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March 20, 2006

Another Trip To The Apple Store Reinforces Confidence

It's been a rotten year so far for shareholders of Apple Computer (AAPL). AAPL shares have fallen almost 10% against a gain of close to 6% for the S&P 500. I've felt the pain as all clients of Northlake and my own accounts own AAPL. My pain was lessened a bit this weekend when I made a trip to my local Apple Store at Old Orchard Mall in Skokie, IL. The store caters to the well-to-do North Shore of Chicago where I'd make an educated guess that Macs enjoy a much better than average market share and every kid has an iPod. In other words, this store ought to be crowded with long lines at the registers if momentum in iPods and interest in Macs is continuing.

That was definitely the case on Sunday. I got in line to buy a Mac Mini as an upgrade for my daughter's computer. There were at least a dozen folks in line when I started and when I finally checked out. An unscientific survey showed people buying Macs, iPods, and accessories. Furthermore, the store was crowded with people looking at all the products on display. If I had to choose one area of particular customer interest it would be iPod accessories, with lots of people looking at the new iPod Hi-Fi boom box. The product was displayed right next to the hot selling Bose iPod boom box. AAPL was asking $350, a $75 premium to Bose. I was glad to see the big premium because while I see accessories as an area of big upside for AAPL in 2006, I have a mild concern that as AAPL introduces more of its own accessories it could lose the support of some of its partners. These partners have been critical in developing the dominant market share for iPod + iTunes....

As for the Mac Mini, it was a wonder to take home and set up. It comes in a little box, not much bigger or heavier than four boxes of checks sitting 2-by-2 so getting it to the car in the far corner of the crowded parking lot was easy. Once I got it home, I unpacked it, plugged in my old monitor and my old USB keyboard (by old, I am talking five years at least), and I was up and running with the latest Mac OS. When the system booted for the first time, it asked me if I wanted to hook up another computer to transfer files. I said yes and a SetUp Assistant popped open. It gave me instructions to connect a cable between the two machines and then scanned the old computer looking for users, network connections, documents, and applications. A window asked me what I wanted to transfer and I checked off several items. Less than 10 minutes later, I had everything I needed except for my daughter's 5,000 song iTunes library. I launched a separate program called Migration Assistant to bring over her library because the SetUp Assistant didn’t allow me to transfer just her library without the rest of the library that includes my own tunes and my son's tunes.

So for $599, I upgraded to the top of line AAPL system. From the time, I sat down to turn on the Mac Mini for the first time, in one hour I had it up and running and had transferred all the files and applications I needed from the old machine. Then just for fun, I pulled out the remote control and launched Front Row from across the room while my daughter was typing a paper. Up popped iTunes with the same interface as an iPod. I loaded some Bob Marley and we were jamming.

I believe AAPL shareholders will also be jamming again soon. The products are still in heavy demand, more innovative products are coming, and lead times on shipments of the new Intel-based laptops are starting to come down. Analyst estimates have moderated and are now close to management guidance. Probably in the July quarter, but certainly in the October quarter, demand will once again rule, and investor concerns will moderate. A move to new highs heading towards late summer education related demand should be in order.

Posted by Steve Birenberg at March 20, 2006 10:42 AM in AAPL