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Apple: On The Road (Back) To Respect?

Tuesday, 12 Feb 2008 | 11:10 AM ET

Apple Inc. as a "value play?" Seems counter-intuitive to think of a company trading at better than 20 times next year's earnings as a "value," but maybe--just maybe--the Street is coming around to the idea that the growth and potential of this company seem horribly undervalued.

The latest to join the Apple "party" is Citigroup analyst Richard Gardner who put Apple on the firm's "Top Picks Live" list yesterday, Citi's top picks of 59 stocks that show the greatest potential for growth. Despite the steep sell-off recently, Citi maintains its $212 target. And because of the steep sell-off, Citi says Apple offers enormous value right now.

Rumors of an iPod slowdown--above and beyond the seasonal slowdown that normally happens this quarter; worries of an economic slowdown that could crimp the company's Mac sales; concerns that iPhone sales are sputtering are all either overblown or already factored into the company's share price.

The fact is, it's about time that some on the Street are beginning to take notice once again that Apple is on the move; that the company's position in the marketplace and in the industries in which it competes continues to exude leadership and innovation.

Citi says Apple will beat the Street's expectations for the March quarter by a dime or more even though revenue will come in line. In other words, not only is Apple doing just fine, it's coming up with a way to be more profitable. It's not just fancy flash at this company, it's about running a tight business that builds on the success it enjoys in the marketplace.

As I have written previously, I fully expect Apple to unveil its 3G version of the iPhone in May, or sooner, and that promises to juice iPhone sales even further. What amazes me is that even though we know a better version of the device is mere months away, it appears iPhone sales today are not being affected, that consumers aren't waiting for the better one to come along. Citi anticipates no trouble for Apple to meet its publicly stated goal of 10 million iPhone shipments for 2008. Based on the 4 million the company sold to date, as of Macworld last month, it seems like the goal is well within reach.

Says Gardner: "We believe that lack of 3G has been a significant headwind for iPhone in Europe where 3G is already pervasive." Something else to consider: he estimates 35 percent of iPhones were sold with the purpose of being unlocked. It's a huge and somewhat troubling number since part of Apple's revenue model is receiving a portion of the monthly service contracts from AT&T. But as Apple enters more global markets, the desire to buy a phone and unlock it for use in a specific market where the iPhone isn't available yet will be significantly reduced. Something American Technology Research's Shaw Wu wrote about last week.

All that as Research in Motion prepares to unveil the long-anticipated touch-screen version of the BlackBerry, Nokia continues to shine, and the wireless community waits to see what Palm comes up with next.

I, for one, am interested to see how well the company's new Macbook Air is selling. The super-slim laptop shows huge promise, but it's pricey. The solid-state, flash-drive version is downright expensive. But it's gorgeous. The question is: with economic worries dogging shoppers, are they putting that aside and buying the device anyway. Still, Air comes out just as Mac momentum has never been better. Is it a case of throwing kerosene on the fire; or throwing water?

Apple shares are off 37 percent so far this year. The stock is inching back as the clouds on Wall Street begin to dissipate, and the Apple story re-captures a kind of clarity missing these past few months. Compelling products coveted by shoppers even in the face of economic worries; a strong product pipeline delivering innovation in digital entertainment and information management; and the ability to turn those sales into what could be better than expected profits. It all still seems like a winning story to me.

Questions? Comments? TechCheck@cnbc.com

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