S&P firm: Apple's success comes from 'focus on innovation'
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S&P firm: Apple's success comes from 'focus on innovation'

Jim Yin of S&P Equity Research sees faster growth coming from emerging markets in Asia, Eastern Europe, Latin America, and the Middle East. There are 10 large, mid-size, and small-cap companies in the S&P Computer Hardware subindustry index. The two highest-ranked members are Apple, which is ranked "5 STARS" (strong buy), and IBM), which carries a "4-STARS" opinion.

Here's S&P's "business summary" of Apple: "Apple Inc. may have a relatively small share of the more than $200 billion market for PCs (according to market research firm IDC), but in the rapidly growing MP3 player market, Apple has dominated with the success of its iPod. The worldwide portable compressed audio market was about $21 billion in 2005 and is projected by IDC to have grown 29 percent in 2006.

"We believe the success of Apple's iPod line has translated into higher demand for its computers, as its share of the PC market continues to grow and is approaching five percent in the U.S.

"In August 2006, as a result of an internal stock option investigation, the company announced that it would likely need to restate its historical financial statements to record non-cash charges. In December 2006, AAPL confirmed that it was restating results for prior periods and recording non-cash charges of $84 million on an after-tax basis. While we view the news as disappointing, we believe it does not change AAPL's fundamental operating model.

"Apple, in our opinion, derives its competitive advantage from its focus on innovation. We believe the iPod is a clear example of this strategy's success. AAPL entered the consumer device market with the iPod in 2001 and in FY 06 (Sep.), it accounted for 40 percent of total revenues.

"Another key differentiator for the company is that its computers are based on its own operating system, enabling a further area for Apple to innovate, in our view. AAPL's computers are based on the Mac OS (versus the prevalent Windows operating system). Apple's Mac OS operating system focuses on simplicity and is viewed as graphically sophisticated, in our opinion. The Mac line also differed from peers due to its use of the PowerPC RISC-based chip, developed by IBM and Motorola (now Freescale), but transitioned to the more common Intel chip, effective January 2006. Apple differentiated its iPod from other MP3 players by launching its iTunes digital music download service (launched in 2003, with certain video content added as of October 2005 and movies in September 2006). As of October 2006, the company estimated that iTunes had an 85% share of the legal download music market."

Standard & Poor's is a provider of independent credit ratings, indices, risk evaluation, investment research and data.

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