Apple's ( AAPL) stock is soaring and its revenue is booming. The computer maker has a hit product and is getting loads of favorable press. So what's wrong with this picture? Nothing, if you ask investors who have enjoyed a run-up of 24% in the stock this year after a 200% surge in 2004. But more-skeptical observers might note that Apple's been here before. And even some of those bullish on Apple's future admit to some doubts about whether the company can maintain its momentum. "That's the million-dollar question," said Tim Deal, an analyst with Technology Business Research. "When you're dealing with a consumer-focused company like Apple, it's very difficult to anticipate the consumer wind. Consumer interests sometimes have no rhyme or reason." While Apple seems to be in tune with consumer demand right now, it's had a tin ear many times in the past. As recently as its 2001 fiscal year, for instance, the company saw revenue plummet 33% amid a drop in demand for its core Macintosh computers. In the mid-1990s, revenue slipped three years in a row. And that's just in recent days. Those with a long memory may recall that the company saw initial success and even market dominance with its Apple II and original Macintosh computers only to lose steam and market share to fierce competition. "Apple's success is cyclical," dependent on maintaining a high interest in its products, said Deal, who has no investment in the company. "There are certainly examples in its history where it's failed to do that." The keys for Apple, analysts say, are to keep up with demand for its hot products and to continue its innovative products. The first requirement is a problem that has frequently plagued the company, said Gene Munster, an analyst with Piper Jaffray.
"Part of it is being a small company," said Munster, who doesn't hold Apple shares but is generally bullish. "I don't know when that's going be solved." (Piper Jaffray has not done recent investment banking for Apple.) The company currently has a backlog on two of its new products, after facing supply shortages of its iPod digital music-player line over the holidays. Likewise, the company has at times fallen out of step with demand either because it slowed product development or because it came out with flops, such as the G4 Cube desktop of several years ago. "That's why people are so passionate about Apple's products, because they innovate. That to me is
also the real risk," Munster said. Right now, of course, everything appears to be clicking with the iPod. In its fiscal first quarter for instance, Apple shipped 4.58 million of the devices, up from just 733,000 a year earlier. Thanks to that kind of growth rate, the company claims that it now has some 65% of the market for digital music players, up from 31% a year ago. Meanwhile, the company has seen a pickup in sales of its bread and butter: the Macintosh computer line. Revenue from Mac sales increased 26% in the recently completed quarter, a rate about double that of the PC industry as a whole. And Apple is clearly not standing still. At the MacWorld conference in San Francisco last month, the company rolled out two new cut-price products: an iPod Shuffle and the Mac mini, a bargain-priced computer. Early indications are that both products, which are targeted at the low end of both markets, will be successes. Not only does Apple have a backlog of orders for the iPod Shuffle and the Mac mini on its Web site, but a recent Wall Street report found that the company's U.S. stores were all but sold out of both products.
Wall Street obviously has been listening to the sounds of Apple's success and many experts don't see an end to the boom in sight. "I think you've got a product here in the iPod that's really barely scratched the surface" of potential demand, said Scott Rothbort, president of LakeView Asset Management and a contributor to TheStreet.com's sister Web site Street Insight. (Rothbort is long Apple.) And if the iPod or Mac mini are able to lure new Macintosh buyers, the company could see a revenue windfall. "That's the case that a lot of bulls are making," Rothbort said. "It doesn't take a lot
of market-share change to move Apple to the next level." But that bullishness has now boosted the stock to a point at which some analysts are beginning to question whether investors have grown too enthusiastic. In a research report last month, Lehman Brothers analyst Harry Blount nudged up his price target on Apple shares but reiterated his equal weight rating on the company's shares, noting he was growing wary of the company's valuation. Indeed, with a price that is 39 times the company's projected earnings for its current fiscal year, Apple's shares are trading at a premium to its rivals'. Shares of PC industry leader Dell ( DELL), for instance, are valued at about 26 times the company's projected earnings for its coming fiscal year. And analysts aren't the only doubters. In an interview with CNET News.com last month at the CES trade show, for instance, Microsoft ( MSFT) Chairman Bill Gates, long the bete noire of the Apple universe, pointed to Apple's past. Asked about the company's current success with the iPod, Gates noted that Apple "had a hit with the Apple II, they had a hit with the Macintosh. ... In the long run, there will be a lot of people making digital music players, and we think that there will be a very different market share with dozens and dozens of companies."
Gates, of course, is not an unbiased observer. Yet it's hard to deny the success his company and its allies have had against Apple, which could be another factor in the chipping away at the current exuberance surrounding Apple shares. In fact, that already may be happening. As of Jan. 10, investors were short 15.6 million shares of Apple. Although that represented just 3.9% of the company's float, the short interest was up by more than a million from a month earlier.