The strength of Apple Inc.'s (AAPL) iPod business has carried over into its computer business, and we expect Macintosh to continue taking share from traditional PCs as consumers become more familiar with Apple products and enjoy the enhanced media capabilities. However, we are cautious on consumer spending going into 2008, and believe the market for AAPL's successful iPod line could slow over the next several years.
At its current price of $119.46 per share, Apple's stock is trading at 23.7x our fiscal 2008 estimate. Apple has established a strong track record of earnings growth, which went from a loss of $0.07 per share in 2001, to an expected profit of $5.03 per share in the current fiscal year.
With a strong new product pipeline for 2008, including MacBook Air, Mac Pro, and iTunes Movie Rentals, we believe the stock deserves a premium valuation to its peer group. Although its current price appears to be quite reasonable given Apple's record of growth over the past several years, we are concerned about the potential for slowing growth at its iPod franchise.
Moreover, the phone business requires continued investment and will take longer to pay-off given the revenue model. Finally, we are cautious on consumer spending during 2008, which was reflected in Apple's guidance for the March quarter. Given these concerns, we maintain a Hold rating on AAPL shares and lower our six-month price target to $125.50, representing a P/E multiple of 25x our fiscal 2008 estimate, which is still a premium to the industry, but more accurately reflects the current outlook.
Anita Mohata contributed to this report.
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