Apple's settlement seen as the right move
Apple Computer's decision to settle its legal disputes with Creative Technology by way of a $100 million cash payment will likely save the iPod maker from potential headaches that could have arisen down the line, one Wall Street analyst says.
In a research note released to clients on Thursday, PiperJaffray analyst Gene Munster dubbed the one-time payment a "drop in the bucket," explaining that it represents just 1.1 percent of Apple's total cash holdings.
"If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches including: further appeals, product injunctions, future and historical royalty payments, etc.," the analyst wrote. "Considering $100 million represents 1.1 percent of Apple's $9.2 billion in cash, we believe the settlement will prove to be the right course of action."
Separately, Munster said he sees Creative's decision to join Apple's "Made for iPod" accessory program as a turning point in its digital music strategy.
"Over the last several years, Creative has been focused on head-to-head competition with the iPod and it appears that the company is now embracing the iPod eco-system as a way to grow revenue," he said. "We see this as a subtle admission by Creative that iPod does in fact dominate the MP3 player market and more may be gained from 'coopetition' than direct competition."
In a second research note, also released on Thursday, Munster said he continues to find Apple's share price attractive despite the Street's consensus that shares currently trade at premium valuation.
"We believe many investors generally feel that Apple shares have a high relative valuation and, therefore, the Street remains split between those that believe shares deserve to continue to trade at a premium and those that believe shares should trade lower due to declining momentum," the analyst wrote. "Our take is that Apple shares do not trade at a premium valuation."
Munster said he believes the best valuation metric to provide a parallel comparison between Apple shares and its hardware and software competitors is to examine the company's price-to-earnings ratio divided by its year-over-year earnings growth rate (P/E/G) -- a metric where lower figures represent higher value.
"Apple is a unique company in that its business stretches into both hardware and software," the analyst explained. "As such, we believe a comparative valuation group should consist of Apple's competitors in both hardware and software."
Munster chose to use his valuation metric to compare Apple to Dell, IBM, HP, Adobe, Autodesk and Microsoft. "With all of the relevant pieces in place, we see that the P/E/G excluding cash on Apple shares is 1.0, while the comp group average is 1.5," he told clients. "Clearly the right valuation metrics to use on any given company are up for interpretation, but we believe this method provides the most consistent strategy for comparison."
Going forward, Munster believes that Apple will continue to outpace the growth of its competitors and that it is destine for further market share growth in the PC sector over the next 2 years. The analyst maintains an "Outperform" rating on shares of Apple with a price target of $99.
In a research note released to clients on Thursday, PiperJaffray analyst Gene Munster dubbed the one-time payment a "drop in the bucket," explaining that it represents just 1.1 percent of Apple's total cash holdings.
"If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches including: further appeals, product injunctions, future and historical royalty payments, etc.," the analyst wrote. "Considering $100 million represents 1.1 percent of Apple's $9.2 billion in cash, we believe the settlement will prove to be the right course of action."
Separately, Munster said he sees Creative's decision to join Apple's "Made for iPod" accessory program as a turning point in its digital music strategy.
"Over the last several years, Creative has been focused on head-to-head competition with the iPod and it appears that the company is now embracing the iPod eco-system as a way to grow revenue," he said. "We see this as a subtle admission by Creative that iPod does in fact dominate the MP3 player market and more may be gained from 'coopetition' than direct competition."
In a second research note, also released on Thursday, Munster said he continues to find Apple's share price attractive despite the Street's consensus that shares currently trade at premium valuation.
"We believe many investors generally feel that Apple shares have a high relative valuation and, therefore, the Street remains split between those that believe shares deserve to continue to trade at a premium and those that believe shares should trade lower due to declining momentum," the analyst wrote. "Our take is that Apple shares do not trade at a premium valuation."
Munster said he believes the best valuation metric to provide a parallel comparison between Apple shares and its hardware and software competitors is to examine the company's price-to-earnings ratio divided by its year-over-year earnings growth rate (P/E/G) -- a metric where lower figures represent higher value.
"Apple is a unique company in that its business stretches into both hardware and software," the analyst explained. "As such, we believe a comparative valuation group should consist of Apple's competitors in both hardware and software."
Munster chose to use his valuation metric to compare Apple to Dell, IBM, HP, Adobe, Autodesk and Microsoft. "With all of the relevant pieces in place, we see that the P/E/G excluding cash on Apple shares is 1.0, while the comp group average is 1.5," he told clients. "Clearly the right valuation metrics to use on any given company are up for interpretation, but we believe this method provides the most consistent strategy for comparison."
Going forward, Munster believes that Apple will continue to outpace the growth of its competitors and that it is destine for further market share growth in the PC sector over the next 2 years. The analyst maintains an "Outperform" rating on shares of Apple with a price target of $99.
Comments
yes apple got away very cheap. this could have cost them many times more than what they paid. think if they had to pay $10 for every iPod sold. that would be billions.
More like $580 Million. This settlement equates to roughly 2 bucks for every iPod sold. But you're right, they got away pretty cheaply. The patents must have been pretty buttoned up for Apple to agree to $100MM settlement.
Steve * Ive * iPod * MacBook / Ballmer / Shitty Creative bailout / Dell dude
Throw in a wildcard Woz and serve with skepticism.
Although I would like Creative to disappear (and thus not too crazy about Apple giving them money to extend their existence), this settlement does seem to be the best possible outcome. Apple gains a iPod partner and will be getting a portion of the money back in the made for iPod licensing. And could get more money back if Creative gets money from other licensees - in other words, Apple has become a "co-holder" of the patent.
Considering how important the iPod's simple user interface is to sales, that's a bargain. Even if the patent is completely obvious and shouldn't have been granted. Apple may even get some of that money back if Creative license it to other companies, and third party Creative peripherals for the iPod will increase the appeal of the iPod platform too.
More like $580 Million. This settlement equates to roughly 2 bucks for every iPod sold. But you're right, they got away pretty cheaply. The patents must have been pretty buttoned up for Apple to agree to $100MM settlement.
Not really. It's just a matter of economics. Even with weak patents, you'll have an entire 18-month long ITC investigation, and then an entire federal lawsuit plus appeals. Both sides would probably be paying millions by then, win or lose, and in the meantime Apple would have a big cloud hanging over them. $100M is definitely worth having the most visible and potentially costly lawsuit against the iPod dropped, and there's a chance even that amount could be lowered if Creative can convince others to pay royalties. And without Apple to challenge the patent, it would be hard for anyone ELSE to claim they didn't infringe, since most of the prior art seems to be Apple's.
I love my macs and my ipods, but I hope that this doesn't erode any long-term competitive spirit in the portable/music gadget arena. Although Creative's products aren't exactly my cup of tea, there's a benefit to having choices. I trust that Apple will remain self-motivated, but checks and balances is a good thing (though one does wonder if it's been asleep in the U.S. govt. for the last 6 years or so.)
Creative is no longer Apple's biggest competitor. That's now SanDisk, who has at least twice the market share of Creative depending who you ask. Even if Creative gets out of the MP3 market, it won't lessen the competitive landscape too much.
It is all about the ecosystem. That is what gives MS its inertia and will do so for iPods. Does anyone know what products Creative will try to market as "made for iPod?" Apple could let them make devices with smaller niche markets, like adaptors for in-car videoplayers, etc. I would like to see metal iPods like the iPod mini form.
Can't wait to see what the shiny, new iPods will look like just before the Zune roll-out! "Zune what?!"