The market found a reason to believe in Apple Computer ( AAPL) again: the prospect of a second-half rebound.The first half of this year -- and a bit more - has been nothing to write home about for shareholders, with Apple's stock falling 42% this year through last week. But investors found reason to hope again on Thursday, sending Apple's stock up more than 13% in recent trading. What's changed? The company's fiscal third-quarter earnings, which the company reported Wednesday night, were much better than expected. But more than that, the report indicated to investors that there are more good times to come. Apple's transition to Intel ( INTC)-based processors at the heart of its Macintosh computers finally seems to be bearing some fruit in terms of market-share gains. Add to that the expected refreshes of the company's iPod lineup and the potential for new products, and the company looks poised to post strong results in coming quarters, bulls say. And that should send the company's stock soaring again. "If you look across the universe and ask which stock has the best promise for the second half, this is definitely one of them," says Jim Grossman, a portfolio manager at Thrivent Investment Management, which is long Apple. For many bulls, the big bright spot of Apple's report was the performance of its computer business. Total shipments were up 12% year over year, outpacing the worldwide market. But Apple could do much better in coming quarters, bulls argue. The growth in the latest quarter came despite even though the company didn't start shipping its new Intel-based consumer notebooks until partway through the quarter. And the growth came even though the company has yet to update its professional line of desktop computers, a factor that likely contributed to the 23% year-over-year decline in desktop computer shipments.
Analysts expect Apple to complete its move to Intel chips as soon as next month. With the move to Intel, Apple has taken away some of the key factors that had been holding back its computer sales, analysts and investors say. Not only is the company finally able to offer notebook computers with competitive performance to machines running Microsoft ( MSFT) Windows, the new chips also enable the company's computers to natively run Windows and Windows-based programs through a new dual-boot application. The success of the iPod revived Apple in the last couple of years, but the Mac is again becoming a big part of the story, says Noah Blackstein, a portfolio manager at Dynamic Mutual Funds, which is long Apple. "The Mac story isn't a sexy story with Wall Street
compared with the iPod ," says Blackstein, "But it's incredibly profitable and incredibly material. Mac market share is going to be a significant driver" for the company. While Apple had good things to report about its computers, it had somewhat disappointing news concerning iPod sales. Although unit shipments of the music players grew 32% from the third quarter last year to 8.1 million, that was the slowest annual growth rate the company had ever reported for the product. Meanwhile, on a sequential basis, sales declined for the second quarter in a row for the first time ever. But investors shrugged off the recent results, arguing that the triple-digit percentage growth rates of previous quarters were bound to slow down at some point, and that the company hasn't refreshed its iPod lineup in nearly a year. Indeed, many investors and analysts had feared that iPod sales would come in even lower than they did. Going into the quarter, the iPod was the "real worry," says Grossman. While sales weren't great, they were good enough, he says.
And with the transition to Intel chips all but completed, the company can focus on the iPod again, analysts and investors say. Apple is widely expected to update its flash-based nano and high-end hard-drive-based iPods later in coming months. Assuming those updates are significant enough, the new devices should drive sales not only to new iPod customers but also to current iPod users who want to have the latest, greatest thing. Rumblings out of the supply chain are already indicating that Apple is expecting strong sale in coming quarters, says one hedge fund manager who asked not to be named. "We are hearing that the ramp for the nano is pretty big," says the fund manager, whose firm has been both long and short Apple but doesn't currently have a position in the stock. And then there's the so-called X factor: new products and categories that Apple hasn't announced or entered yet. Talk has been swirling for months about a music-playing Apple cell phone, a rumor that company CFO Peter Oppenheimer vaguely seemed to give some credence to on the company's earnings conference call Wednesday night. Rumors also have swirled about the company coming out with some kind of digital living room device that would serve up movies and music on demand and pump them through consumers' entertainment centers. No one knows exactly what to expect, but many investors are counting on Apple CEO Steve Jobs to continue to come up with cool, must-have devices for consumers. In recent months, "we haven't been talking about cool stuff. We've been talking about how bad things are going to be," says Grossman. "I think there's a lot of cool stuff to come." To be sure, some investors have their doubts. The hedge fund manager, for instance, says Apple's stock will sell off after Thursday's rally. The technology sector as a whole is likely to have a tough time after the earnings period, and that's likely to weigh on Apple, the fund manager says. While Apple's computer sales have been strong, the fund manager is surprised that they haven't been growing even faster than they have been. With iPod sales slowing, the upside for Apple's stock could be limited, the fund manager says. Still, even the fund manager is looking to go long Apple. "Will
Apple be the big blowout name it was the last couple of years? Probably not," the fund manager says. Still, "It's a good second-half story."