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December 27, 2006

Apple Shares Remain Unusually Weak

The point of my post about the Forrester report on Apple's iTunes sales was not really to discuss AAPL. Instead, I was trying to point out how the type of analysis can impact the conclusions drawn. In other words, good inputs lead to useful outputs and vice versa.

When I posted this piece on StreetInsight.com, two contributors, Scott Rothbort and Jeff Bagley, responded to my post and reiterated their own bullish views on Apple. I am in total agreement and remain long as ever, including adding the stock to new accounts last week (Northlake owns pretty much the same portfolio for all individually managed accounts but client agreements usually allow ample flexibility as to the timing of the transition to Northlake's investment strategy.)

Similar to Scott and Jeff, the basis of my bullishness on Apple is Macs, not iPods or iPhones or iTV. I believe Apple's market share gains in Macs are just beginning and will go beyond most current estimates and be persistent and sustainable. Apple has bet the company on management of digital content. The operating system, the applications, and the hardware (Macs and iPods and the soon to be iPhone and iTV) are all built around the idea that PC use, particularly among consumers is being dominated by the need to manage the digital lifestyle. Apple is miles ahead of Microsoft on this front, providing a competitive advantage vs. all the windows-based PC manufacturers including Dell Computer (DELL) and Hewlett Packard (HPQ). Given the small share Apple has on a global basis, the rapid developments in digital content, and the increasing use of digital content in the business world, Apple has made the right bet and will reap the benefits for several years....

I believe that December quarter Mac sales will be very strong. Coming on the heels of the great Mac sales in the September quarter and a strong holiday season for iPods, I believe the shares are undervalued based solely on Macs, iPods, accessories, and software.

I think recent weakness in Apple shares has as much do to fears the iPhone will fail as fears it will be late to market. Getting the iPhone to market in mass quantity is tricky and just a few percent market share of the global phone market has huge positive implications for Apple's financial performance. However, I think investors were a little too matter of fact about the sure fire success of the iPhone. The decline in the stock during December has reset the bar on the iPhone and set up a positive reaction to the good news that is coming on Mac sales.

Posted by Steve Birenberg at December 27, 2006 09:51 AM in AAPL