Long Live Steve Jobs (and Apple's Profits)

(This story is updated from Oct. 17 with projections of Apple's margins and profitability from RBC analyst Mike Abramsky.)

BOSTON ( TheStreet) -- Apple ( AAPL) has risen from a tech has-been to a profit-generating juggernaut in only a decade, and the maker of the iPhone and iPad shows no signs of slowing even after the death of the company's co-founder and chief innovator.

Apple, set to report fiscal fourth-quarter results after the close of trading today, is at a critical juncture following the Oct. 5 death of Steve Jobs, the company's former star CEO. After Jobs returned to Apple in 1997, he helped turn around the struggling company by rolling out the successful iMac computer before branching out to the iPod music player and, eventually, the iPhone smartphone and iPad tablet computer. When Jobs returned to Apple, the stock was trading around $5 a share, and it's now at $419.

Apple Co-Founder Steve Jobs

During his second go-around, Jobs turned Apple into a wildly successful company with his innovative vision. For example, Apple's gross margin widened from 23% at the end of fiscal 2001 to almost 40% by the end of this fiscal year. High-priced, high-margin devices are the main reason for that growth, as Jobs preferred to have Apple focus more on design and features than on lower prices.

Although he's gone, Jobs' fingerprints will be all over Apple's quarterly results now and into the future. CNet's Brooke Crothers, citing an unnamed source with knowledge, said the next iPhone is "a very large project that Steve dedicated all of his time to. He was not that involved in the 4S because his time was limited."

That helps to substantiate a report last week by The Daily Mail that Jobs left behind plans for four years' worth of new Apple products. If future products are anywhere nearly as successful as the iPhone 4S launch, that could mean a windfall for Apple for the next several years.

Investors are already seeing Apple continue its success without Jobs around. On Monday, Apple announced that it sold over 4 million of the new iPhone 4S over the weekend after the Oct. 14 launch. Technology writer Dan Frommer put that number in context, noting that weekend sales of the iPhone 4S may have eclipsed the first weekend sales of all other iPhone devices combined. Frommer says it's a safe assumption that Apple raked in at least $2 billion in iPhone sales last weekend. That news pushed Apple shares to an all-time high of $426.70 on Monday.

Although the iPhone is thought to be Apple's highest-margin product, Wall Street researchers speculate the company's profits could shrink. Analysts expect that Apple's gross margin will hit 39.6% in tomorrow's quarterly report, according to a survey by Thomson Reuters, down from a record 41.7% in the company's fiscal third quarter. In Apple's first fiscal quarter, which will include this holiday season, analysts are already forecasting constant gross margins of 39.6%.

Some analysts are now wondering aloud if gross margins could dwindle over time. They include Citigroup analyst Richard Gardner, who on Monday raised his price target on Apple to $500 from $480 and also increased his estimates for what Apple will report tomorrow. In his report, Gardner noted Apple's declining margins and what it says for the company's future profitability.

"While we are modeling gross margins down 170 basis points quarter-over-quarter due to mix and product transitions, we see potential for upside here," Gardner writes. "Even with declining gross margin, Apple should be able to grow earnings per share 20% to 25% in fiscal 2012 ."

RBC Capital Markets analyst Mike Abramsky, in an email today, says Apple may say it sold 12.5 million iPads in the most recent quarter. Interestingly, he says margins may actually have widened, to 41.5%, as component prices fall. All of this could mean that Apple reports earnings per share of more than $8 for its fiscal fourth quarter.

Channing Smith, manager of the Capital Advisors Growth Fund ( CIAOX), says shrinking margins aren't something new to big technology companies, and that investors shouldn't yet fear that Apple can't be as profitable as the company was under Steve Jobs.

"Profit margins matter, but any investor needs to understand that you have to accept the fact that profit margins will come down," Smith says. "If you're going to saturate the market, you're going to have to move downstream at some point. You have to bring the prices down, especially when moving into emerging markets, which impacts margins."

For example, Apple has now begun to offer its iPhone 3GS handset, launched in 2009, for free with new two-year contracts with wireless providers. Apple also cut the price of its iPhone 4 model, which debuted last year. The lower price points should hurt Apple's gross margin, although Smith argues the company "can make it up in volume. There is tremendous operating leverage there."

Smith says that, given the successful iPhone 4S launch, he doesn't see anything slowing down for Apple heading into the important holiday quarter.

"The road map is there, and they're executing and delivering and consumers have shown they still want their products, as evidenced with the iPhone 4S launch," Smith says. "Going into the holiday quarter, it looks like it's going to be gangbusters. Our price target, which is $500 to $600, is definitely achievable."

Beyond the holiday quarter, though, nothing is certain for Apple. Smith says his fund owns Google ( GOOG) in addition to Apple shares, as he believes Android is the only viable competition. "Longer term, it will be more difficult for Apple to sustain this technological advantage," he says.

For now, though, Apple is able to maintain that competitive lead with its current product line. "This isn't an amazing brand-new phone, but even with the incremental upgrades, it's still so much better than what is out there," Smith says of the iPhone 4S. "It proves Apple's technological advantage over the competition."

Even without considering competition, Apple could become its own worst enemy. The so-called Law of Large Numbers in business theorizes that companies that grow too large aren't able to keep up with previous growth rates. Apple recently eclipsed Exxon Mobil ( XOM) to become the largest company in the world with a market cap of nearly $390 billion. Could Apple become the exception to this theory?

"We do respect the law of large numbers, and it will become more difficult for Apple to see the market cap continue to grow like it has in the past few years," Smith says. "But what you have to watch is how the company executes. Apple executes extremely well. We need to see Apple stumble before we begin to worry, and we have not seen that yet."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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