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Growth Fears Biting Apple

Investors already seem to be registering their doubts. Although the stock is up 12% for the year, that's far off the more than 200% rise it posted last year. And since Apple reported its second-quarter earnings earlier this month -- and with it the sequential decline in iPod sales -- the company's shares have dropped 12%.

Apple is trading at about 28 times its projected earnings for this year. That's not an unreasonable amount to pay for a company whose earnings and revenue are skyrocketing. But should growth slow, the company will start to look increasingly expensive, especially relative to rivals such as Dell (DELL), which is trading at just 22 times its projected current-year earnings.

With growth of its star product slowing, the company needs something else to drive its growth rate and its stock price, analysts say. The company, investors and analysts have long hoped that sales of the iPod would have a "halo effect," attracting users of computers running Microsoft's (MSFT - Get Report) Windows operating system to Apple's line of Macintosh computers. Even with the iPod driving its growth in recent years, the Macintosh line still provides Apple with the bulk of its revenue.

While Macintosh sales have outpaced those of the overall PC market in recent quarters, the extent to which those sales were driven by the halo effect is unclear. And Apple may have a difficult time persuading consumers who buy its bargain-priced music players to purchase its typically pricey computers, analysts say.

"It really comes down to, how many Mac units is this going to drive?" says Bare. "That part is really less clear."

Even if the company does see a sustainable halo effect from the iPod, Apple still will likely need to come out with another hit product soon, say analysts, who point to video device or a wireless-enabled iPod as the company's next effort. Regardless, Apple needs a new device and needs it to be a success, because some investors and analysts are already building projected sales from the next product into their estimates, notes Wu.
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DELL $0.00 0.00%
PLAY $39.00 0.00%
AAPL $95.03 0.21%
MSFT $49.90 0.00%
SYNA $81.10 0.00%


Chart of I:DJI
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S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

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