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					North America Equity Research
13 March 2009

Apple Inc.
Our Vision of How Apple Could Introduce a Netbooklike Device
We believe this year is the right time for Apple to enter the netbook PC market. Media and investor speculation of a netbook-like device from Apple has picked up in recent weeks. We think such an entry makes sense as the company could further cement its leadership in consumer electronics products. Here, we would not expect Apple to diminish its higher-end stature, and we estimate a netbook-like device would be accretive for Apple’s gross margins, as presented in this report. • The timing is right for Apple's entry into netbook-like devices. Given the momentum behind lower cost PCs, i.e. netbooks, and an increasingly price sensitive consumer, we believe it is important for Apple to introduce new CE products in the sub-$800 price range. Apple is more than a PC company, and with the introduction of a netbook-like device, the company would sustain its leading CE stature while addressing a new market having longer term growth potential.

Overweight
AAPL, AAPL US Price: $96.35 Price Target: $100.00

IT Hardware and Imaging Mark Moskowitz
AC

(1-415) 315-6704 mark.a.moskowitz@jpmorgan.com

Anthony Luscri
(1-415) 315-6702 anthony.s.luscri@jpmchase.com J.P. Morgan Securities Inc.
Price Performance
180 $ 140 100 60
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

• Apple’s netbook-like product would be differentiated and not so cannibalistic.
Apple, unlike other PC-related companies, has the platform to introduce a netbooklike device that is both differentiated and has limited cannibalization impact on its existing product offerings. In our view, a larger, enhanced iPod touch-like device could be a reasonable progression. The device could be a music player, netbook PC, gaming handheld, and a portable Internet device, all in one. We would expect the keyboard to be touch-screen, distinguishing from other netbook PCs. • Price points could be $499 for 32GB and $599 for 64GB. Our view on Apple’s potential netbook-like device includes all of the current iPod touch capabilities, plus a larger 10-inch touch screen, wireless (3G data and bluetooth, in addition to WiFi), and higher storage capacities. With any netbook-like device, we expect Apple to chose an elastic price band in the $499-599 range (with the help of carrier subsidies) to keep enough separation from its entry Macbooks and iPhone/iPod touch lines. • We think Apple’s “netbook” would be accretive. Given rapid component cost declines and a robust margin profile on the iPod touch, we believe that the addition of a new netbook-like device should be accretive to the model, at gross margins at or above 50%. Our margin assumptions are outlined in this report.
Apple Inc. (AAPL;AAPL US) 2008A EPS Reported ($) Q1 (Dec) Q2 (Mar) Q3 (Jun) Q4 (Sep) FY CY Revenues FY ($ mn)
1-FAS123 Compliant Source: Company data, Reuters, J.P. Morgan estimates.

YTD Abs 12.9%

1m -2.9%

3m -2.0%

12m -23.5%

2009E 1.78A1 1.01A1 0.94A1 1.00A1 4.73A1 4.48A1 32,975A

2010E 1.531 1.151 1.171 1.311 5.151 5.281 35,309

1.761 1.161 1.191 1.261 5.361 5.381 32,479

Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ bn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date

96.35 12 Mar 09 192.24 - 78.20 85.67 Sep 889 100.00 31 Dec 09

See page 7 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

Mark Moskowitz (1-415) 315-6704 mark.a.moskowitz@jpmorgan.com

North America Equity Research 13 March 2009

Overview
We believe this year is the right time for Apple to enter the netbook PC market. Media and investor speculation of a netbook-like device from Apple has picked up in recent weeks. We think such an entry makes sense as the company could further cement its leadership in consumer electronics products. Here, we would not expect Apple to diminish its higher-end stature, and we estimate a netbook-like device would be accretive for Apple’s gross margins, as presented in this report.

Key Points
The timing is right for Apple’s entry into netbook-like devices Given the momentum behind lower cost PCs, i.e. netbooks, and an increasingly price sensitive consumer, we believe it is important for Apple to introduce CE products in the sub-$800 price range. Over the past year, netbook PCs have become an important consumer electronics product. Apple is more than a PC company, and with the introduction of a netbook-like device, the company would be sustaining its leading CE stature and addressing a new market having longer-term growth potential, in our view. Apple’s netbook-like product would be differentiated and not so cannibalistic Apple, unlike other PC-related companies, has the platform to introduce a netbooklike device that is both differentiated and has limited cannibalization impact on its existing product offerings. In our view, a larger, enhanced iPod touch-like device is a reasonable progression. The device could be a music player, netbook PC, gaming handheld, and a portable Internet device, all in one. We would expect the device to have a touch-screen keyboard. We believe the lack of a keyboard would enhance Apple’s simple, yet sophisticated design, providing differentiation from other netbook PCs and limiting cannibalization of Apple’s entry-level Macbook offering at $999. Price points could be $499 for 32GB and $599 for 64GB Our view on Apple’s potential netbook-like device includes all of the current iPod touch capabilities, plus a larger 10-inch touch screen, wireless (3G data and bluetooth, in addition to WiFi), and higher storage capacities, based on SSD. In our view, the device could be suitable for either the coffee table or the portable user hitting the road. Wireless subsidies could help the price points, too. We submit that our estimated $499 and $599 price points for a netbook-like device could be achieved through a carrier subsidy similar to the iPhone model. With any netbook-like device, we expect Apple to target an elastic price band in the $499-599 range (with the help of carrier subsidies) to keep enough separation from its entry Macbooks and iPhone/iPod touch lines. A multi-tiered pricing strategy, which could include no subsidy Our $499 and $599 netbook-like device pricing assumptions, on 32GB and 64GB offerings respectively, evolve from the existing $229 8GB, $299 16GB and $399 32GB iPod touch family. We concede that the introductory price points of a netbooklike device could be higher, but given the disheveled state of the consumer, we
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North America Equity Research 13 March 2009

believe Apple may be better suited to try and keep the upfront cost to the consumer as low as possible. We submit that if Apple were to keep its non-3G subscription based iPod touch family as-is, while adding the netbook-like device offerings, there could be a heightened risk for cannibalization of the existing margin-rich product set. We believe the addition of a required 3G data subscription at the $499 and $599 price points could limit this risk. Such a complete product lineup could then address both the “cost conscious” and the "gotta have it yesterday" type of consumer that is willing to pay more for functionality and elegance, in our view. We do not believe Apple would pursue a strategy of lowering prices across the iPod touch family to accommodate any netbook-like device. Finally, Apple could offer the consumer the choice of not activating the 3G capabilities at the time of sale and increase the initial cost of the devices to $699 for 32GB and $799 for 64GB. We think Apple’s “netbook” product would be accretive Given rapid component cost declines, a robust margin profile on the iPod touch, and Apple’s strong supply chain management, we believe that the addition of a netbooklike device would be accretive to the model, with gross margins at or above 50%. Our margin assumptions are outlined below. We assume the new product will take advantage of higher capacity SSDs and a larger 10-inch diagonal touch screen. The screen module wields a hefty price tag driven by its larger size, in combination with touch capabilities and LCD. Also, the product could contain added features such as 3G wireless, Bluetooth, camera, GPS to name a few. Note that we assume that the 8GB iPod touch held close to 50% gross margins at its initial release. The 8GB product’s margins have improved over time due to supplier management, redesign, and steep declines in component pricing.
Table 1: Comparison of 8GB iPod touch and 32GB and 64GB “Netbook-like” Devices
8GB iPod touch iPod touch components Flash 8GB Touch screen and LCD module Total iPod touch bill of materials Manufacturing Total cost of sales Gross margin Selling Price
Source: J.P. Morgan estimates.

32GB Netbook-like Device $47 $12 $35 $94 $5 $99 57% $229 iPod touch components Flash 32GB Touch screen and LCD module Additional BOM (3G, bluetooth, camera, GPS, etc.) Total 32GB “Netbook” bill of materials Manufacturing Total cost of sales Gross margin Selling Price $47 $44 $106 $50 $247 $5 $252 50% $499

64GB Netbook-like Device iPod touch components Flash 64GB Touch screen and LCD module Additional BOM (3G, bluetooth, camera, GPS, etc.) Total 64GB “Netbook” bill of materials Manufacturing Total cost of sales Gross margin Selling Price $47 $90 $106 $50 $293 $5 $298 50% $599

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North America Equity Research 13 March 2009

Valuation and Rating Analysis
Summary financial model presented at the end of this report.

We maintain our Overweight rating and Dec-09 price target of $100. Our price target is derived from a weighted blend of EV/EBITDA and P/E scenarios (see below tables) utilizing historical peak/trough multiples. Currently, Apple trades at 18.2x our calendar 2010 EPS estimate versus the peer group average of 11.0x. We expect this valuation gap to persist in Apple's favor longer term. We continue to highlight Apple as having higher relative downside protection to numbers than most of its peers. We think the near term could get bumpy for Apple, but we would expect any disturbance to be an isolated event. We believe that all companies under coverage reporting a quarter having a full three months of 2009 should exhibit pain, and here, we believe that Apple should exhibit less pain than most.
Table 2: Apple Inc. P&L Scenarios
$ in millions, except per share data, C2009 Sales Y/Y growth % Operating profit % of sales Interest/other inc. (exp.) Pre-tax income Income taxes Tax rate EPS Y/Y growth % Diluted shares D&A EBITDA % of sales Worst Case $31,716 -4.0% $5,202 16.4% 295 $5,497 $1,704 31.0% $4.20 -22.1% 904 $654 $5,855 18.5% Base Case $32,515 -1.6% $5,578 17.2% 295 $5,873 $1,820 31.0% $4.48 -16.8% 904 $654 $6,231 19.2% Best Case $34,690 5.0% $6,314 18.2% 295 $6,609 $2,049 31.0% $5.04 -6.3% 904 $654 $6,967 20.1%

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

Table 3: Apple Inc. EV/EBITDA
$ in millions, except per share data, C2009 EV/EBITDA multiple Implied enterprise value Net debt Implied market cap Implied stock price Probability Average stock price Worst Case 9.0x $52,697 ($33,780) $86,477 $95.66 40% $102.84 Base Case 10.0x $62,312 ($33,780) $96,093 $106.30 55% Best Case 11.0x $76,640 ($33,780) $110,420 $122.15 5%

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

Table 4: Apple Inc. Forward P/E
P/E Multiple Implied stock price Probability Average stock price Worst Case 21.5x $90.20 40% $97.48 Base Case 22.5x $100.85 55% Best Case 23.5x $118.54 5%

Source: J.P. Morgan estimates. Note: Base case represents current J.P. Morgan estimates.

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Mark Moskowitz (1-415) 315-6704 mark.a.moskowitz@jpmorgan.com

North America Equity Research 13 March 2009

Table 5: Apple Inc. Blended Price Target
EV/EBITDA P/E Average stock price
Source: J.P. Morgan estimates.

Price $102.84 $97.48 $100.00

Weight 50% 50%

Risks to Our Rating and Price Target
Macroeconomic and secular conditions We assume that Apple possesses partial buffers to the macroeconomic environment and the deteriorating PC market. Should incremental weakness blunt end market demand more than expected or even slow Apple’s retail store expansion, then our view and estimates could be at risk. Competitive dynamics We assume that Apple will continue to outgrow the market in PCs, music players, and smartphones. Should competitive responses in these three segments detract from Apple’s revenue streams, then our view could be at risk to the downside. Rate of new product cycles We expect Apple to sustain its accelerated cycle of new product refreshes in the coming year. Should the company begin to slow in its technology improvements and frequency of refreshes, the company’s image for leading-edge solutions could take a hit. In such a case, we fear that investors could begin to lose interest in the story.

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North America Equity Research 13 March 2009

Apple Inc.: Summary of Financials
Income Statement - Annual
Revenues COGS Gross profit SG&A R&D Other expense Total operating expenses Operating income Interest expense Other income / (expense) Pretax income Income taxes Net Income EPS PF Options expense per share FAS 123 EPS Diluted shares outstanding

FY08A FY09E FY10E
32,479 21,334 11,145 3,761 1,109 4,870 6,275 620 6,895 2,061 4,834 5.76 (0.40) 5.36 902 32,975 22,084 10,891 3,883 1,215 5,098 5,793 353 6,146 1,876 4,270 5.28 (0.55) 4.73 903 35,309 23,785 11,525 4,012 1,222 5,234 6,291 485 6,776 2,100 4,675 5.75 (0.59) 5.15 907

Income Statement - Quarterly
Revenues COGS Gross profit SG&A R&D Other expense Total operating expenses Operating income Interest expense Other income / (expense) Pretax income Income taxes Net Income EPS PF Options expense per share FAS 123 EPS Diluted shares outstanding

1Q09A 2Q09E 3Q09E 4Q09E
10,167 6,635 3,532 1,091 315 1,406 2,126 158 2,284 679 1,605 1.91 (0.13) 1.78 901 7,622 5,107 2,515 948 300 1,248 1,266 58 1,324 411 914 1.15 (0.14) 1.01 902 7,379 5,001 2,378 915 295 1,210 1,168 63 1,231 381 849 1.08 (0.14) 0.94 903 7,808 5,341 2,467 929 305 1,234 1,233 74 1,307 405 902 1.14 (0.14) 1.00 904

Balance Sheet and Cash Flow Data
Cash and short-term investments Inventories Accounts receivable Other Total current assets Net property, plant and equipment Long-term portfolio investments Other assets Total assets Current debt Accounts payable Accrued expenses and other Total current liabilities Long-term debt Other non-current liabilities Total liabilities Shareholders' equity Total liabilities & shareholders' equity Net Income D&A Other Change in working capital Cash flow from operations Capex

FY08A FY09E FY10E
24,490 509 2,422 7,269 34,690 2,455 0 2,427 39,572 0 5,520 8,572 14,092 0 4,450 18,542 21,030 39,572 4,834 473 4,119 9,596 30,295 475 2,481 5,622 38,873 2,716 0 5,836 47,425 0 5,561 9,682 15,243 0 6,480 21,722 25,703 47,425 4,270 637 3,449 9,121 38,469 582 2,784 6,351 48,186 3,456 0 6,488 58,130 0 6,560 13,428 19,988 0 7,592 27,580 30,550 58,130 4,675 738 3,607 8,995

Ratio Analysis
Sales growth EBIT growth EPS growth Gross margin EBIT margin EBITDA margin Tax rate Net margin Return on assets (ROA) Return on equity (ROE) Free cash flow yield

FY08A

FY09E FY10E
7.1% 8.6% 9.0% 32.6% 17.8% 19.9% 31.0% 13.2% 8.9% 16.6% 10.6%

35.3% 1.5% 42.3% (7.7%) 36.3% (11.8%) 34.3% 19.3% 20.8% 29.9% 14.9% 14.9% 27.2% 11.4% 33.0% 17.6% 19.5% 30.5% 12.9% 9.8% 18.3% 10.8%

(1,091) (1,046) (1,059)

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Sep

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North America Equity Research 13 March 2009

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures
• • • • Market Maker: JPMSI makes a market in the stock of Apple Inc.. ISE option specialist: An affiliate of JPMSI is associated with a specialist or market maker that makes a market in the options of Apple Inc., and therefore such specialist may have a position (long or short) in the options of the issuer and may be on the opposite side of public orders in such options. Client of the Firm: Apple Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Apple Inc.. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Apple Inc..

Apple Inc. (AAPL) Price Chart Date
318 265 212 Price($) 159 106 53 0 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 N OW OW $102

Rating Share Price ($)
N OW OW OW 94.95 104.08 89.16 87.71 88.84

Price Target ($)
--104.00 102.00 100.00

18-Jan-07
OW $104 OW $100

15-Oct-08 14-Jan-09 06-Mar-09

18-Dec-08 OW

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage May 01, 1999 - Oct 18, 2001, and Sep 12, 2002 - Dec 02, 2003. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Mark Moskowitz: Agilent Technologies (A), Apple Inc. (AAPL), Brocade Communications (BRCD), Dell Inc. (DELL), EMC (EMC), Emulex Corp. (ELX), Hewlett-Packard (HPQ), IBM (IBM), Lexmark International (LXK), National Instruments (NATI), NetApp (NTAP), QLogic Corporation (QLGC), Seagate Technology (STX), Sun Microsystems (JAVA), Voltaire (VOLT), Western Digital (WDC), Xerox Corporation (XRX)

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North America Equity Research 13 March 2009

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2008 Overweight (buy) 38% 54% 37% 76% Neutral (hold) 44% 52% 49% 71% Underweight (sell) 18% 43% 14% 62%

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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North America Equity Research 13 March 2009

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Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. 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