AAPL target raised

Analyst Charles Needham has raised his price target on Apple based on better-than-expected profits from the iPod and software and a strong cash position. In a report released to clients, Needham & Company said it was raising its price target on Apple from $52 to $57 because of a more profitable iPod financial model following the introduction of the iPod nano, a more profitable software revenue stream than was previously assumed, and a larger free cash position. Apple has generated over $1 billion in additional free cash since our last valuation exercise. Earnings per share estimates remain at $1.40 and $1.65 for 2005 and 2006.

The first contributor to the increase in Needham's target price is increased iPod sales and earnings.  "Apple’s share of the portable music player market increases only nominally as a result of the nano’s introduction in our forecast.  However, the nano signaled that Apple should be able to maintain materially higher average selling prices on the iPod than we previously assumed." 
 
Modestly higher Macintosh sales make only a nominal contribution to the new price target.  The firm's forecast focuses on iPod halo effect "switchers," rather than those who have switched due to Windows malware.
 
Another major contributor is a change regarding the profitability of software sales.  About 75 percent of Apple’s software sales consist of Apple-branded software applications. These sales carry a gross margin of at least 90 percent.  "Accordingly, we’ve raised our software gross margin assumption from 50% to 75%."

by MacNN Staff