Apple Sales Rise, Shares Dip

PowerMac sales were definitely disappointing -- 206,000 units for $398 million, vs. expectations of 250,000 units and $446 million, commented Fil Zucchi, managing member of Zebra Fund, LLC, a long/short equity/options fund, and a contributor toStreetInsight.com.

"This is probably the reason the stock is getting hurt."

Another problem: iMac units declined 10% sequentially and 24% year over year compared to expectation of flat quarter-to-quarter performance, said Morgan Stanley's Runkle, who nevertheless raised her second-quarter EPS estimates to 9 cents. Runkle, whose company is seeking investment banking business with Apple, advised investors to monitor PowerMac sales and inventor levels "since this is such a key product."

As is often the case, Apple's strong run up in recent months left some investors feeling that the stock is a bit pricey, and at least one analyst expressed concern that the company's cost model is still quite high.

Last week, the company surprised industry watchers by announcing it will supply its popular iPod portable music players to Hewlett-Packard , which will then resell them with an H-P label.

"For Apple, it represents the ability to further accelerate unit growth and gain volume -- which it needs to leverage its cost structure -- by tapping into H-P's massive distribution capabilities," commented Joel Wagonfeld, a principal of First Albany. "However, the fact that Apple has agreed to supply its most successful product to a key competitor on a Wintel platform ... provides an important signal. We think this move reflects Apple's difficulty in driving increased PC penetration via its new non-PC offerings," he said in a note to clients. First Albany does not have a current investment banking relationship with Apple.

Music has been a key to Apple's resurgence, and strong iPod sales were responsible for at least part of December's revenue surprise. Since the company launched its iTunes music store in April, the stock has shot up nearly 75%. That's true despite Apple's still-diminutive PC share: In 2003, it claimed less than 2% of the global market by units, according to estimates from Gartner Dataquest and Merrill Lynch.

On Tuesday, Merrill Lynch -- which had dropped coverage of the stock -- issued a report recommending investors buy the shares.In the note, analyst Steve Milunovich predicted sales will jump 18% in fiscal 2004 to $7.3 billion, while EPS will double to 42 cents.

"We think Apple has gotten its act together in focusing on core markets, building a mature management team, and most important innovating again," he wrote. Merrill has a recent investment banking relationship with Apple.

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