iCloud: What the analysts sayJune 7, 2011: 8:18 AM ET
The sell-side analysts liked the show. The market, not so much.
With one exception (ahem, J.M.P.'s Alex Gauna), the analysts who follow Apple (AAPL) seemed to understand what the traders who drove Apple's shares down Monday $5.40 (1.57%) to $338.04 did not: The hundreds of improvements in its software ecosystem -- big and small -- that Apple announced Monday could, in the long run, sell more devices, convert more customers, and make more money for the company than the new iPhone some were apparently still expecting Steve Jobs to pull out of his sleeve.
A sampling of post-keynote analyst notes (with ratings and 12-mos. price targets):
Merrill Lynch's Scott Craig: As expected, Apple introduced the iCloud which will store content in "the cloud" and then wirelessly push it to all the user's devices. iCloud apps (total of nine announced) include iTunes in the Cloud, and Photo Stream. The iCloud includes 5GB of free cloud storage for mail, documents and backup. The iCloud apps will be free (storage price not mentioned and perhaps indicates free; available this fall). Apple also introduced iTunes Match (scans music library and finds match in Apple's music library so users don't have to upload all their songs to iCloud) for ~$25/year (unclear how much Apple gets versus music companies). (Rating: Buy. Price objective: $465.)
Ticonderoga's Brian White: In our view, these new announcements further strengthen Apple's digital ecosystem by providing consumers with increased functionality, enhanced ease of use, greater efficiency and cool new features that we believe will drive further adoption of Apple devices in the future. At the same time, the presence and active participation by Steve Jobs during the keynote is clearly a positive, in our view. Trading at just 10x our CY11 pro forma EPS estimate (ex-cash), we remain aggressive buyers of Apple during this consolidation. (Rating: Buy. Price Target: $612.)
Deutsche Bank's Chris Whitmore: The highlight of the show was iCloud which allows Apple devices to store/share content and wirelessly pushes it across devices... iCloud is free which will drive broad adoption (vs. $99 for MobileMe) and the beta software is available immediately (consumer availability expected this Fall). We believe iCloud will greatly increase the stickiness of the Apple platform, particularly for multi-device iPad/iPhone/Mac owners, and further differentiate the AAPL platform in terms of scale and size. This combination is likely to extend AAPL's leadership with developers and customers alike and further enhance the overall value of the iOS platform. (Reiterate Buy and $450 PT.)
Needham's Charlie Wolf: What distinguishes iCloud is that it's virtually invisible to the user. As Steve Jobs put it, "it all just works". Synching files with a Mac or PC is now over. All documents on a Mac, iPhone, iPad or iTunes-enabled PC are seamlessly uploaded to the cloud—Apple's gigantic server farm in North Carolina—with virtually no user intervention. These include data files, applications, music, photos, videos and more. The data are then automatically synched and downloaded to all of the iOS, MacOS and iTunes-enabled devices owned by an individual. There is no competing service that remotely matches iCloud. And it's FREE! (Rating: Buy. Price target: $450.)
Barclay's Ben Reitzes: While not catalysts, we believe the software and service upgrades announced today will help keep Apple ahead of its competitors in digital music and within the mobile ecosystem (i.e., Amazon and Google). While it may not be obvious today, we believe these innovations are laying the foundation for the next round of share gains in mobile phones, tablets and computers, especially with 4G connectivity going mainstream next year. (Rating: 1-Overweight. Price Target: $465.)
Goldman Sachs' Bill Shope: We believe the announcements represent a significant step forward for Apple's iOS platform. Apple's cloud introduction and iOS 5 refresh effectively eliminate the need for a PC or Mac hub for iOS devices. We believe this substantially enhances the value of the platform, increases barriers to entry for all iOS devices, and makes it easier for users to purchase and manage multiple iOS products. Most important, we believe that Apple's cloud offerings require cutting-edge compute infrastructure and a tightly integrated platform, which few companies will be able to fully replicate. (Rating: Buy. Price target: $470.)
UBS Maynard Um: It's all coming together for Apple. Today's Worldwide Developers Conference demonstrated Apple's intense focus on making its hardware ecosystem attractive by differentiating itself through software... We believe the seamless integration of applications and content across the Apple ecosystem is a major step in the right direction for the company, and one that we believe will set Apple up nicely to continue to drive hardware sales to consumers well into the future. (Rating: Buy. Price target: $510.)
J.M.P. Securities' Alex Gauna: We are reiterating our Market Perform rating on Apple following our attendance of a sold out and well executed World Wide Developers Conference keynote that held no real surprises and was more evolutionary than revolutionary in nature. On the positive side, OS X Lion and iOS 5 updates included attractive new touch and organizational features that are likely to please the Apple faithful and keep Apple products best in class with regard to intuitiveness and usability. Likewise, the seamless synching offered by its free iCloud services should maintain the dominance of iTunes in digital music and the halo effect among OSX and iOS devices. The stock was off -1.57% in response to the keynote, however, and we agree with the reaction given the absence of new hardware to assist the software in winning incremental converts, stem the tide of faster Android adoption, or to make enterprise inroads. Since the iPhone was introduced in 2007, this is the first WWDC without a new phone, and while expected, it is likely to exacerbate concerns around Apple's ability to execute without a healthy CEO. (Rating: Market Perform. Price target: "NA".)
Credit Suisse's Kulbinder Garcha: Although Google and Amazon are already offering cloud based offering, we believe Apple has continued to lead innovation in the services space with the introduction of its iCloud, which we believe is superior to existing cloud services from competition. We believe this will provide Apple with a sustained level of differentiation both as a mobile device and PC vendor, thereby also allowing the company to maintain its premium pricing strategy in both smartphone and PC segments. (Rating: Outperform. Target price: $500.)
Wells Fargo's Jason Maynard: Apple's developer conference showcased very important long-term software and cloud platform advancements that should stem any major disruptive threats for the foreseeable future. The combination of Apple's new iOS 5 and iCloud significantly raises the mobile OS bar and distances itself from the competition. Monday's (6/6) keynote demonstrated how Apple is ahead of the game from a software standpoint and is translating their integrated offering right into the cloud. In our view, CEO Steve Jobs made a huge statement by saying the PC/Mac is no longer the hub of your digital life. The PC/Mac have been demoted and the digital hub has moved to the cloud. (Rating: Market weight. Valuation range: $400-$420.)
BMO Capital's Keith Bachman: We believe iCloud will entice users to join the Apple family, and encourage users of Apple products to stay within the Apple family by allowing seamless integration of all devices. We think that iCloud service for free could provide the same stickiness that iTunes for free did for the iPod. Net, we believe iCloud keeps users within the Apple family because users will be reluctant to move away from Apple with all content stored in iCloud, and therefore more willing to purchase incremental Apple devices. We believe this is just the beginning of iCloud, with more features and functionality to come. (Stock rating: Outperform. Target price: $420, up from $415.)
Canaccord Genuity's T. Michael Walkley: With iTunes Match, Apple allows customers to essentially grandfather in all songs already in iTunes but not purchased from Apple into Apple's cloud for use across a user's iOS and MacOS devices for only $25 per year. By doing this, Apple has significantly lowered the barrier to entry into the iOS cloud ecosystem for new Apple customers. (Rating: Buy. Target: $485, up from $480.)
Susquehanna's Jeff Fidacaro: One of the key takeaways, in our view, was the power of the synchronization functionality embedded in iCloud, which alleviates many of the pain points of sharing digital content and data across multiple devices and users. Apple's move should allow it to better compete with Google on e-mail, documents in the cloud, photo sharing, and other social and productivity features. Current limitations to iCloud include Wi-Fi only syncing and no music streaming subscription service, nonetheless the service is a major strategic step in the right direction. (Rating: Positive. Price target: $465.00.)
RBC Capital's Mike Abramsky: No Surprises, but Possible Game Changer... By 'cutting the cord' to the PC, Apple may expand its addressable device market by 4x, addressing the ~3B handset users who have a phone -- but not a PC. We believe we may see new devices in time, based off iCloud services. As we expected, Apple did not unveil a new iPhone at WWDC; however, we continue to expect iPhone5 in September. (Outperform, Above Average Risk. Price Target: $450.)
Think Equity's Mark McKechnie: The big surprise is Apple's pricing, which offers free cloud services for up to 5GB of personal data. Importantly, this 5GB quota does not include space for purchased music, apps, books, and PhotoStream, and will remain "Ad Free" for all users. Apple clearly is pricing the cloud offering to drive adoption, which longer term we believe will create loyalty and thus drive continued hardware sales. (Rating: Buy. Price target: $450.)
Citi's Richard Gardner: In our opinion, the key positive surprises from today's announcements included 1) the $29 upgrade price of Mac OS X Lion (versus $129 for prior Mac OS X upgrades), 2) PC-less activation, software updates and content synchronization for iOS devices, and 3) FREE iCloud synchronization service... The most obvious omission versus pre-WWDC conjecture was the lack of a music streaming service. The initial incarnation of iCloud displays iTunes purchase history on all Apple devices and supports one-button synchronization of this content, but does not support automatic streaming of purchased content from the Cloud. Apple is also charging $24.99 per year for "cloud services" on ripped CDs (if the customer uses a new "auto-matching" feature in iTunes), presumably to appease record labels concerned about illegal music sharing. (Rating: Buy/High Risk. Target price: $435.)
Jeffries' Peter Misek: As expected, the keynote focused on software and cloud services with mostly me-too capabilities announced. We expect this to be Apple's first round of cloud service announcements with round two in the Fall (likely focused on video) and round three in 2012. We reiterate our Buy/$500 target with the stock likely to appreciate ahead of multiple CQ4 catalysts. Also, we see iMessage as very negative for RIM as it undermines BBM.
Morgan Keegan's Tavis McCourt: We view iOS 5 as a highly significant upgrade, as it begins Apple's transition from a Mac-centric company to a cloud-centric company. In many respects Apple is playing catch up in certain aspects of iOS (OTA software updates, notifications, proprietary IM application, etc...), but in many areas it is truly innovating (AirPlay Mirroring, iCloud Backup, iCloud Storage). We believe the iMessage app could be a significant driver of iPhone adoption outside the US, where mobile IM is used to avoid texting, picture messaging and roaming fees. (Rating: Outperform. Price Target: $462.)
Sterne Agee's Shaw Wu: Other announcements we found interesting include: (1) iMessage; (2) Twitter integration; and (3) No PC required. With iMessage, AAPL is providing free messaging between users via its iCloud network replicating functionality similar to that offered by BlackBerry Messenger. With iOS 5, Twitter becomes a system level service where AAPL integrated Twitter functionality without having to acquire the company. It begs the question of whether bringing Twitter in-house makes sense in the future. And last but not least, AAPL is allowing direct storage of content on mobile devices and in iCloud, enabling a user to use an iPhone, iPad, or iPod touch without having to purchase a PC or Mac. This will definitely be an interesting trend to watch as the debate whether smart phones and tablets replace PCs rages on. (Rating: Buy. Price Target: $460.)
Gleacher's Brian Marshall: In our view, the introduction of the widely anticipated iCloud service offering stole the show (relative to the previews of iOS 5 and Mac OS X Lion). While it is unlikely to move the "financial needle" at AAPL anytime soon, we believe iCloud is significant as it increases the "stickiness" of the AAPL ecosystem (i.e., another reason why roughly 95% of the total PC and smartphone users today who are not using an AAPL product should be). From a stock perspective, we believe AAPL holds a unique (albeit strange) position combining both the elements of a value name (i.e., CY12 P/E multiple of 11x with no net cash benefit) and a secular grower (i.e., three-year CY revenue growth average of 42%). (Rating: Buy. Price target: $450.)
Piper Jaffray's Gene Munster: Bottom line is that Apple is increasing the likelihood that consumers buy multiple Apple devices. What's new is that Apple will be giving away iCloud for free (we had expected it to be priced between $25-$99 a year). This will allow Apple devices to automatically share contacts, calendars, messages, photos, apps, and music purchased on iTunes; sharing non iTunes music will cost $25 a year. (As a point of reference, Amazon's Cloud drive could cost up to $200 a year.) Also, Apple made it easier for consumers to have an iPad or iPhone as their primary computing device because a computer is no longer needed to set up an iPad or iPhone. (Maintain Overweight rating and $554 target.)
More as they come in.