The Apple of investors' eyes
Stock Spotlight: Apple has had a volatile year, but that's created a great buying opportunity.
By Grace Wong, staff writer

NEW YORK ( -- Apple has long been known on Wall Street as a volatile stock, and this year's been no different.

The company has been hit by the widespread stock options backdating scandal plaguing many tech companies. Some investors have also expressed frustration that Apple hasn't launched a new iPod in some time.

Over the past two years, shares of Apple (green) have far outperformed those of H-P (orange), Microsoft (blue) and Dell (yellow).
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Although shares of Apple (Charts) are up about 1 percent so far this year, they are trading more than 15 percent below their 52-week high.

But analysts are bullish about the company's growth potential. According to Thomson First Call, 22 out of 25 analysts rate the stock a "buy" or "strong buy."

iPod sales may no longer register the same torrid growth rates they did when the music player was first launched, but analysts think the company has been effective in broadening its product line and remains the leading innovator in the computer industry..

And while the internal investigation into the timing of stock options granted to some employees, including one made to CEO Steve Jobs, hangs over the company, the impact is likely to be limited to past results and not impact Apple's earnings power, analysts said.

Attack of the iPod killers

iPods and other music-related products and services account for nearly half of Apple's revenue, so it's no surprise investors were disappointed when Apple didn't unveil a new iPod at its developers' conference in August.

But Tim Deal, a senior analyst with Technology Business Research, said the market tends to overreact to the lack of product introductions and that he's optimistic the company will launch a new product that will restore confidence in the iPod line very quickly.

"Apple plans its product introductions very precisely, and Jobs is very effective in using the the product release cycle in such a way to maintain value and demand for existing products while rejuvenating growth," he said.

Analysts at Citigroup said in a recent note that the company could launch a redesigned iPod Nano as early as this month. That could coincide with the Apple Expo in Paris, which runs from Sept. 12-16.

The company remains the undisputed market leader in digital music, with a 76 percent share of the digital music player market, according to market research firm NPD Group, but competition is intensifying.

Microsoft's (Charts) so-called iPod killer, called Zune, is expected to debut later this year, and SanDisk recently launched a product rivaling the iPod Nano that holds twice as many songs.

But so far, Apple has been successful in fighting off its competition, said Shannon Cross, an analyst at Soleil-Cross Research. "The 'Apple ecosystem' lends people to keep buying iPods," she said, referring to the slew of gadgets and accessories the iPod has spawned as well as its popular iTunes music store.

Apple also has been effective in broadening its product offerings. Many analysts said they are expect Apple to launch an iPod phone next year, which would pit the company against handset makers like Motorola (Charts) and Nokia (Charts). There are also expectations the company will branch out into new categories, including online movie downloads and rentals.

Centering on the core

While Apple is far and away the leader in music, that's not the case in the personal computer market.

Apple has only about a 5 percent share of the PC market in the U.S., according to research firm IDC. But sales have been growing at a double-digit pace.

Apple's easy-to-use software, which includes popular programs for managing music and photos, as well as its competitive pricing and reliable operating system, should help the computer maker gain market share worldwide, analysts from Citigroup wrote in a recent note.

The company also recently completed its transition to Intel-based Macs, which have the ability to run Microsoft Windows, and plans to release "Leopard," the newest version of its OS X operating system, next spring. Leopard will be the fifth update of OS X since it launched in 2001.

The steady flow of upgrades has boosted higher-margin software and computer sales. And Jonathan Hoopes, an analyst with ThinkEquity Partners, thinks Apple could increase its market share as more consumers buy Macs thanks to Apple's user-friendly software.

Apple also said late last month that Google CEO Eric Schmidt is joining its board of directors. The addition of Schmidt, an "anti-Microsoft guy" who was formerly CEO at software maker Novell, is a sign Apple may have its sights set on competing for more business with larger corporate customers, Hoopes said.

A risky bet

The outlook for Apple is upbeat, but the stock may be too pricey for some. Apple's stock trades at 28 times analysts' estimated earnings for fiscal 2007, which ends in September of that year. That's more expensive than PC rivals Dell (Charts) and Hewlett-Packard (Charts), which trade at about 17.5 and 14.3 times next year's earnings estimates, respectively.

But analysts said the company's valuation is justified. "Nobody has a multiple quite like Apple, but there's a good bit of expectation that they're going to be able to sustain that top line growth," said Mark Demos, a research analyst with Fifth Third Asset Management, whose firm owns shares of Apple.

Analysts surveyed by Thomson First Call expect sales to jump 19 percent in fiscal 2007 with earnings soaring 21 percent year-over-year.

But Apple's known for being volatile, and investors should be prepared to stomach the stock's ups and downs.

Longer-term investors, though, have been rewarded for riding out the storm - over the past two years, the stock has tripled in value, far outperforming its competitors.

None of the analysts quoted in this story own shares of Apple. Citigroup owns shares and has an investment banking relationship with the company.

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