Apple Needs More Than an Adequate Quarter

Analysts expect the tech star to post solid earnings, but investors are skeptical.
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SAN FRANCISCO -- A lot is riding on

Apple's

(AAPL) - Get Report

second-quarter results, which are scheduled to be announced Wednesday after the close of market.

The Cupertino, Calif.-based company is one of the "four horsemen" of technology, along with

Google

(GOOG) - Get Report

, BlackBerry maker

Research In Motion

(RIMM)

and

Amazon.com

(AMZN) - Get Report

. A solid earnings report would go a long way to soothe investors' recent fears about the impact of the economic slowdown and tighter consumer spending on the company's sales.

Expectations are high for Apple to beat Street estimates the way tech giant Google did last week and RIM did last month.

While there's little doubt among analysts that Apple will post a solid quarter, investors are still worried for a number of reasons.

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Sales of iPods were reportedly sluggish in the second quarter, and some analysts believe the company could lose momentum in the current quarter as customers await new products.

And then there are the high expectations that have been driving up the stock. Apple shares have gained nearly 14% over the last four weeks, though they are still about 20% down from the 52-week high.

"The big difference between Google, RIM and Apple is that the other stocks had been weak prior to the report," says Darren Chervitz, director of research at Jacob Internet Fund, which holds shares of Apple. "Apple's stock price has already anticipated pretty decent results, so they have to do very well for an upside."

Analysts polled by Thomson Reuters expect Apple to report earnings of $1.07 a share on revenue of $6.96 billion in the second quarter, compared with EPS of 87 cents on revenue of $5.26 billion a year ago.

For the third quarter, Apple is expected to post EPS of $1.10 on revenue of $7.15 billion.

Gadgets and Guidance

Analysts and investors will be watching closely Apple's guidance. The upcoming 3G iPhone is unlikely to ship before July, and new Macs won't arrive till a few weeks after that, indicating that the third quarter could be under stress due to the lack of new products to drive sales, says Shaw Wu, an analyst with the independent research firm American Technology Research, in a research note.

Already some investors are trying to cash in. Shares of Apple closed down $7.96, or 4.7%, to $160.20 Tuesday.

Apple's second-quarter results are expected to be boosted by a strong performance of Apple's Mac division, especially Mac Pro desktops and the thin, lightweight Macbook Air laptop, analysts say.

Street estimates for Mac sales is 2.06 million units though some analysts believe Apple could sell as many as 2.2 million Macs, according to a report from the NPD group that February Mac sales increased 60% from a year earlier.

Still, investors may be getting ahead of themselves, says Toni Sacconaghi, an analyst with Bernstein research, which makes a market in Apple shares.

"Although the Mac's momentum has remained strong, we believe it is not immune to a consumer slowdown given its high-end positioning and near exclusive dependence on consumer sales," says Sacconaghi in a research note.

The iPhone Factor

The other major driver for Apple is the iPhone. Analysts say sales of the popular smartphone should remain strong despite reports of

shortages last month

in Apple stores. They expect the company to report sales of 1.5 million iPhones for the quarter.

Less bright could be the performance of the iPods. Analysts expect iPod sales of 10.6 million units in the quarter, flat from a year earlier. Any further signs of a pullback there could take a toll on the company's stock.

That could be disappointing, because "the iPod has clearly been a big driver of Apple's results in the past year," says Chervitz.

"Now that the iPod business needs to transition to a converged device such as iPhone, it has to be done slowly and in a way that offsets the weakness in stand-alone MP3 players," he says.

The outlook for iPod sales is mixed. Earlier this week, Richard Gardner, an analyst at Citigroup, reduced his iPod sales estimate from 10 million during the quarter to 9.5 million.

He also said the iPod business is likely to struggle until Apple refreshes the line in the third quarter by adding new colors and new features. Citigroup owns shares of Apple and has an investment-banking relationship with the company.

At the same time, Chervitz says strong sales of the iPod Touch could help soothe investor sentiment, since the device carries a higher price point and could potentially recharge the iPod line.