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Technology > Tech Biz
Apple looks for the halo
Sure, iPod is hot, but will it ever help Jobs sell more iMacs?
January 10, 2005: 12:08 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - This is Apple's big week. The company kicks off its biannual Macworld conference in San Francisco today, with CEO Steve Jobs scheduled to give his widely covered keynote address on Tuesday.

On Wednesday, Apple will report its first-quarter earnings, which include the holiday season. It's expected to be the company's strongest quarter ever.

Apple's (Research) stock price, at upwards of $70, has been setting 52-week highs for two months now. Despite the stock's nosebleed valuation, some analysts are predicting more upward movement.

"Expectations are running high," writes First Albany Capital analyst Joel Wagonfeld in a note released Friday. "Nevertheless, we expect ... further appreciation."

Analysts expect sales of Apple's groundbreaking iPod device to come in between 4.5 million and 5 million units for the quarter, up from 2 million the previous quarter. And the consensus earnings estimate has risen to 48 cents per share.

American Technology Research's Shaw Wu initiated coverage on the stock last month with a "buy" rating and established a price target of $78. "Our estimates may prove conservative given iPod momentum and potential for Mac sales to re-accelerate," he writes.

Wow. A 15 percent price increase is called conservative. Who'd have thunk?

New products

But Wu and the other Apple bulls may be right, because coupled with the holiday season earnings report is the rumor that Jobs will introduce a less expensive, flash-memory-based iPod and a sub-$500 iMac.

Both announcements, if they pan out, would be boons for the company and its investors, as they should allow Apple to preserve its high profit margins and finally usher in the "halo effect" everyone's talking about.

With a flash-memory-based iPod, Apple could lower the price point of its cheapest unit to $99 or $149 from $249, while still retaining its margins. That's because the core storage component in flash memory is only $10 to $15, according to Wu, compared with $80 to $100 for a hard drive. And prices for flash memory are falling fast.

Apple enjoys some of the highest margins among PC makers. "Apple's margins are the envy of the entire PC industry," says IDC vice president Roger Kay.

Kay estimates that the company's gross margins sit in the low 20 percent range, while "the rest of the industry has margins in the teens on a good day."

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Introducing a lower-cost iMac (Apple's least expensive unit is $749) would eliminate the "boutique" tag and finally get Apple into the fastest-growing segment of the PC industry -- the low end.

As to the halo effect -- the belief that the rocket-fueled growth of iPod sales would spur users to buy a more margin-rich Apple computer -- it's a nice theory.

But so far, that hasn't happened, according to Kay.

"I have sifted through the numbers, and there's no evidence of [a halo effect]," he says. "The iPod is two years old, and Apple's desktop share has been absolutely flat for that period. I would applaud Apple's introducing a sub-$500 computer. It would address the company's one glaring weakness in its computer line -- nothing on the low end."

For the much-heralded halo effect to occur, Apple needs to make it easier for goo-goo-eyed iPod consumers to make impulse computer purchases. A Mac that's almost as cheap as a Hewlett-Packard PC but that makes it easier to manipulate music and videos might be the long-awaited incentive that consumers need to switch to an Apple computer.

Already, investors are snatching up Apple stock ahead of the big week.

On Friday the stock was up 7 percent on nearly three times its average trading volume. It might not be too late to get in on some quick gains, but after the market closes Monday, it may be. Investors are crazy for this stock, and if the product rumors and earnings meet expectations, look for this thing to rocket.

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