Wednesday, September 20, 2006

Apple and iMovies

(Note - this version corrects a math error from earlier version on number of movies sold per year and earnings impact)

The iMovies portion of iTunes has been open a week and insiders are reporting sales in excess of 125,000 movies. Apple is on the Finance Wonk Buy List and if you invested when I recommended it you have made 31% in 3 months. How are the movies likely to impact AAPL stock?

First lets look at the 125,000 movie per week number. Assuming that number stays constant (which it won’t), that would be 1.5 million movies per year. Based on a statement by Disney regarding profit, it looks like Apple makes $2.50 to $7.00 per movie at different pricing levels. Multiplying these together and deducting a little bit for overhead it looks like Apple would add around $7.5 million over 12 months to net income, or 0.6% of 2005 revenue.

That is a small number, but adding 0.6% on top of current growth is good. Selling more iPods and moving upscale into iTV (the new product declared for January) is better. Combine both those with a growth scale like the one that happened with iTunes and you could be adding 7-10% to growth over the next 12 months. This would, of course, be great for the stock. (As a side note I do have iTunes myself and have taken a look at the iMovies interface – pretty slick.)

All of this comes with cautions, however. If we assume that the growth rate stays around 19% (still a good number, but without any knockout performance from the iMovies or iTV), then the current price of $75 is getting very close to the present value at a 15% discount rate. I think Apple is good for more of a run, but don’t expect another 31% from here unless iMovies and iTV takes off.

The main point here is that even the greatest company can be a bad stock if the price gets too high, so I don’t want people to be caught unawares if AAPL weakens.

I’m going to ride Apple a bit longer. I think that iTV and iMovies will stoke some more growth, and if/when Apple announces the iPhone there will probably be another jump, but we need to be cautious and keep in mind that stock prices must ultimately be sustained by profits.
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