Updated from 9:47 a.m. EDT

Defying declines in the broader tech market,shares of Apple ( AAPL) jumped Thursday, a dayafter the computer hardware maker delivered a blowoutfirst quarter.

After trading as high as $29.58 early on, Apple's stock was recently up $2.14, or 8%, to $28.78.

Apple beat Wall Street's expectations for thesecond quarter by 4 cents, tripled its net income andboosted revenue by 29%, in a quarter driven by robustsales of iPods, Apple's hit portable music player, andcomputer notebooks.

Analysts were lavish with praise in morning notes."Since our initiation in January, we've increased our fiscal 2004 earnings estimate by 50%," noted SteveMilunovich of Merrill Lynch. "Our estimate then was$0.42, and now we're raising it to $0.63. That showsthe leverage in Apple's model on higher revenue." (Hisfirm hasn't done banking for Apple.)

iPod units of 807,000 "handily beat" our initial600,000 and revised 700,000 unit forecasts, Milunovich wrote, noting it wasalso the first quarter Apple sold more iPods thanPCs.

Meanwhile, Apple's new Mini digital music playerproved to be such a hot item that Apple couldn'tmanufacture enough to meet demand in the first quarterof its debut, due to a shortage of drives. "In theMini, Apple has a product which the competition isunlikely to emulate for over a year -- if that soon," predicted Needham analyst Charlie Wolf. "Bythe time they do, Apple's volume economics shouldtranslate into a sustainable competitive advantage." (Needhamdoesn't do banking for Apple, but either Wolf, amember of his household or one of his associates has aholding in Apple.)

Still, "As important as iPod is, PCs are criticalto financial results; PC sales were $1.16 billionversus our estimate of $1.17 billion," notedMilunovich. But he expects PowerMac sales to improveas the creative market begins to upgrade over 2004,boosting PowerMac sales back to a quarterly run rateof 200,000 units vs. 174,000 units in the latestquarter.

Meanwhile, as Apple basks in favorable iPodpublicity, Milunovich believes more consumers will buyMacs.

Granted, "Apple's PC market share isunder 2% and has done nothing but fall in recentyears, so this argument may be a stretch. Still, weagree with Apple that anecdotal evidence suggestsincreased Mac interest," he added. "We are rarely with five ormore investors when someone doesn't say he or she hasbought a Mac recently. We think Apple's newfoundmomentum is likely to snowball and continue tosurprise investors on the upside."

One final point of upside: Apple's iTunes musicstore. Though the company didn't break out sales fromiTunes, Needham's Wolf believes more than 60million songs have now been downloaded.

"What'sincreasingly clear is that the company's music suite,consisting of the Store, its iTunes music managementsoftware and the iPod, is turning into a powerfulbusiness in its own right," Wolf wrote. " Sales should be bolsteredeven further when Hewlett-Packard ( HPQ) begins to sell an HP-branded iPodand consumer PCs loaded with the iTunes Music Store software this summer."

Apple Performs

For the March quarter, the Cupertino, Calif., company posted a net profit of $46 million, or 12 cents per diluted share, according to generally accepted accounting principles. These results compare with a net profit of $14 million, or 4 cents per diluted share, in the year-ago quarter. Revenue for the quarter was $1.90 billion, up 29% from a year ago.

Without an after-tax restructuring charge of $7 million, the company would have earned 14 cents a share, compared with the 10 cents expected by analysts polled by Thomson First Call.

Looking forward, the company now expects a third-quarter profit of 12 cents to 13 cents, including another 2-cent restructuring charge on sales of about $1.925 billion. Wall Street was expecting pro forma earnings of 9 cents on sales of $1.825 billion.

Merely meeting expectations wouldn't have been enough for investors who pushed Apple's shares up by 28%. So far this year, as of Tuesday's close, it was markedly better than the Nasdaq Composite as a whole (up about 1%) or the big kahuna of the Windows-based computer world -- Dell ( DELL), up just 4%.

One explanation for the difference: Apple's resounding success in the world of online music and related consumer devices. "Mac sales are holding their own, but the story is a dramatic increase in products other than computers," said Wolf.

Sales of items other than computers represented 11.2% of Apple's revenue in 2001. By 2003, those sales rose to 27.6%, and in the consumer-oriented December quarter, the number reached 36.7%, Wolf said.

"As a long-term investor, I'm happy with how broad the company's portfolio has become," said Vinnie Muscolino, managing director of David L. Babson, which manages more than $80 billion in assets and is long Apple. "It eases the ups and downs of the product cycle."

Is the stock too rich? "Not at 2.5 times price-to-cash," Muscolino continued. "I wish all my investments were performing that way."

The company shipped 807,000 iPods during the quarter, a 909% increase over last year. Sales of Macintosh computers were up 5% in the same period.

"The iPod probably accounted for probably half of Apple's revenue growth," Fred Anderson, Apple's chief financial officer, said during a conference call with analysts.

Gross margins slipped to 27.8% from 28.3% a year ago, and the company said that component shortages have forced it to push international sales of its new mini iPOD until July.

Apple's Tasty Stock
While Dell and the Nasdaq languish, Apple soars.
Source: Baseline

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