Apple's iPod Potential

04/23/2004 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

At last year’s Money Show in Las Vegas, John Buckingham, editor of The Prudent Speculator, picked Apple Computer as one of his favorite stocks. With The 2004 Las Vegas Money Show just around the corner, he updates his continued bullish outlook for the stock.

"Back then, profits at Apple Computer (AAPL NASDAQ) were down, revenues were flat, and questions of the day centered on the Power Mac G5, the new retail strategy, the fourth major release of the Mac operating system, and the introduction of the iPod. We confessed that our knowledge in any one of these areas was average at best, and instead pointed to the huge cash horde, $4.5 billion or $12.38 per share, as the primary reason we liked Apple. Not that we weren't excited about the new product portfolio and the various growth opportunities it presented, but more so that the balance sheet was just too rich to ignore.

"No one could have known at that time that the iPod would go on to become a bigger seller unit-wise than the Macintosh, nor could they have predicted the success of the iTunes Music Store. In recognizing only that this was an innovative, brand name technology company with a loyal following, $5.7 billion in revenues, and a fantastic balance sheet, we were able to justify purchase in a broadly diversified portfolio. And boy are we happy we did. We mention this not to toot our own horn, but as an example of how common sense, simple math, and a stringent discipline can lead to great rewards.

"The shares have been strong, rising nearly 10% in just one day, after the company announced fiscal second quarter net income that tripled and revenue that jumped 29%. Apple posted net income of $46 million, or $0.12 a share, compared with net income of $14 million, or $0.04 a share, a year earlier. Excluding a charge to close a plant, Apple would have earned $0.14 a share. The results were driven largely by the continued success of the iPod, which reported record unit sales of 807,000 for the quarter, up more than 900% from a year ago. In total, approximately 2.8 million iPods have been sold since the portable audio player was introduced. As for computers, Apple shipped 749,000 Macintosh computers, up 5% from a year ago and accounting for $1.2 billion of Apple's total $1.9 billion in quarterly revenue. As for the mini iPod, demand has far outstripped supply and so the company has delayed its global launch until July.

"Longer-term, Apple hopes that the success of the iPod will fuel more Mac sales and to that end, Hewlett-Packard will begin selling the iPod under its brand name later this year. As obvious from the revenue breakout, Apple is still mostly a computer company, but its success so far in diversifying into a variety of digital product categories is extremely impressive. We have raised our liquidity goal price to $49 and our fundamental goal to $40, and we would consider still-cash-rich Apple a premier long-term holding. We would even consider buying more if a broader tech sell-off or a short-term hiccup provided an entry point in the $24 to $25 range."

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