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Fundamental Analysis:

To put matters in perspective, it wasn't long ago (1997) that Microsoft invested in Apple in order to keep a competitor alive, and thus avoid the moniker, monopoly.  

Today, Apple's enterprise business model has improved but obvious weaknesses still exist with respect to transparency and leadership revealed by the recent stock option scandal.  This is not a new development since Wall Street continues to struggle (always has) with integrity and transparency.

While Apples enterprise business model has improved, its current valuation is rich based on almost any reasonable fundamental metric.  The Ipod developed into a significant success and major earnings driver for Apple, but clearly Apple  needs to continue that success with other products to maintain its current valuation 

iTV a Flop?

Sales and revenues growth for upcoming products such as iTV are dependent upon many of the same variables that created Ipod success.  Namely, a market comprised primarily of fickle teens and young adults with disposable time, and money.  The same formula that bred success could haunt Apple's earnings as there is the risk of market erosion from competitors, and the risk of abandonment by its current market base that lacks the same brand loyalty as Apple's power users:  the vagaries of the teen market.

Operating System (OS) Indifference, The Big Snore

In addition, contrary to what many on the street are expecting,  neither MS Vista, nor Apple's Leopard will likely create the product demand and earnings momentum that the current stock  valuation demands.  There will always be the early adoption market, and power user base for new operating system releases, but the majority of users have no compelling business reason to upgrade either hardware, or software at this point in the cycle.  The business question is already being asked to CIO's and potential buyers, just how much productivity does one really gain by the new OS features?  The answer is less than convincing from a cost benefit model, despite the circus atmosphere marketing hype.

Optimism at the Top

Finally, a disturbing trend of unbridled optimism has gripped the street with many of the same commentators that were recommending EXDS at $180 (now defunct) and JDSU at $120 are now talking up technology stocks and Apple in similar fashion.  This is indicative of a market that is frothy, and more likely to fall unexpectedly downward than oblige the mainstream thinkers and rise as expected.

Below is a weekly graphic of Apple detailing first and second support for the equity at $70, and $50, respectively.  One does not need to be a technical analyst to see that Apple barely provided investors with positive returns in a year that the major indexes returned double digit gains.  Our 9-12 month price target shows $50 for Apple Computer.

Disclosure:  Neither the analysts nor the employees of Financial Trader Research© or FiancialTrader.com© hold any positions or interests in the equities covered in the Apple Research Note:.  Financial Trader Research does not receive any compensation, in any form, from the companies covered.  We create simple, straight forward, and independent world class research, and decision support tools.

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