Despite the fantastic performance of shares of Apple Computer, including today’s big run-up on the company’s outstanding fourth quarter earnings results, I believe the opportunity for substantial further gains exist. Consequently, client portfolios purchased a trading position in Apple shares (AAPL) after some of the morning enthusiasm wore off. The investment thesis is that the operating momentum generated by the success of the iPod will be sustained and carry the shares to $85 to $100 in 2005….

…Apple has struggled for many years to convince the mass market to buy its high quality, innovative, easy to use, and well designed products. With over 10 million iPods sold, including 4.5 million during the holiday season, the mass market has now been exposed to Apple. The wall created by the Windows monopoly is beginning to crumble.
My family has used Macs since we bought our first home computer. Presently, we use the swivel screen iMac, own two iPods, and use an Apple Airport wireless router. We use Office for Mac to access Excel, Word, and PowerPoint. I also use a Dell laptop for work. The Dell works seamlessly with the Airport router for wireless internet access and I pass files back and forth between the Mac and the Dell with no difficulty.
For some time, I have thought that home computer use was shifting due to the adoption of the digital lifestyle. Home computer use is increasingly focused on internet browsing, email, photos, music, and calendars. The widespread adoption of broadband has accelerated the shift to a digital lifestyle. For Apple, this transition is critical because these applications reduce the importance of the computer operating system. In turn, the fear of the Mac and desire to standardize on Windows is lessening.
As a Mac user, I enjoy the seamless interaction between Apple’s software for browsing, email, photos, and music. Each program has the same look and feel and is driven by the same basic menus and commands. Consumers who are using iPods are seeing the ease of use of Apple’s products for the first time because Apple has just a 2% market share of personal computer shipments. Further, with Apple stores popping up all over, consumers also get to easily see how the entire suite of digital lifestyle applications work. The Windows wall crumbles further and Apple is now poised to gain home computer market share as the halo effect of iPod success translates to increased iMac sales and easier introduction of other new digital lifestyle products. (such as the new $499 iMac or $99 iPod Shuffle).
While I had been developing this thesis for some time, I had not owned Apple shares because there had been no evidence that the halo effect would work. Now, with fourth quarter 2004 iMac sales up 26%, more than twice the PC industry growth rate, evidence exists. Therefore, despite the upward movement in the shares today, I believe they are more attractive than they were before the earnings report.