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What does AAPL's Future Hold?

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By rnsmth
February 2, 2005

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I have written some things in the past two weeks that have sounded a bullish in regard to AAPL. This seems to be the truth :), but I have moved up the stop-loss order amount this morning on 55% of my AAPL shares to $71.00. If that were taken out, it would give me a good profit on those shares.

I still am, BTW, bullish, but there is some information I would like to have. Some of it is theoretically available now; some will not be for another 6-12 months.

So far, inferring from shipping dates, it looks like early orders for the Mini and the Shuffle are doing well. This could be, however, a mixed blessing, for there are things we do not know:

1) What are the margins on these new products? While the common hypothesis is that they are lower than Apple's historical margin on hardware products, I suspect they are still healthy. Also, given Apple's growing revenues it seems reasonable to assume that relatively fixed costs of the enterprise will be spread out among more units, making that hit proportionately smaller. Nonetheless, we won't really know some of answers to this question until April. One analyst - and I have read so many reports lately without taking notes on each one, I do not recall which one - thought that about half of the gross margin from these new products would drop directly to the bottom line. I am unsure of his reasoning, but if that is the case we should be happy campers, those of us who are long.

2) Apple does not have a stellar history of handling new product launches, and while we have some clues about orders, we have no way to parse how much of the month or so delay in shipment is due to strong orders and how much may be due to early production issues, should any exist. Given Apple's history with new products, I do not rule out the latter, but we are still left to make informed guesses. My guess is that we might of heard of early problems, if they existed �as we have with past launch problems. In the long term it may not matter much, but it could have an impact on share price in the short term.

Now, onto other information that the next 6 to 12 months will bring:

Mac Mini demand after early enthusiast buying:

Apple could have a real hit on its hands here. It could be very big. When will we know? Well, I think the back to school period - mid-July to mid-September will give us some clues �and we will know that when they report earnings in October. Holiday sales after that will give us more information. Until presented with evidence to the contrary, I am assuming it will be a hit. If it becomes a super-hit ala the iPod, then most projections will be blown out of the water and we will have a very big thing indeed. My thinking is that there is an even odds chance (or maybe a little better) that the Mini will become a lot bigger than some of our wildest dreams - but it may not.

iPods and the Music store. To the moon is my modest projection. If a deal is cut with one of the satellite radio providers that would enable listening to them via a Pod, then the demographic expands further - like to 53 year olds who live with National Public Radio (Me, me).

Anyway, the sale of 20 million iPods (and with the Shuffles available, I don't think that is too wild), would mean the sale of an additional 100 million songs if the new owners average buying 5 songs each. Not all of the new iPods will go to new customers of the Music store so this is not real precise, but it is positive.

I (and others) have written what I viewed as a shift in the business model from software as an encourager of hardware sales toward a model that emphasizes hardware as a platform for the sales of software, music and services - as hardware being the razor rather than the blade as one writer put it a day or so ago.

Thing is, Apple does make money on both, and there are millions of computers whose owners are potential buyers of iLife 05, iWork and Tiger. As computer sales accelerate, and I think they will at least double by the end of FY 2006, there will be millions more who are potential buyers of future software upgrades, accessories and etc... So, while it has some faults, this razor and blade analogy, the introduction of far less expensive and attractive computer has placed some new attention on this aspect of the sales pitch. OS X, iLife 05 and other software and a computer for $600.

Part of the Mini's impact here will be through upgrades of older Macs among the faithful, from boxes that cannot competently run the new software (Tiger, iLife 05, iWork), to boxes that can. Apple is providing an inexpensive upgrade path for owners of G3s and earlier PowerPC boxes. I assume there are still a bunch of those out there.

Part of the Mini's impact here will be through upgrades of older Macs among the faithful, from boxes that cannot competently run the new software (Tiger, iLife 05, iWork), to boxes that can. Apple is providing an inexpensive upgrade path for owners of G3s and earlier PowerPC boxes. I assume there are still a bunch of those out there.

So I am still bullish, but I want to see the money :). I suspect there is going to be plenty of it to see.

Oh, there are other issues � dilution being one. As an investor in mining junior companies, I am used to this and growth can mask its effects, but it is still there.

Ron


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