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January 05, 2007

MacWorld Preview: How Expecations Impact Apple

MacWorld convenes next week and expectations of investors for good news out of Apple Computer (AAPL) are high. The shares have bounced significantly off their late December lows following what appears to a great reduction in risk related to the options backdating issue – in other words, investors are betting that Steve Jobs is safe even in the face of shareholder lawsuits and the distinct possibility of a formal SEC investigation.

Despite the pop, I think the trading ahead is subdued and sentiment is not particularly bullish. In fact, I think many investors are assuming that MacWorld is going to be disappointing and lead to a sell-off in the shares. I don’t know how to game it for trading purposes but I do the know the much bigger news for AAPL shares will be December quarter earnings and March quarter guidance which are due later this month.

As far MacWorld, rumors are running fast and furious....

The latest is that Apple will introduce a tablet Mac. The sourcing on this seems good but I see a tablet as a niche product with limited stock market and financial implications. I do think a tablet is a good idea for Apple as the design factor plays to the company's strength and ultimately a tablet could morph into a home controller for networks and various other devices. That fits in with the digital content strategy that is the core of Apple's strategy (sorry, bad pun.).

The real big news investors are looking for out of MacWorld surrounds the iPhone. I think to satisfy investors, at a minimum, Apple must formally introduce the product and explain how and when it will come to market in the first half of 2007. Will Apple go it alone as an MVNO? If not, what deals are in place with current mobile operators? Additionally, I think investors will be looking for the product development path. For example, is a Blackberry type device in the future? In terms of actual introductions, I believe expectations exist for a candy bar phone that essentially combines an iPod nano with a cellphone. Apparently, Apple has resolved power issues by having a battery for each device built right in. Also, unlike most music phones on the market, storage capacity is supposed to be significant – 4GB and 8GB. Disappointment related to the iPhone is a significant risk for Apple shares next week. My pal Cody Willard from Real Money is long and Apple and thinks iPhone related disappointment is a real possibility.

On iPods, expectations are more varied. Some observers are looking for a "true video iPod" which moves video to the core of the device at the expense of music. This would not just be an upgrade of the current video iPod but instead a completely new design incorporating a large screen and unique video technology such as touch screen controls. I don’t think lack of a true video iPod at MacWorld will cause much consternation among investors but it does raise the stakes for later this year. iPod sales during the holidays were great but even optimistic estimates have the growth rate slowing to 25-30% year-over-year. Without a true video iPod analysts would be unlikely to assume more than a 10% for next holiday season. Even with soaring Mac sales, which I expect will continue, a complete loss of iPod momentum is a problem unless the phone rollout goes without a hitch.

Investors are also expecting the formal introduction with product availability of Apple's iTV device that was introduced last fall. I see this product as evolutionary and central to Apple's digital content strategy but I don’t think it is likely a home run from a financial perspective. The easy movement of downloaded content from a Mac or PC to the family room TV is critical to any digital content strategy. I just don’t think even Apple can make it simple enough yet for most households to make it a breakthrough product for 2007. And don’t forget there are issues with the quality of downloaded video relative to what consumers are used to seeing on their TV sets, even before HD is considered.

Finally, beyond the tablet Mac, I have read little about the possibility of new products in the Mac line. Some people believe that a smaller 12 inch version of the MacBook is a possibility but maybe that is the tablet. I do think a really portable laptop would be a winner especially as digital content plus email and internet connectivity is a very large market. Heck, that is all most consumers need in a personal computer.

Hopefully, this post provides a baseline against which to judge the hype and hyperventilation that will occur next week. I remain long Apple across the board based on my belief that 2007 is shaping to be another great year driven by Mac sales to consumers. And don't forget much of the creative market won’t upgrade to Intel-based Macs until Adobe issues its next generation Creative Suite this spring. I think December quarter earnings are a better catalyst for Apple shares than MacWorld but for this massively analyzed stock and company (count me as guilty!) anything can happen.

Posted by Steve Birenberg at January 5, 2007 10:16 AM in AAPL