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Sell Dell, Buy Apple (Update 3)

For its fiscal first quarter ended Dec. 29, Apple reported a net profit of $13.078 billion, or $13.81 a share, compared to $13.064 billion, or $13.87 a share, a year earlier. Fiscal first-quarter net sales were $54.512 billion, growing from $46.333 billion, a year earlier.

Investors were obviously not pleased to see the company's gross margin decline to 38.6% in the fiscal first quarter from 44.7% a year earlier; the company's guidance for the fiscal second quarter was for the margin to range from 37.5% to 38.5%.

But the declining margin is probably already baked into the share price.

It's not really fair to compare Apple and Dell, because while Dell is struggling to come up with strong revenue growth in consulting and software services, Apple already has plenty of non-hardware revenue, and it is growing by leaps and bounds. For the fiscal first quarter, Apple's revenue from iTunes, software and services totaled $3.687 billion, growing by 22% from $3.02 billion in the first quarter of fiscal 2012. While iPad revenue grew at the same pace and iPhone revenue grew even faster, the significant revenue contribution and very strong growth-rate for non-hardware products is nothing to sneeze at.

Yes, Apple may see a drop in market share for the iPhone, but the iPhone and iPad are wonderful content distribution devices, and there's no reason to expect that revenue to stop growing. Even beyond music, the devices are compelling for content.

Using iBooks, users can purchase books and periodicals from Apple, but they can also purchase books from other providers, such as Baen Ebooks, to name just one example. Books purchased from other providers are DRM-free and render beautifully within iBooks, with no worries over whether the files are in the Mobi format for Amazon's (AMZN - Get Report) Kindle, or in the E-Pub format, for Barnes and Noble's (BKS) Nook.

And using iBooks keeps the reader from being "locked in" to the Kindle or Nook ecosystems.

The point is not to direct your attention to which book reader you should be using, but to point out that Apple is so much more than a seller of hardware, and its non-hardware sales growth is amazingly strong.

That, together with the epic pullback of the stock price and the low valuation to earnings, is why Apple's shares are a far better play than speculating on Dell's take-out.

Apple's shares rose slightly on Monday to close at $463.58. Dell's shares were up 3% to close at $14.51.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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