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January 22, 2007

Many Bullish Catalysts For Apple Over Next Six Months

Apple (AAPL) shares continue to pull back sharply following release of the company's latest quarterly earnings report. I remain surprised by the size of the pullback as well as the large amount of negative press Apple is getting surrounding the introduction of iPhone. I think a major disconnect has developed as many bullish catalysts exist over the next six months. Here are some follow-up comments to my earnings coverage now that I have had a chance to review analyst commentary:

First, I think comments that Mac sales were disappointing are fair. The number isn't bad and the market share gains are large, but a major thesis for Apple bulls, myself included, is that Mac sales would cover for any maturing in iPods or even disappointment in the iPhone. Mac sales will still cover these risks but maybe not as much as previously thought at least for 2007. In the short term, you can score that one for the bears.

However, I think that is about all you can score for the bears, leaving aside any debate over the iPhone.....

Estimates are rising by 25 cents to 30 cents. It looks like iPods might be able to sustain a higher profit margin than previously expected. It also looks like iPods are gaining traction in Europe, a market that bears had previously pointed to as indicating that iPods were going to mature more rapidly that expected. Macs also appear to be gaining share in Europe. Mac average selling prices look to be settling at a higher level than expected which provides a strong boost to profitability. Operating expenses may be under better control than previously thought. March quarter guidance looks like it is based on conservative assumptions. The June quarter could be huge with initial iPhone shipments, stronger Mac shipments to the professional market when Adobe ships the latest Creative Suite, and the launch of the extremely high margin Leopard operating system upgrade for Macs. The September quarter is shaping up well for Macs with signals from management on strong educational and institutional demand and rising "student intent to buy" measures.

I think those bullish factors outweigh the risks and will serve to contain the weakness the shares are again exhibiting this morning. I'm not a trader, so I have no opinion if the shares are a buy right now, but I am highly confident that come late spring, summer, and fall, Apple shares will be significantly higher than where they are trading today.

Posted by Steve Birenberg at January 22, 2007 08:25 AM in AAPL