Apple's ( AAPL) iPod may be grabbing all the attention these days, but its Macintosh computers are still the key to the company's continued success, some analysts say.

Sales of iPod digital music players have revived Apple's business over the last two years. But the lion's share of the company's revenue and profit still comes from computer sales.

For the company to maintain momentum -- and its sky-high stock price -- the Mac computer line needs to catch some of the iPod's fire, analysts say.

"What happens down the line, that's the worry with Apple," says Jay Somaney, a portfolio manager with TSG Capital Group, who is net neutral on the stock, being long the shares and put options. Computer sales "could be the wild card, and that's what I'm watching for," he says.

Somaney and other Apple watchers should get some insights into the company's business Wednesday afternoon, when it reports second-quarter earnings. Many on the Street have high expectations for the company's just-completed second quarter.

Analysts polled by Thomson First Call are expecting a profit of 24 cents a share on $3.18 billion in sales. That's far ahead of Apple's own outlook; in January, Apple predicted it would earn 20 cents a share in its just-completed quarter, on $2.9 billion in sales.

Assuming the company hits even the lower target, it would mark a considerable improvement from the year-ago period, when Apple earned $46 million, or about 6 cents a share, on $1.9 billion in sales.

Apple has yet to provide an outlook for the rest of its fiscal year, but the Street is expecting the company to keep on clicking. In the third quarter, analysts are predicting a profit of 24 cents a share on $3.21 billion in sales. For the full year, they are looking for $1.11 in per-share earnings on sales of $13.34 billion.

Those targets imply that analysts are expecting Apple's earnings per share to more than triple this year on a jump in sales of more than 60%.

Full Harvest

Despite the heady expectations, Apple's recent history gives many analysts and investors confidence it will be able to hit or exceed those targets. In its first quarter, the company's sales jumped 74% to $3.49 billion, more than quadrupling net earnings.

Driven by the improving results and analysts' expectations of more to come, Apple shares have soared. The stock has more than tripled in the last year and is up 32% this year.

The stock's appreciation has pushed valuation up to 38 times expected earnings this year and 32 times expected earnings for the next fiscal year.

In contrast, PC industry leader Dell ( DELL) is trading at less than 24 times expected earnings this year and 20 times expected earnings for fiscal 2006.

Of course, Dell doesn't have the iPod.

Apple's iPod sales nearly quadrupled last year to $1.3 billion from $345 million in the prior year. Last quarter, sales of the device nearly quintupled, rising to $1.2 billion from $256 million in the first quarter of fiscal 2004.

Many analysts expect those numbers to continue to grow, at least in the short term. According to market researchers, Apple continues to dominate the market for hard drive-based digital music players. In February, the company's iPods held 89.3% of the market for hard-drive players in terms of units sold at retail stores in the U.S., according to NPD Group.

Prior to this year, Apple offered only hard drive-based players, sales of which constitute around 50% to 60% of the total digital music player market. But in January, the company introduced the iPod Shuffle, its first flash-based digital music player. Early indications are that the Shuffle has been a success also, according to market researchers. Apple captured 45% of the U.S. retail market for flash-based players in February, based on data from NPD Group.

"They had a strong February," says Stephen Baker, a hardware analyst with NPD Group. "I expect them to have a pretty strong March, too." The research firm has not yet released its March data.

But some analysts are starting to question how long Apple can ride iPod's wave. Competition is starting to grow.

Microsoft ( MSFT) has targeted the market and is promoting rival players that use its own audio-encoding scheme. Some analysts, though, predict Apple will see a greater threat to the iPod from devices that do more than play music.

Sony ( SNE) is trying to push its own digital music scheme with music-playing phones from its Sony Ericsson unit and the PlayStation Portable, a new multimedia-capable, handheld game machine.

"The competition is just fierce," Somaney says.

A Snowball From Heaven

Even if Apple is able to continue its torrid iPod growth, the expectations built into its stock have reached the point at which the company needs to show growth in other areas -- namely computer sales, analysts say.

The company has made much of Microsoft Windows users switching to Macs. Meanwhile, a number of analysts have predicted the iPod will have a "halo effect," attracting users to the Mac platform. But to date, the company has had little evidence to show it's attracting new Mac users in significant numbers.

"The iPod is a snowball going downhill: It's getting bigger and bigger every quarter. The Mac doesn't have that kind of momentum," says one hedge fund manager who is long Apple. "I'm hoping that it will develop that kind of momentum. They've got to sell more Macs."

Apple is attempting to do just that. The company is pitching its new cut-price Macintosh, the Mac Mini, to Windows users who are reluctant to switch because of the typically higher costs for Apple computers. And on Tuesday, the company announced that later this month it will begin shipping the latest version of its operating system, which has features not available with Windows.

The company's efforts may be paying off. Sales of Apple's Mac grew faster than did the PC market in the fourth quarter last year. And data from NPD Group indicate the company gained share in January and February as well.

Apple's ability to grab share in the PC market could be crucial. The Cupertino, Calif.-based company's market share has been hovering at less than 3% of total PC sales. But that translated into $4.9 billion in sales in fiscal 2004, or 60% of Apple's total revenue. Bumping up market share by just 1 percentage point or so could add billions to the company's revenue -- and likely millions to the bottom line.

"I think people are too focused on the iPod," says Scott Rothbort, president of LakeView Asset Management and a contributor to's sister Web site Street Insight. "They're not seeing the forest for the trees," says Rothbort, who is long Apple stock and calls.

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