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July 14, 2005

Apple Shines

Apple (AAPL) shares were trading up sharply during its conference call last night and look even higher in pre-open trading today. The gains are well deserved as the earnings report and the tone of the call were both excellent. iPod shipments easily exceeded expectations and computer shipments were at the high end of expectations. Gross margins were better than expected due to strength in software sales, declining commodity costs for storage, and maybe even average selling price declines that weren't quite as bad as feared....

Most of the tough questions on the call were related to the September quarte rguidance, which is very slightly below current analyst estimates. Management stated that history suggests a 60% drop in Tiger sales in its second quarter. Further, education sales had their best-ever June quarter. Additionally, management said it had no evidence of slowing computer demand due to the MacTel transition but that it was "prudent" to be cautious. I believe these expectations suggest management is being conservative. There is no indication in the guidance of any problems.

I think this quarter shows the AAPL story has legs. The halo effect is in place with computer shipments growing three times the industry rate. Additionally, if management is to be believed, iPod sales are still very strong as sell-through is matching shipments. Overall, management is very confident across all measures and consistently reminded analysts how strong the business is and how it is pressing its leadership position with big investments in new products.

...The bottom line on this quarter is that there is very little for the bears to chew on, particularly given the high expectations that there would be problems in iPod numbers this quarter. I think traders were positioned for a downdraft in the shares so with the strength in shipments of iPods and Macs and management's comments on strong sell through and under control channel inventories, the shares are positioned to move higher.

Remember, the shares are not that expensive given the growth rate after adjusting for the cash balance. Growth appears intact, and the fourth quarter especially should be seasonally strong.

I am holding all client positions in Apple and expect AAPL shares can trade to new highs in the upper $40s over the balance of the year.

Posted by Steve Birenberg at July 14, 2005 08:00 AM