“Apple, of course, is becoming less of a computer company every minute — and is therefore less vulnerable to the ups and downs of the PC market. In its fourth quarter, for example, sales of Apple’s hit iPod music player and related services such as iTunes accounted for 27% of the company’s total revenue. In the December quarter, when consumer-electronics items top holiday shopping lists, the iPod will contribute 32% of the company’s revenue and about 26% of gross profit, estimates Goldman Sachs analyst David Bailey,” Bill Snyder writes for TheStreet.com.
“Apple will likely roll over rivals that are hoping to grab a share of the online music business, but forecasting significant appreciation for its already expensive stock is a challenge,” Snyder writes. “Ryan Jacob, the generally bullish manager of the Jacob Internet Fund, has pared his position in the stock way down, and said that looking for upside ‘is a very tough call. The wild card is how well will iPod sales translate into computer sales.’ Ryan and other analysts say that some iPod buyers are so happy with their purchase that they’ve switched from Windows-based computers to Macs. Within the industry, that trend is called ‘the halo effect.'”
Snyder writes, “Citing the cost and difficulty of switching platforms, Wolf figures that few Windows users will jump to Macs, but ‘Apple’s leadership in software applications that manage digital content could translate into a much higher switching rate than we’re forecasting and, in turn, a much higher valuation.’ Not all of Apple’s success in 2004 was based on the iPod. The Cupertino, Calif., company is now handling with panache the fundamentals of its business. ‘Apple has dramatically improved several of its balance sheet items, specifically its cash conversion cycle and inventory, to levels that rival industry leader Dell,’ Goldman’s David Bailey said in a note. ‘At the same time, strong revenue growth should unlock Apple’s operating leverage in fiscal 2005 and 2006, even as the company increases spending on R&D and its retail outlets,’ he said.”
Full article here.