Updated from 9:47 a.m. EDT

Defying declines in the broader tech market, shares of Apple ( AAPL) jumped Thursday, a day after the computer hardware maker delivered a blowout first 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 the second quarter by 4 cents, tripled its net income and boosted revenue by 29%, in a quarter driven by robust sales of iPods, Apple's hit portable music player, and computer 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 Steve Milunovich of Merrill Lynch. "Our estimate then was $0.42, and now we're raising it to $0.63. That shows the leverage in Apple's model on higher revenue." (His firm hasn't done banking for Apple.)

iPod units of 807,000 "handily beat" our initial 600,000 and revised 700,000 unit forecasts, Milunovich wrote, noting it was also the first quarter Apple sold more iPods than PCs.

Meanwhile, Apple's new Mini digital music player proved to be such a hot item that Apple couldn't manufacture enough to meet demand in the first quarter of its debut, due to a shortage of drives. "In the Mini, Apple has a product which the competition is unlikely to emulate for over a year -- if that soon," predicted Needham analyst Charlie Wolf. "By the time they do, Apple's volume economics should translate into a sustainable competitive advantage." (Needham doesn't do banking for Apple, but either Wolf, a member of his household or one of his associates has a holding in Apple.)

Still, "As important as iPod is, PCs are critical to financial results; PC sales were $1.16 billion versus our estimate of $1.17 billion," noted Milunovich. But he expects PowerMac sales to improve as the creative market begins to upgrade over 2004, boosting PowerMac sales back to a quarterly run rate of 200,000 units vs. 174,000 units in the latest quarter.

Meanwhile, as Apple basks in favorable iPod publicity, Milunovich believes more consumers will buy Macs.

Granted, "Apple's PC market share is under 2% and has done nothing but fall in recent years, so this argument may be a stretch. Still, we agree with Apple that anecdotal evidence suggests increased Mac interest," he added. "We are rarely with five or more investors when someone doesn't say he or she has bought a Mac recently. We think Apple's newfound momentum is likely to snowball and continue to surprise investors on the upside."

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

"What's increasingly clear is that the company's music suite, consisting of the Store, its iTunes music management software and the iPod, is turning into a powerful business in its own right," Wolf wrote. " Sales should be bolstered even further when Hewlett-Packard ( HPQ) begins to sell an HP-branded iPod and 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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