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The reason why apple is going to grow

Here is what everyone's missing:

• The key driver of Apple's growth over the next year will not be the i Phone or even its i Pod (and it certainly won't be i Tunes). It will be Macs.
• Macs still account for half of Apple's revenue, and except for the relatively tiny i Phone, they are Apple's fastest-growing product line.
• The Air demonstrates that Apple is still at the forefront of sexy design prowess, which will increasingly be the most important determinant of computer choices.
• The Windows world is eroding, with more and more companies allowing employees to choose their own PCs.

Bottom line, Apple's Macs are cleared to make even more impressive share gains in 2008. With half of Apple's revenue still derived from Macs, this will have much more of an impact on the bottom line than i Pods or i Phones. Despite the impact of short-term "Mac world effect" bets, in other words, the Apple growth story is very much intact.

the catalyst for a move higher will be upward revisions to EPS estimates. I don’t think they currently account for the immense sales potential of the new iPhone, as well as the momentum in the demand for Macs. Albeit, Apple is giving up the monthly subscription revenue payments from AT&T (T), thus the increase in volume will be coming at a lower margin. This might possibly be why Apple’s shares have failed to respond more positively.

There are a couple things to consider. First, there have been estimates that the new phone’s manufacturing cost is half of the current iPhone. Second, the MobileMe service at $100 per year adds revenue potential associated with the new iPhone. Sales of iPhone applications from Apple’s App store is another avenue to boost revenue. Most importantly, iPhone sales will expose the Apple brand to many who lack experience, and ultimately boost Mac sales.

Apple isn’t cheap trading at 35x FY08 consensus EPS estimates and 28x FY09. It may actually be cheaper if you believe those estimates are too low. I think the estimates are likely too low, thus Apple would be trading at slightly lower multiples. Apple could be bought on any weakness or pullbacks, since Apple’s share price reflects the fundamentals as opposed to pure sentiment, as it did last fall and this winter.

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