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Tiny iPod gives huge boost to Apple's sales, share price

By Connie Guglielmo
Bloomberg News

NOAH BERGER / BLOOMBERG NEWS Apple Computer's iPod mini, released in February, is the size of a business card and comes in five colors. It sells for $249.

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SAN FRANCISCO — After clothes, money and a car, an iPod is what U.S. teenagers want most this holiday season.

A survey of 600 high-school students by Piper Jaffray analyst Gene Munster found Apple Computer's digital player No. 4 on their wish list. And the iPod wasn't even among the items Munster suggested — the kids wrote it in.

"It was really surprising," Munster said in an interview from his office in Minneapolis. "They didn't say music player. They said iPod. Teens want to be cool, they want their music, and the iPod is a cool way for them to get their music."

Demand for the iPod, unveiled by Chief Executive Steve Jobs in October 2001, has helped make Apple the fourth-best-performing stock in the Standard & Poor's 500 Index this year. A surge in iPod sales will help Apple report a 25 percent gain in fourth-quarter sales, according to analysts surveyed by Thomson Financial. The results, slated to be released tomorrow, would be the fifth straight period revenue growth exceeded 15 percent.

The iPod, the fastest-growing product at Apple, has reduced the company's reliance on PCs. Music products, including iPod sales, accounted for 16 percent of Apple's $2.01 billion in revenue in the third quarter, up from 8 percent a year earlier.

Apple shares have surged 81 percent this year, compared with a gain of 1.1 percent in the S&P 500, and are trading near their highest levels since Sept. 28, 2000, when the shares closed at $53.50. The stock fell 47 cents to $38.59 yesterday.

Analysts expect fourth-quarter profit, excluding some costs, of 18 cents a share in the period ended Sept. 25, the average of 21 estimates in a Thomson Financial survey. Sales probably reached $2.15 billion, their highest level since the quarter that ended Jan. 1, 2000.

Jobs, 49, built the recent success around the white iPod and a "mini" version released in February that comes in five colors. Apple has sold 3.72 million of the players, including 860,000 in the third quarter alone. iPod revenue more than doubled to $249 million in the third quarter from a year earlier.

The success of the devices has made the iPod a target for competitors from Sony to PC king Dell. Virgin Electronics has entered the fray with its Virgin Player, which debuts today. Jobs has beaten them back because the iPod, which works with its iTunes software and online music store, adds up to a combination other manufacturers have not been able to mimic, Piper Jaffray's Munster said.

"Style matters, simplicity matters, experience matters," Munster said. "That's what Apple sells, and that's what they're doing different from everyone else."
 
The iPod won 82 percent of the market for hard-disk-based players sold in U.S. retail stores in the 12 months ended in August, up from 64 percent in the same period a year earlier, and 33 percent two years ago, according to NPD Group.

"The iPod is still in its infancy on a global basis," said John Buckingham, president of Al Frank Asset Management, which owns 102,000 Apple shares. He bought an iPod for his wife from Apple's Web site three months ago. She likes it enough that she won't let him use it, he said.

Future gains in the stock may be limited, Buckingham said. Apple shares are selling for 60 times its projected earnings, compared with 28 times for Dell and 14 times for Hewlett-Packard.

Apple may surprise investors when it reports earnings, Merrill Lynch's Steven Milunovich and Joel Wagonfeld of First Albany said in notes last week. They expect Apple to beat the 18-cent average estimate by 1 cent.

Overseas sales of the iPod and a redesigned version of the iMac, released in mid-September, drove sales in the quarter, Milunovich said. He anticipates sales of $2.2 billion and suggests investors buy the stock. He said he doesn't own the shares.

Apple began shipping the mini overseas in July, after Apple delayed its release to meet demand in the U.S. Retailers such as Costco and Sears have begun carrying the player, helping bolster sales, Milunovich said.

Hewlett-Packard started shipping its own version of the device in September. Hewlett-Packard sells in 110,000 stores in 173 countries.

Investors are betting that customers who bought an iPod, which range in price from $249 for the mini to $399 for a 40-gigabyte version, might also be more willing to spend $1,299 or more on the company's latest iMac.

The iPod's "halo effect" will drive holiday sales of the iMac, Milunovich said.

"You get evangelists for Apple and the Macintosh growing," said Munster, whose enthusiasm for his own iPod led him to buy his first Apple PC two years ago. "All their core products get a tailwind for the next two years because the iPod is the avenue for customers to go to Apple stores and see other Apple products."