Growth Fears Biting Apple

To some analysts, Apple(AAPL) is so last year.

The computer company was the "in" thing in 2004, thanks to the megahit iPod line of music players. But some analysts are wondering whether Apple may be a one-hit wonder. The iPod's ability to drive Apple's stock is already fading, and unless the company finds another chart-topper, it could be yesterday's news.

"It's just a different ballgame this year than last year," says Shaw Wu, who covers the company for American Technology Research. Wu doesn't have a position in Apple's stock, and AmTech does not do investment banking.

Apple continues to post strong iPod sales, of course, and is the leading vendor of digital music devices. But Wu and other analysts see signs of trouble. Among them:

The sharp decline in iPod average sales prices. Unit sales were up 16% in the second quarter over the first quarter, but the company's iPod revenue was down 16% sequentially. That means Apple saw about a whopping 28% drop from the second to the third quarter in the average price it got for each iPod. Some of that can be explained by new budget-priced flash-memory-based players, but some analysts worry that it also indicates slowing sales of Apple's higher-priced hard-drive players.

Adding to this worry is the disappointing guidance issued by Synaptics(SYNA) last week due to "softness" in the music-player market. Because Synaptics provides the click-wheel interface for the hard drive-based iPod, its outlook could indicate slowing demand. More clarity may appear Thursday, when iPod supplier PortalPlayer(PLAY) releases results.

Apple's slowing overall growth rate. Revenue grew 70% in the second quarter from a year earlier. While that's a phenomenal rate of growth for the computer industry, it was down from the first quarter, when the company's sales grew at a 74% annual pace. And the company says future growth rates may come in closer to 15%.

Growing competition. Asian device makers are coming out with low-priced rivals to Apple's shuffle. Rio, Creative (CREAF) and other companies have dropped prices on their competing music players, analysts note. And Sony (SNE) is making a strong push to attract Apple's potential customers through both its new digital music players and its PlayStation Portable, a video-game device that also plays movies and music.

Meanwhile, some think that Napster (NAPS) or Real Networks(REAL) will see strong demand for their subscription-based music services. Both compete with Apple's iTunes store but have a format that is incompatible with Apple's iPods. And devices compatible with their services generally won't play songs sold through iTunes.

On top of all this is the little matter of Apple's history. The company has had great success in the past with its original computers, with the Macintosh and with its first iMac line, only to see its market share and sales slip away because of missteps and fierce competition. Add up all those factors, and Apple could go from rock star to has-been in a short time frame, analysts worry.

"You have to wonder when the music's going to end, in which quarter," says Rod Bare, an analyst who covers Apple for Morningstar. Morningstar doesn't do investment banking, and Bare has no position in the stock.