“We continue to believe that MacBook Pro and MacBook are due for refreshes with more radical redesigns, but won’t likely be unveiled at this event as the focus appears to be on its non-Mac businesses,” he also observed. Not so underwhelming to matter a great deal – at least, not to Wu, who chose to maintain his Buy rating and 6-12 month price target of $220. We considered rewriting this release with our own special slant, but figured you may want it straight – here’s what Wu writes…
Low Expectations for a Break-Through Announcement: While there is always room for surprise, it seems this event may be somewhat underwhelming vs. previous expectations and events. Over the past several days, AAPL shares have pulled back as expectations have likely come down. Likely iPod Centric: The “Let’s Rock” invitation and our recent supply chain checks suggest this will likely be an iPod-centric event. This may be viewed as disappointing as some were hoping to see new Macs. We think radical changes in the iPod portfolio are less likely given the great success and extensive refinement iPod has already undergone. We anticipate a modestly redesigned 4th generation iPod nano and slimmer 2nd generation iPod touch with lower price points and higher storage capacities. The future of the 6th generation iPod classic is unclear as our checks indicate build plans have been more modest as it has become more a niche product. New Macs Not Likely At This Event: We continue to believe that MacBook Pro and MacBook are due for refreshes with more radical redesigns, but won’t likely be unveiled at this event. We are picking up that MacBook Air could see a minor refresh and potential price cut to increase its value proposition. Checks indicate that build plans have slowed somewhat from earlier robust levels with customers opting for MacBook or MacBook Pro. Potential Wildcards: We believe wildcards on new products are: 1) an advanced AppleTV with DVR and TV tuner capabilities and/or 2) new touch form factors (iPod-Mac hybrid) with larger screens. Conclusion: While AAPL shares will likely remain volatile given market sentiment, we view current levels as a buying opportunity for longer-term investors. AAPL remains one of the best positioned large-cap technology companies. We see upside to $220 based on 32.5x our CY09 EPS of $6.73. Event Likely Less Surprising But There Is Always Room for the Unexpected: Heading into this event, our concern is that it could end up being one of the less surprising ones simply because AAPL product expectations are always high (given its strong track record and world-class R&D) and radical changes in its iPod business are likely more difficult to achieve given the great success and extensive refinement it already has. Nonetheless, there is always the likelihood for the unexpected and we think there are two potential wildcards including an advanced AppleTV with DVR and TV tuner capabilities and new touch form factors with larger screen (iPod-Mac hybrid). New iPods Most Likely: Our recent supply chain checks indicate that this event will most likely usher in new iPods, including a modestly redesigned 4th generation iPod nano and slimmer 2nd generation iPod touch with lower price points and higher storage capacities. The fate of its 6th generation iPod Classic is unclear as build plans have been more modest. We think this product remains attractive to those users who value high-capacity storage (80 and 160 GB), but the “old” design and cannibalization by iPod touch limit its appeal. New Macs Not Likely At This Event: We continue to believe that MacBook Pro and MacBook are due for refreshes with more radical redesigns, but won’t likely be unveiled at this event as the focus appears to be on its non-Mac businesses. In addition, we are picking up that MacBook Air could see a minor refresh and potential price cut to increase its value proposition as build plans have slowed from earlier robust levels as customers have opted for MacBook or MacBook Pro instead. Lower iPod Price Points Make A Lot of Sense. In this tough macroeconomic environment, we believe price cuts make a lot of sense to re-accelerate iPod sales, particularly iPod touch, which is somewhat mispriced (outside of its recent back-to-school promotion) at $299 (8 GB), $399 (16 GB), and $499 (32 GB) price points given the lower $199 (8 GB) and $299 (16 GB) price points of the 3G iPhone with 2-year service plans. We believe AAPL should be able to absorb lower price points without impacting its margins materially given very favorable component pricing trends. Competitive Advantages Intact: We believe AAPL’s key competitive advantages remain its 1) strong brand loyal customer base; 2) vertically and horizontally integrated hardware, software and service model (iPod + iTunes, Mac, Apple TV, and iPhone); 3) proprietary interface technologies (clickwheel and multi-touch); and 4) unique and pleasant customer experience with its Apple stores. Macro headwinds are becoming more apparent: We continue to see AAPL as the best play on digital media in the home and a large beneficiary of the shift to mobile computing. In two of its three big franchises, Mac and iPhone, penetration is very low and starting in the higher-income demographics. The disturbance in the macroeconomic environment is within lower-income demographics and financial institutions with exposure and impact to overall liquidity. This could certainly spread, but we believe AAPL’s business will remain strong in the near- to medium-term. Enough high-end consumers are still buying tech, though commodities inflation could pressure future margins. Comments?
