By Philip Elmer-DeWitt
May 5, 2008

You don’t see this too often.

Less than two weeks after American Technology Research’s chief Apple analyst zigged when the Street zagged, downgrading Apple (AAPL) from Buy to Hold in advance of the company’s Q2 earnings report — and in the face of a generally bullish consensus — Shaw Wu on Monday issued a new report that reverses his April 22 opinion and raises his price target from $175 a share to $210.

What makes the change of heart so unusual for an analyst of Wu’s caliber is that he doesn’t cite any major change in market conditions or Apple’s performance. Instead, his report reads like a mea culpa. He writes:

“We overestimated the potential negative reaction on the quarter, concerned with high expectations, a typically conservative outlook and the extreme sell-off following December results. In hindsight, we should have maintained our BUY rating and moderated our position rather than downgrading. While AAPL shares will likely remain volatile and we may see a better entry point from here, we need to align our rating with our longer term view on fundamentals of the company.”

While Wu continues to worry about what he calls a “product vacuum” and inventory draw-downs in the June quarter, he now believes that investors have already factored those concerns into the share price and are focused on what’s coming in the second half of the year. Here he adds some useful specifics:

  • New portable Macs in time for the back-to-school sales.“Our contacts also suggest a radical redesign of MacBook and MacBook Pro, with styling closer to the new iMac and MacBook Air. While MacBook and MacBook Pro have done well, there has not been a form factor refresh since 2001-2002.”
  • An iPhone transition around June and July.“In addition to a 3G version, our contacts indicate that the 2.5G model could see a minor casing change and lower price point closer to $299-349 vs. its $399 price today. We believe Steve Jobs will likely unveil new models at his WWDC keynote in early June.”
  • Accelerating growth in Mac share of the worldwide PC market. “We estimate Mac had about 3.0% share of the worldwide computer market in 2007, up from about 2.5% in 2006…. We estimate that every incremental 50bps of incremental share gain (around 1.5m units) would be $0.45-0.50 per share in earnings.”
  • Growth in media and entertainment.“The spread of Wi-Fi, 3G cellular and future generations of wireless technologies will have a profound impact on media consumption and distribution. … With a multi-platform approach, AAPL is positioned to benefit more than any other supplier.”

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