Apple Inc. (AAPL)
Reiterates 5 STARS (strong buy)
Analyst: Scott Kessler
Apple announces that starting in May, EMI Music's digital music will be available via iTunes without digital rights management. These DRM-free tracks will offer higher quality and interoperability for $1.29 apiece. Apple will also enable users to upgrade their EMI songs for 30 cents apiece. Apple expects more than half of iTunes' songs to have non-DRM versions by year-end. Less than two months ago, Apple CEO Steve Jobs called for music companies to sell their music without DRM. We think the proliferation of DRM-less digital music would be good for AAPL.
Warner Music Group (WMG)
Maintains 3 STARS (hold)
Analyst: Tuna Amobi, CPA, CFA
EMI plans to offer songs at $1.29 a download, free of digital rights management software on Apple's iTunes store, with DRM-embedded songs still offered at 99 cents a track. We view this move by the world's third largest music company as a major break with industry practice after, in our view, Apple CEO Steve Jobs' debate-stirring "Thoughts on Music" treatise published last month. While the move could help address long-term device interoperability issues with non-iPod users, we see potentially adverse piracy implications, and we expect Warner Music and others to tread rather softly.
Creative Technology (CREAF)
Reiterates 2 STARS (sell)
Analyst: J. Hingorani
Creative expects March-quarter revenues to fall short of expectations, and it forecasts an operating loss of roughly $20 million. We think expected revenue of $180 million, almost 16% below our estimate, is symptomatic of a decelerating economy and slowing consumer spending. We estimate a March-quarter loss of 21 cents per share, and a fiscal 2007 (ending June) loss of 36 cents before one-time items recorded in the previous quarter. We are lowering our 12-month target price by 50 cents to $5.50, about 0.45 times our calendar 2007 revenue per share estimate, below historical levels due to our view of declining sales.