Apple Poised for a Comeback

Apple(AAPL - Cramer's Take - Stockpickr), finds itself on familiar ground where it has to prove itself.

The Cupertino, Calif.-based company has defied expectations in the past and made a comeback like few other technology companies.

This time around, investors are disappointed with Apple's conservative guidance for the current quarter and fears that the iPod juggernaut is slowing and may be coming to an end. A bigger concern is that recessionary fears could curtail consumer spending on Apple products.

The Apple Conundrum

The stakes are huge. Apple rode the iPod to become a Wall Street darling, with the stock rising nearly 235% in three years. Apple shares closed at a 52-week high of $199.83 on Dec. 28.

At the close of trading on Wednesday, its shares were far off that mark -- down $16.57, or 10.65%, to $139.07. Two Wall Street firms have slashed their price targets on the stock since the earnings report Tuesday. Goldman Sachs reduced its price target to $175 from $220, while ThinkEquity lowered its target to $165 from $227.

But with strong sales of Mac computers and new products waiting in the wings, Apple's growth story may be far from over.

Products such as the recently introduced lightweight notebook Macbook Air, the 3G iPhone expected this year and movie rentals announced at the Macworld conference last week could help Apple go beyond the iPod and become a bigger consumer electronics play.

The selloff in Apple's stock may be overdone as the company continues to offer new products at a higher price point, analysts say.

With Apple shares more than 35% off from their 52-week high last month, the stock may offer a buying opportunity, though investors will have to be patient.

"It will take new product announcements or the next earnings report to get the stock moving again," says Romeo Dator, co-manager of the All American Equity Fund(GBTFX - Cramer's Take - Stockpickr).

Apple posted a first-quarter profit of $1.58 billion, or $1.76 a share, compared with profit of $1 billion, or $1.14 a share, a year ago. Revenue for the quarter was $9.6 billion, compared to $7.1 billion a year ago. Analysts polled by Thomson Financial were expecting EPS of $1.62 on revenue of $9.46 billion.

But it was the company's EPS forecast, which was nearly 14% below Street expectations, that left investors disenchanted.

Apple is known to low-ball its forecasts, but the company's guidance this time around has fallen short even by historical standards.

In the last seven quarters, Apple has guided on average an EPS 9% below Street expectations, says Gene Munster, an analyst with Piper Jaffray. But this time around, its EPS guidance is 14% lower than estimates.

Apple's strategy of offering overly conservative guidance may have backfired this time around, says Dator.

"Current market environment will not forgive guidance that is below estimates," he says. "Investors think estimates are too high and companies that don't guide at least in line will not be rewarded and if you disappoint, you get punished."

For the second quarter, Apple forecast revenue of $6.8 billion and earnings of 94 cents a share. Analysts were expecting revenue of $6.98 billion and EPS of $1.09.

The biggest disappointment for investors, though, has been the slowdown in iPod sales. Apple may be nearing saturation levels on the market for iPods as iPod sales grew 5% in the last quarter compared with 50% in the year-ago quarter.

Growth in U.S. sales for the iPod was nearly flat. However, the introduction of the more expensive iPod touch raised Apple's average selling price for the iPod to $181 from $159 a year ago.