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April 27, 2007

Lots of Shine to Apple

Apple (AAPL) 2Q07 results were spectacular and the feared "even more conservative than usual guidance" failed to materialize. I think the shares should be higher and my only concern is technical in that the muted upside suggests the massive battleground that has become AAPL will continue. I was especially pleased with Mac sales which showed a little upside in the quarter. I don’t think the upside was any more meaningful than the slight downside last quarter but the trend is unmistakable: Macs are gaining share. iPod sales were also solid although they were effectively preannounced. Growth in non-US markets continues strong (ex-Japan) which is key as iPod market share is much lower abroad. Assuming a decent stock market I think AAPL shares are entering a new higher trading range of $95-115 ahead of the iPhone launch. I have little fear about initial iPhone demand. What will matter is product reviews. I am perfectly happy to have so many bashers of the product out there as they are keeping expectations in check.

There is really a lot to say about AAPL this quarter than in the past. The quarter was fantastic and there is virtually no reason to complain. EPS came in at 87 cents easily beating consensus of 64 cents and the whisper number of 70 cents. Part of the upside came from better tan expected revenues due to an extra 100,000 Mac sales and stable average selling prices on iPods.....

The real upside though came from margins as sharply declining component costs, especially for memory, led gross margins to come in at 35%, fully 5% ahead of management guidance and 3% ahead of street estimates. Management noted that they are starting to see some firming in component prices and guided June quarter gross margins to 32%.

Overall, it was a great quarter and the shares should settle in a new higher trading range as the iPhone launch is anticipated. There are many skeptics on Wall Street about the iPhone who complain about battery life, slow internet connection speeds, high pricing, lack of a keyboard, and the dirt that will accumulate on the touchscreen. No one has ever used or held an iPhone so we shall see. I do think that expectations are more subdued due to all the skepticism so a smooth launch could be a big positive for the stock. Also, the September quarter brings the back to school season where Mac sales should boom and then December might see new iPods incorporating the larger, touchscreen display on the iPhone. In other words, AAPL has lots of momentum and the shares could go much higher.

Posted by Steve Birenberg at April 27, 2007 01:40 PM in AAPL