off part of MY holdings to someone else is not OK with me.

I'm not advising Apple to do this. They don't have to. It was a general statement in response to another general statement.
post #35 of 51
Quote:
Originally Posted by SpamSandwich View Post

And what was your reason for selling?

It went up a good amount, and Apple's stock was rising again. I thought that Apple's stock would rise faster than Google's did.

It did.
post #36 of 51
Quote:
Originally Posted by McHuman View Post

Using today's multiple of 47 with the $7.00 EPS scenario, AAPL would be at $329.

Isn't it likely that as AAPL's market capitalization goes up, and let's say it approaches and even eclipses Microsoft's, that the P/E has to come down? I believe the high P/E is an expression of investors' expectations of growth, but as Apple becomes bigger and bigger, the same growth rate, especially in terms of percentages, becomes harder and harder to achieve. Don't we expect dividends and a lower P/E at some point?

Any thoughts?
post #37 of 51
Quote:
Originally Posted by delreyjones View Post

Isn't it likely that as AAPL's market capitalization goes up, and let's say it approaches and even eclipses Microsoft's, that the P/E has to come down? I believe the high P/E is an expression of investors' expectations of growth, but as Apple becomes bigger and bigger, the same growth rate, especially in terms of percentages, becomes harder and harder to achieve. Don't we expect dividends and a lower P/E at some point?

Any thoughts?

Exactly!

The larger a company becomes, the more difficult it is to maintain the same level of growth. That's one reason why large companies often go on an acquisition binge. It's the only, and often, cheapest, and safest, way, the company can continue to grow.

We can look at MS itself. Without moving into other, faster growth areas, MS can only grow at the pace of the industry, except for a few more years in server software, where MS has caught up with the open solutions, and whose growth has yet to reach its monopoly limits.

So, if MS remains just an OS/Office company, their growth will be no more than 8 to 10% yearly, under optimum conditions (assuming that OS X and Linux isn't eating into their marketshare by much). If the industry slows down further, so will their growth. That's why the stock price declined, and has been stuck at, or below, $30 for so many years.

Therefore, the attempt at cell OS licensing, entertainment, hardware, investments in communication companies, etc.

I'm not saying that in their case all of this is working out the way they want, but they do understand that they have to do something.

In Apple's case, I wonder why they have been so tightfisted with their cash. At the end of this quarter, they should have about $14 billion.

Are they holding this for one big acquisition? I wonder.
post #38 of 51
I've felt for years that Microsoft's best option would be to split up the company into divisions with a tighter focus on profitability in each division. As you've noted, their growth has been disappointingly flat for years. Ballmer should be fired, and Xbox should be a separate company.

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post #39 of 51
Quote:
Originally Posted by SpamSandwich View Post

I've felt for years that Microsoft's best option would be to split up the company into divisions with a tighter focus on profitability in each division. As you've noted, their growth has been disappointingly flat for years. Ballmer should be fired, and Xbox should be a separate company.

Often, a company has more value in the individual parts, and as you say, when broken up would be worth more.

But, the XBox would disappear without MS's deep pockets. It's a failure as a business.
post #40 of 51
Quote:
Originally Posted by delreyjones View Post

Isn't it likely that as AAPL's market capitalization goes up, and let's say it approaches and even eclipses Microsoft's, that the P/E has to come down? I believe the high P/E is an expression of investors' expectations of growth, but as Apple becomes bigger and bigger, the same growth rate, especially in terms of percentages, becomes harder and harder to achieve. Don't we expect dividends and a lower P/E at some point?

Any thoughts?

The most insightful post in an otherwise, occasionally bewildering discssion thread on corporate finance!

Apple's current P/E -- which is unsustainably high -- presages the cash flow (and its proxy, earnings) growth that the company has to deliver in the next couple of years. So, in that sense, your observation is spot on, it's P/E will have to inevitably come down given the assets-in-place. Of course, Apple could keep it going if it came up with some next new big thing that none of us as investors foresees yet!
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