Apple Inc. (NASDAQ: AAPL) Kicks Off 2008 with Bold New Innovations

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Apple Inc. (NASDAQ: AAPL) is one of the Top 20 Innovators of The Innovation Index.

Apple had an outstanding 2007 - the stock price and market cap more than doubled and finished upwards of 130% owing to such game changing innovations including the new iPhone, the new iPod Touch, and the all new Mac OS – Leopard, and on the strengths of the growing iPod and Mac business. Is iPod, Apple’s best innovation? Or has the new iPhone toppled the venerable iPod?

On the business front, Apple executed and fired on all cylinders, and beat the earnings estimates every quarter. Apple business grew from $19.3 billion in 2006 to $27 billion in 2007, a solid increase of 24%, and net profits grew from $1.98 billion to $3.49 billion, a huge increase of 76%. Apple sold more than 4 million iPhones in 2007. The street expects Apple to sell more than 25 million iPods in the latest quarter, the busiest revenue quarter traditionally.

According to Marketwatch story, “Retail research firm NPD Group says Apple's iPods still maintain a lock on the top spot in U.S. sales of digital music and media players, with as much as 75% of the market.” What are the hottest selling Apple products in the retail stores? The MacBook laptops, the new iPod touch and the video-playing iPod nano digital media players could be the winners in the latest quarter. On the other hand, the revolutionary iPhone not only created a new market and business for Apple in the SmartPhones marketplace, it also paved the way for new innovations including the iPod Touch, that alone created a new segment of buyers in the MP3 players market. Finally, Leopard, the latest Mac operating system, found a stronghold in the Apple crowd with a host of new innovations including the Time Machine, a redesigned Finder, Quick Look, Spaces, and Stacks. Leopard sold more than two million copies in just the first weekend, and we expect Apple to sell more than four million Leopards during the latest quarter.

Apple once again proved to the naysayer that new innovations could create new markets, which in turn can fuel new business and new growth for the business. To the consumers – especially the teenagers, the young adults and the growing Apple community – Apple remains the space-age leader, the king of innovations.

Can Apple top 2007?

One thing is certain with Apple and Steve Jobs: It does not idle. It does not rest. It does not quit.

Apple kicked off 2008 with planned new innovations that espouse unbridled creativity.

The most significant announcement from Apple came in the heavily crowded laptop segment:

MacBook Air

At the MACWorld, Apple® introduced “MacBook® Air, the world’s thinnest notebook. MacBook Air measures an unprecedented 0.16-inches at its thinnest point, while its maximum height of 0.76-inches is less than the thinnest point on competing notebooks. MacBook Air has a stunning 13.3-inch LED-backlit widescreen display, a full-size and backlit keyboard, a built-in iSight® video camera for video conferencing, and a spacious trackpad with multi-touch gesture support so users can pinch, rotate and swipe. MacBook Air is powered by a 1.6 GHz or 1.8 GHz Intel Core 2 Duo processor with 4MB L2 cache, and includes as standard features 2GB of memory, an 80GB 1.8-inch hard drive, and the latest 802.11n Wi-Fi technology and Bluetooth 2.1.

“We’ve built the world’s thinnest notebook—without sacrificing a full-size keyboard or a full-size 13-inch display,” said Steve Jobs, Apple’s CEO. “When you first see MacBook Air, it’s hard to believe it’s a high-performance notebook with a full-size keyboard and display. But it is.”

Here are some of the key new innovations introduced by MacBook Air:

·Thinnovation – or Thin Innovation – the awesome size of the laptop, or lack thereof. The thin design is another testament to the design innovation prowess of Apple.

·Vibrant 13.3-inch LED-backlit glossy widescreen display that is energy efficient

·Spacious trackpad that offers multi-touch gesture support for pinch, rotate and swipe, making it more intuitive than ever to browse and rotate photos or zoom into web pages in Safari™.

·Backlit keyboard that makes it ideal for dimly lit environments such as airplanes, studios or conference halls

·Built-in ambient light sensor that automatically adjusts the brightness of the keys as well as the display brightness for optimal visibility.

·Up to five hours of battery life for wireless productivity and includes AirPort Extreme® 802.11n Wi-Fi networking, which delivers up to five times the performance and twice the range of 802.11g (according to Apple).

MacBook Air does not have an optical drive for playing DVDs or installing software from DVDs or CDs. Apple does provide the Remote Disc feature that allows you to access the DVD or CD drive of a nearby Mac or Windows PC.

Can MacBook Air find a new segment of buyers beyond the loyal Apple base? Would students and teachers rush to buy the MacBook Air? The largest segment of laptop buyers are the business users. Would a business user buy the MacBook Air? Is it compelling enough? What percentage of business users will convert to MacBook Air? These questions will be answered during the course of 2008. For now, MacBook Air is poised to create new growth for Apple in the Mac business line and create sales of over 5 million units in 2008.

iPod Touch

Another key innovation introduced by Apple is “a major software upgrade for the iPod® touch, making the best iPod into even more—the world’s best Wi-Fi mobile device. iPod touch customers already have the most advanced mobile web browser in the world with Safari™, and now Apple is adding five more great mobile applications—Mail, Maps, Stocks, Weather and Notes. The iPod touch software upgrade also includes new features such as Web Clips, a customizable home screen and beginning today, the ability to watch iTunes® Movie Rentals. New iPod touch products shipping from the factory will include the software upgrade and existing iPod touch customers can get the software upgrade for $19.99 by purchasing and downloading it from iTunes.”

The new upgrade will be a blessing for iPod Touch customers. Apple may be bowed to sell the upgrade for free within three to six months; for now, Apple will benefit from incremental revenue from the fifty percent or so iPod Touch customers who will upgrade.

iPhone

Apple also upgraded the iPhone with a free software update “that allows users to automatically find their location using the redesigned Maps application*; text message multiple people in one message; create Web Clips for their favorite websites; customize their home screen; and watch movies rented from the new iTunes® Movie Rentals right on their iPhone.” Now, the loyal iPhone users are locked in for good. For the ones craving to use their iPhones with a real keyboard, perhaps Apple or an Apple partner can provide a basic keyboard accessory. We believe this will increase the market for the Apple iPhone manifolds – a simple keyboard accessory that plugs and plays into the Apple iPhone allowing the non-converts the ability to type away their emails and instant messages without having to learn to tap and enter.

Time Capsule

Apple also introduced Time Capsule, “a backup appliance that automatically and wirelessly backs up everything on one or more Macs running Leopard™, the latest release of Apple’s Mac OS® X operating system including the amazing Time Machine™ automatic backup software. Time Capsule combines an 802.11n base station with a server grade hard disk in one small package. Simply plug it in, then easily set up automatic wireless backup for every Mac® in your house to a single Time Capsule with just a few clicks. Time Capsule offers the benefits of a full-featured 802.11n Wi-Fi base station, and comes in two models: a 500 gigabyte model for just $299 and a 1 terabyte model for just $499.”

Time Capsule is a boon to a small percentage of loyal Mac customers who want backup, and want the best solution in the marketplace. Most Macs feature plenty of hard-disk space though, and most customers do not backup. Can Apple change the customers’ behavior towards making backups an essential part of their lives? Perhaps the business users will buy Time Capsule. The home users will wait.

The feature that is more interesting in the Time Capsule is “the full-featured Wi-Fi base station with the latest 802.11n technology.” “Delivering up to five times the performance and twice the range of 802.11g, 802.11n* is built in to Apple’s iMac® desktop and the entire Mac notebook line up, including MacBook®, MacBook Pro and the new MacBook Air. Time Capsule features a sleek design with a built-in power supply and connections to print wirelessly to a USB printer. With Time Capsule, it’s very easy for users to create a secure, wireless network for up to 50 users and set security restrictions such as Internet access limits for children’s computers.” The wireless networking elements of Time Capsule would be the real hook for homebuyers.

iTunes Movie Rentals

Apple made movie history with the announcement of iTunes Movie Rentals. iTunes® Movie Rentals feature movies from all the major movie studios including 20th Century Fox, The Walt Disney Studios, Warner Bros., Paramount, Universal Studios Home Entertainment, Sony Pictures Entertainment, Metro-Goldwyn-Mayer (MGM), Lionsgate and New Line Cinema. iTunes Users can rent movies for as low as $2.99 and watch them on their Macs or PCs, all current generation iPods*, iPhone™ and Apple TV®. iTunes Movie Rentals will offer over 1,000 titles by the end of February, including over 100 titles in stunning high definition video with 5.1 Dolby Digital surround sound which users can rent directly from their widescreen TV using Apple TV. iTunes Movie Rentals are priced at $2.99 for library titles and $3.99 for new releases, and high definition versions are just one dollar more with library titles at $3.99 and new releases at $4.99.

Apple has positioned itself well for the growth of online movie rentals business. Last year, I wrote about Blockbuster versus Netflix – Winner takes All and talked about the real possibility of Apple and Amazon.com (NASDAQ: AMZN) staying and competing with these companies in the race for online movie rental business. Amazon.com is also one of the Top 20 Innovators of The Innovation Index. If the online movie rental business takes off in 2008, look out!

Mac Pro Business

Apple also introduced “the new Mac® Pro with eight processor cores and a new system architecture that delivers up to twice the performance of its predecessor*. The new Mac Pro combines two of Intel’s new 45 nanometer Quad-Core Xeon processors running up to 3.2 GHz, powerful new graphics and up to 4TB of internal storage to offer the ideal system for creative professionals, 3D digital content creators and scientists. The standard 8-core configuration starts at just $2,799.” And Apple® introduced the new Xserve®, a 1U rack-optimized server that is up to twice as fast as its predecessor* and includes an unlimited client license for Mac OS® X Server Leopard™. Starting at just $2,999, the new Xserve has up to two Quad-Core 3.0 GHz Intel Xeon processors for 8-core performance, a new server architecture, faster front side buses, faster memory, up to 3TB of internal storage and two PCI Express 2.0 expansion slots for greater performance and flexibility.

Apple is trying to make a dent in the business segment, and the gaming, web hosting and graphics workstation markets. It remains to be seen how much of a new business these new Mac Pros and Xserve will carve out for Apple in 2008.

Apple 2008 Outlook

How will Apple perform in 2008? The Apple stock will do just fine; although recently, the stock has lost about 20% of its value from a high of over $200, we believe that Apple stock will end 2008 in the neighborhood of $250, or a growth of at least 25%. Apple will have another solid year for iPod, iPhone, Mac and Leopard business lines. Apple will provide a cautious outlook for 2008 sales owing to current economic conditions; however, it will easily exceed the earnings estimates for the current and subsequent quarters owing to strength in its core business including the iPod and Macs, and growth in new business lines including iPhone and Leopard. Most iPod users will begin upgrading to iPod Touch when the base memory increases to around 40 GB. Macs will give PCs a run for the money. iPhone will go global. The icing on the cake could be the growth of iTunes Movie Rentals.

Invest in the Innovation Index Fund

We launched the new Innovation Index Fund in December, 2007 that invests in the Innovation Index and returned 66% in 2007, and 174% in the previous five years. If you want to learn more about the Innovation Index Fund, fill out your contact information at the bottom of this form: http://www.innovationindexgroup.com/invest.html

The Innovation Index Reports:

Invest in The Innovation Index - Invest in the brand new Innovation Index Fund
Introducing The Innovation Index Fund - Invest into The Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
The Innovation Index gallops to 56% - Quarterly Report - Q3, 2007

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index returned 66% in 2007, and returned 174% over the previous five years (2002-2006). This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.

Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)

The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.

Disclaimer: The Innovation Index Group, Inc. invests in the stocks comprising The Innovation Index.

Amazon.com Valuation - Over, Right or Under Valued - You decide

Amazon.com, Inc. (NASDAQ: AMZN) is one of the top 20 Innovators of The Innovation Index. Amazon.com just announced it's quarterly earnings yesterday after market close. At market close, AMZN had closed at 100.82, up a whopping 156% in 2007.

"The online retail giant reported earnings of $80 million, or 19 cents a share, for the quarter ended Sept. 30, compared with earnings of $19 million, or 5 cents a share, for the same period last year. Revenue grew 41% to $3.26 billion from $2.31 billion last year. Analysts had expected the company to report earnings per share of 18 cents on revenue of $3.14 billion, according to consensus forecasts from Thomson Financial. The company said operating earnings for the period came in at $123 million -- ahead of the $108 million expected by analysts. Last year's third quarter saw operating income of $40 million."- source MarketWatch

Four things emerged from Amazon.com's most recent quarterly earnings results:

1. Amazon.com earnings remained flat at 19 cents a share from the previous quarter. Thus, there was no earnings growth from the previous quarter. Although Amazon.com grew the revenue by $0.38 billion or 13% from $2.88 billion the previous quarter to $3.26 billion in the current quarter. Whereas the total revenue grew 13%, the earnings did not budge - the earnings remained flat. The operating income only grew by 6% from the previous quarter. Does this mean Amazon.com had to overspend to achieve the revenue growth, and hence could not grow the profits?

2. Amazon.com had a huge quarter internationally. "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.47 billion, up 40% from third quarter 2006. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International net sales growth was 33%." Compare this to the previous quarter, when "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.28 billion." This means Amazon.com earnings positively benefited from the exchange rates and the increase in international business of about $0.19 billion. However, the earnings still remained flat.

3. 4th Quarter Guidance: Net sales are expected to be between $5.1 billion and $5.45 billion, or to grow between 28% and 37% compared with fourth quarter 2006. Operating income is expected to be between $221 million and $291 million, or grow between 12% and 48% compared with fourth quarter 2006. This guidance includes $54 million primarily for stock-based compensation and amortization of intangible assets... Thus, Amazon.com is poised to grow the revenue by 62% in the final quarter, the holiday quarter when Amazon.com rakes in the most revenue. The operating income will grow by 108% from the current quarter. When the operating income only grew by 6% from the previous quarter, can investors believe Amazon.com management when they project a growth of 108% of operating income? How would Amazon.com achieve this? What products will provide the increased revenue and profitability for Amazon.com? The new DRM-free MP3 store, or memberships, or 3rd party developers? Amazon.com has recently upped the shared bounty to 20% for the Mp3 store in order to attract increased buyers through its Associate referral program.

4. Operating expenses without the Cost of Revenue increased by $54 million or 9.2% from the previous quarter. This is huge since the generation of an additional 13% growth in revenue resulted in a 9.2% increase in operating expenses. When Amazon.com grows the revenue by 62% in the final quarter, what would be the increase in operating expenses? Overall, Amazon.com's net profit margin and operating profit margins have decreased from the previous quarter. And Amazon.com is planning to not only reverse this trend, but show a healthy increase in the fourth quarter.

Amazon.com closed today at 88.59, down 12.23% from yesterday's close of 100.82.

Here is a comparison of Amazon.com's forward P/E with other retailers (from Google Finance):

Amazon.com, Inc. (NASDAQ: AMZN) Forward P/E: 50.94
eBay Inc. (NASDAQ: EBAY) Forward P/E: 26.86
Wal-Mart Stores, Inc. (NYSE: WMT) Forward P/E: 14.55
Google Inc. (NASDAQ: GOOG) Forward P/E: 32.66
Target Corporation (NYSE: TGT) Forward P/E: 15.30
Barnes & Noble Inc. (NYSE: BKS) Forward P/E: 21.44

Is Amazon.com growing the fastest among all these companies to garner this upside on the earnings multiple? One note of caution: It has the lowest net and operating margins from the above companies (except Barnes & Noble).

Is Amazon.com over-valued, right-valued or under-valued at these multiples? You decide.

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.