Apple Computer (AAPL)

Summary:
Apple had an awesome FY 05 that saw an almost 5-fold increase in net income from FY 04. Net income was over double their best year in the last 10 years (2000). iPods have taken the world by storm, and Macs are slowly making a comeback. They've also managed to bust out one innovative product after another year over year, and don't seem to be slowing down.
The key question is can they keep this up? And will Christmas 05 be as good or better than Christmas 04? I believe that as long as Jobs is CEO, innovation won't slow down, and with the iPod nano and video iPods out, this will be another bumper shopping season for Apple.

FY05:
- Revenue: $13.9B (up 68% YoY)
- Net income: $1.3B (up 384% YoY)
- Net margin: 9.6% (up from 3.3% in FY04)
- EPS: $1.44
- Current P/E: 36.3 (FY05 P/E range was 23 - 63.1)
- Current ratio: 3.0 (Q3 FY05)

FY06 projections:
- FY Revenue growth of 35% (S&P)
- EPS: $1.77 (Yahoo) (23% growth)
- Q1 FY06 revenue guidance: $4.7B (34% YoY growth) (http://www.macobserver.com/article/2005/10/11.15.shtml)

Valuation:
- Current P/E of 36.3 represents an expectation that AAPL can grow earnings by another 80% (over a nominal P/E of 20).
+ 80% growth means revenues of $25.2B and earnings of $2.4B
- At a constant 23% annual growth, they will be able to do this in less than 3 years.

SWOT:
- Strengths:
+ Awesome brand
+ Awesome product line
+ Awesome engineering and product execution engine
+ Great distribution network for iPods (pretty much any electronics store)
+ Mp3 player market is red-hot, and Apple still has room to grow.
+ They've locked in a leading position with the Samsung deal (for 40% of Samsung's flash memory production at a 40% discount)

- Weaknesses:
+ Narrow product line (iPods and Macs)
+ Declining margins as iPods go downmarket

- Opportunities:
+ Video downloads
+ The "real" iPhone
+ Resurgence of the Mac
+ Making the Mac platform a consumer entertainment hub
+ Further leveraging online assets

- Threats:
+ Declining consumer confidence can hit iPod sales
+ Windows Vista launch
+ Performance is highly dependent on Steve Jobs (age 50)

Notes:
Macs switching from PowerPC to Intel chips in mid-2006
124 retail stored at the end of FY 05 (from 86 in FY 04)
Mac OS has 3% market share (by units sold)
iTunes has 85% of the legal music download market
IDC projects mp3 player sales to reach $145B (945.5M units) in '09 up from $47B (225M units) in '04.
iPods account for over 30% of revenue, Macs account for 44%
6.45M iPods sold in Q4 FY05
iPods have est. 50% gross margin (vs. 44% for Mac)

Bottom line:
I believe this will be a strong holiday season for Apple. They have great long term potential, with the proven ability to design, develop, and ship innovative products ahead of the curve. It doesn't look like they will be slowing down anytime soon.

Buy price: $55 (P/E of 31 with $1.77 est. FY06 EPS)
High Sell price: $106 (P/E of 60 with $1.77 est. FY06 EPS)