S&P: Still Plenty of Shine on Apple

Standard & Poor's Scott Kessler maintains his buy rating on Apple as it launches its iPhone and Leopard offerings

Shares of Apple (AAPL) ($117) gave way to a little gravity when the opening bell rang on June 14, selling off in early trading following a 2.4% sell-off the day before. Standard & Poor's Equity Research thinks Chief Executive Steve Jobs may have upset the Apple cart by disappointing devotees at its developers' conference June 11. However, S&P believes now is not the time for investors to sour on the shares.

Scott Kessler, head of technology equity analysis at S&P, reiterated his 4 STARS (buy) ranking on the shares June 12 after listening to company co-founder Jobs' 90-minute-long keynote speech at the conference, which addressed computer software rather than the impending launch later this month of the iPhone.

It's a Jungle Out There

Kessler explains most of the presentation was dedicated to detailing 10 of the 300 new features in Apple's new operating system, Leopard, which is set to be introduced in October—just in time for the holiday shopping season. Jobs also announced Apple's Safari browser is available for Windows computers.

"We think the Leopard product looks good and is on schedule. The price of $129 seems reasonable to us," Kessler says. He also thinks launching the Windows version of the Internet browser Safari, which was only available for Apple's Macs, "makes sense." According to Kessler, it will probably help Apple gain browser market share, attract iPhone developers and applications, and eventually convert desktop and laptop users to Macs—all of which would be positive developments for Apple.

He thinks the stock will outperform expectations over the next 12 months despite having more than doubled in the past year. "Expectations are extremely high over the near term," he says, adding that he believes Apple will be able to achieve its goal of 1 million iPhone units sold by the end of calendar year 2008.

Gains in PCs, Downloads

Despite the significant appreciation in the stock, it trades at a price-to-earnings growth ratio (PEG) of only 1.2 when factoring in S&P's calendar year 2007 earnings per share estimate. "The PEG still is attractive to us based on comparisons to the S&P 500 and other technology shares," Kessler explains.

From Kessler's point of view, the stock is not only attractively valued, it also has great growth characteristics. He thinks, for example, Apple will gain share in the global PC market in both desktops and notebooks. He believes Apple's digital media player, iPod, and download service iTunes will remain dominant in the distribution of digital media.

Kessler has a 12-month target price of $135 on the shares. But that assessment comes with some risks. In addition to the seemingly ever-evolving market for consumer-oriented technology products, potential challenges associated with the company's growing size and offerings, and the critical importance of Jobs to the company, "We have some concerns about the iPhone," Kessler says. "From a product and experience perspective, we wonder about things like the touch-screen interface." By that he means how effective or accurate the touch screen will be or whether people will care about the "smudging" effect of fingerprints on its high-gloss surface.

iPhone Outlook

Plus, he questions what users will think about the iPhone's battery life, its high price point (a retail price tag of either $499 or $599, depending on the model), and the quality of service of the exclusive wireless network provider, AT&T (T).

Kessler says, however, that the iPhone will most likely be marketed to demonstrate its value as a multifunctional device with features that go far beyond its mobile communications capabilities—in other words, an all-in-one gadget. "As CEO Jobs has been saying, the iPhone is not just a phone; it's also an Internet access device and an iPod," Kessler says.

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