Apple Hits a High, but Fails to Convince Big Investors

Retail Stores Take a Toll

One particular area of concern: As is the case with Gateway(GTW), the cost of operating Apple's retail stores takes a toll on margins, as Hillmeyer has pointed out. Before Apple opened any stores, back in fiscal 2000, operating expenses amounted to about 19% of sales of $8 billion, producing a 7% operating margin.

But since then, Apple's sales have fallen off to around $6 billion while its relative expenses have increased, partly because it has steadily expanded its retail base to over 50 stores since opening its first outlet in May 2001. Operating expenses now equal around 27% of sales, leaving an operating margin of only around 1%.

That leaves Apple only barely in the black, with plans to open another 17 stores by the end of this year.

As for Apple's online music venture, analysts are generally taking a wait-and-see approach, though most assume sales won't offer much of a lift to a total revenue base of nearly $5.8 billion over the past year.

To be sure, the early response has been promising: Late Monday Apple said customers have so far downloaded over five million songs from its iTunes music store, at a price of 99 cents each. The same fund manager who sees Apple as a marginal player says he's "kind of intrigued" with the potential of a new market, though it's not enough to make him purchase shares.

But Colicchio, another buysider, says it just shows Apple is "grasping for growth. The fact that they're looking in that direction tells me they're in search of a business model. Which is fine; they should do that -- but it tells me there's a lot of risk," he says.

Click here to read a letter about this story.

>To order reprints of this article, click here: Reprints