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Fri, 01 Dec 2006 Apple set for huge market gains — Needham & Co

Apple share values rise as analyst predicts Apple to take 8.6 per cent of PC market — by 2016

Jonny Evans

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Apple may secure 8.6 per cent of the global PC market by 2016, according to the analysts at Needham & Co.

Analyst Charles Wolf has upped his target price on the company's stock from $90 to $115 per share. The analyst observes "stronger than anticipated growth in Mac shipments" in recent quarters.

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Wolf adds that the new valuation actually excludes any extra revenue and income that could be generated by "yet-to-be-announced products, such as the iPhone" — suggesting Apple's fortunes next year could be even fairer than first thought. 

The new valuation does take into account two successive quarters of strong Mac sales and tremendous sales of the iPod shuffle.

Wolf has consistently pointed to the success of the iPod and Apple's decision to enable the running of Windows on Intel Macs using Boot Camp as catalysts that make it likely more Windows users will switch to Mac.

But even Wolf has been surprised at the speed with which the migration is taking place.

In a survey revealed in May, Wolf states: "Among Windows users who did not own an iPod, the mean switch rate increased from 3.6 per cent when the Mac could not run Windows to 11.1 per cent when it could.  Among Windows users who owned iPods the increase was more dramatic - from 7.6 per cent to 20.2 per cent."

But the analyst feels that his previous estimates for Windows users switching to Mac may be incorrect. He had assumed that Windows users wouldn't switch to Mac until a fully supported version of Boot Camp shipped, with Mac OS X 10.5 Leopard.
 
"In view of the increasing number of Windows users who are switching even before the Mac can run Windows, this was an unrealistic assumption," he observes.

The end result of the pro-Apple tidal wave will be to transform its place among PC manufacturers, the analyst suggests.

"In measuring the impact on the switch rate stemming from the Mac’s ability to run Windows, we assumed that the only Windows users who switched were those in the US and European home markets. These markets represent about 20 per cent of the worldwide PC market. Our forecast has Apple’s share of these two markets increasing dramatically — from 9 per cent in 2006 to over 40 per cent in 2016. A significant portion of the increase results from our plausible assumption that once they switch, a high percentage of Windows users will stay with the Mac platform when they subsequently upgrade," he explained to clients.

But with just a third of Mac sales being generated in those two markets, the analyst observes, and Boot Camp will likely tempt switchers across global markets, particularly in education and the SME sectors.

"A more accurate measure, then, of the iPod halo and Windows-on-Mac phenomena is Apple’s share of the worldwide PC market. This increases more realistically from 3.5 per cent in 2007 to 8.3 per cent in 2016, the last year in our forecast," he explains.

Wolf's model predicts a June release for Mac OS X 10.5, and as well as ignoring (for the moment) the potential for revenue from the release of the iPhone, he has ignored that of the video iPod and iTV for the purposes of his present calculations.

The analyst offers the following estimates for Apple to ship those products: Mac OS X 10.5 in June; "as early as" January 2007 for the iPhone; "first half of 2007" for the 'true' video iPod; and the same six-month range for the eventual debut of the iTV. All these products could significantly increase Wolf's valuation on the stock.

Finally, Wolf revealed the different elements that contribute to his valuation. It's based on the assumption that 30.3 per cent of the value stems from Mac sales, 22.5 per cent from software and peripheral sales, 15.6 per cent from music, 22.8 per cent from iPod, and 8.9 per cent of the valuation is based on Apple's cash in hand.

Mac sales are worth $34.97 per share; software and peripherals, $35.98; music, $17.96; iPod contributes $26.30; and cash reserves offer $10.25 toward Wolf's £115.45 overall valuation on the stock.

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