Wednesday, December 19, 2012

Apple: iPad to Grow in Business Like Hybrid Corn, Says Needham

Needham & Co.’s Charlie Wolf this morning reiterated a Buy rating on shares of Apple (AAPL) and raised his price target�to $620 from $540 after revising upward his value estimate for the iPad and Mac businesses.

Writes Wolf, the introduction of Amazon.com’s (AMZN) “Kindle Fire” tablet last fall boosted the overall “media tablet market” growth rate, in fact much more than he’d expected for the category.

But that overall acceleration in tablets will redound to the benefit of the iPad, which, he writes, “has launched a massive attack on the business market,” and in turn the Mac, given that the “halo effect” of the iPad “has, in turn, translated into an increase in our forecast of Mac sales, which is also invading the business market.”

Wolf expects Apple will continue to best tablets based on Google’s (GOOG) “Android” operating system in the enterprise market because Apple has the tools required for business:

What�s typically skipped over but a crucial component in the iPad�s success in the business market are the tools Apple has integrated into its iOS5 operating system that make it more enterprise friendly. For example, Apple has built-in support for Microsoft�s Distributed file system, Active Directory, Windows Server and Exchange. iOS enterprise management solutions offer a consistent set of provisioning options, controls and restrictions. iPads, in short, represent the most manageable and secure mobile platform, arguably second only to RIM and the BlackBerry Enterprise Server.

Wolf sees Apple losing some share of the expanding tablet market, but as a result of that expansion, also increasing sales by 40% above what he’d previously expected.

Wolf cites The Diffusion of Innovations, by Everett Rodgers, who wrote about the explosion in sales of hybrid corn seeds in the 1920s. The point: adoption of technology accelerates “once the innovation enters the mainstream,” tracing out an “S curve.”

Wolf models iPad sales of 62 million units this year, and 94 million next year, even as market share slips from 85% in 2011 to 80% this year and 75% next year. By 2021, Apple may be shipping 211 million iPads, he writes, and have 50% of the market.

In modeling the Mac, Wolf hypothesizes that 50% of iPad owners do not own an iPhone, so the “halo effect” of the two devices is somewhat split. He models Apple shipping 12.7 million Macs this calendar year, 40% growth, and 17 million more next year. By 2012, Apple could be shipping 64 million Macs and could have 9.7% share of the total worldwide PC market, Wolf believes.

However, Wolf notes that his forecast for this year is already lower than last year’s sales of 17.8 million Macs. He explains this by saying that his forecast is just a forecast of units contributed by the twin halo effects of the iPhone and iPad:

The reason our near-term forecast is below actual Mac sales is because our forecast is solely driven by the twin halo effects emanating from iPhone and iPad, both relatively recent additions to Apple�s product portfolio.

Lastly, Wolf offers a defense of making estimates and price targets, if only a wilting sort of defense:

There�s scant evidence that the stock market itself has paid much if any attention to analysts� price targets in recent years. Pundits have written scores of articles that purport to explain Apple�s tepid valuation. In our opinion, all have failed. And so have we. But we continue to believe the valuation exercise is one worth undertaking if only to calibrate the difference between Apple�s current share price and the fair price generated by our model.

Apple shares today are up $17.64, or almost 4%, at $494.10.

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