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Apple Sitting in Limbo

The stock's bulls hope a positive earnings report will reinvigorate shares.

After a couple of years of being a sweet deal for investors,

Apple Computer's

(AAPL) - Get Free Report

stock has become a bit sour in recent months.

The question is how long it will stay that way.

Bulls are convinced that the stock's selloff is a short-term trend and that Apple shares are ripe for the picking. Other investors are worried about even more bitter returns ahead and think the stock could be a short.

Meanwhile, many investors seem uncertain about how the stock will turn and are hoping for any indication one way or another.

"To me, the stock's just in no man's land," says Darren Chervitz, research director at Jacob Asset Management, which has a small long position in Apple. "From a trader perspective, it's a very difficult call to make."

Investors should see some signs of Apple's direction when the company reports earnings after the bell on Wednesday. Sell-side analysts are expecting the company to post significant growth in earnings and revenue. But reports have abounded in recent weeks that the company will post disappointing shipment numbers for its iPod music players and Macintosh computers.

In January, Apple warned that it could see a sequential slowdown in its second quarter after posting record holiday-quarter earnings. But the rumors floating around have suggested that the slowdown from the holiday period could be even sharper than expected.

In response, Apple stock has fallen 8% since the end of last year. But shares are off more than 23% since hitting their all-time high in January. They closed Tuesday at $66.22.

Even with the selloff, the stock could have more room to fall. Compared with the stock of Apple's rivals in the PC and software industries, the company's shares are fairly pricey. Apple's stock, for instance, is trading at more than 25 times next year's expected earnings, while shares of


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are each trading at about 15 times next year's earnings, and


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at about 18 times.

"Apple's just gotten to a level on the valuation side where it can't afford any misstep, even if it's short-term in nature," says Chervitz, whose fund has about $116 million under management. "The kind of investor who had been buying Apple on its rise up isn't the type of investor who wants to hear about any misstep, whether it's short-term or long-term in nature."

To view Street Insight's video preview of Apple, please click here


Unfortunately for Apple, a number of factors could conspire to produce a misstep -- or at least disappoint investors:

  • The company is in a middle of a transition in which it is switching the microprocessors at the heart of its Macintosh computers from those made by IBM (IBM) - Get Free Report and Freescaleundefined to Intel's (INTC) - Get Free Report standard chips. Although Apple plans to complete the transition sooner than previously predicted, it still is seeing some transition troubles. For instance, the company didn't begin shipping its new Intel-based notebooks until midway through the quarter, and it reportedly battled supply problems for much of the period."It's hard to tell how the Intel-based Macs are going to do," says one fund manager who follows Apple but whose firm is not involved in the stock. "There's a lot of mixed data points."
  • In its second quarter last year, Apple boosted sales of its iPod line by introducing a new low-end model, the shuffle. The company didn't do anything similar this year, potentially making for a tough comparison with last year."There's probably not as much bang" from this year's product introductions compared with last year, said the fund manager.
  • Rumors have been circulating for months that the company was poised to introduce some new or revamped products beyond its computer line that would juice sales. Thus far this year, the company hasn't done so, meaning that investor and analyst expectations for current and future results may have gotten ahead of themselves."Apple really needs to paint a picture of where it's going," says David Schamens, a portfolio manager at Invictus Funds, which doesn't have a position in Apple's stock. "People are wondering if it can take it to the next level."

In terms of the numbers, analysts polled by Thomson First Call are expecting the company to post earnings of 43 cents a share for the quarter on $4.53 billion in sales. The company, meanwhile, has predicted earnings of 38 cents a share on $4.3 billion in sales for the period.

In the same quarter last year, Apple earned $290 million, or 34 cents a share, on $3.24 billion in sales.

But a number of investors are already confident in looking past Apple's present doldrums in terms of stock price and results. By the holiday quarter this year, the company likely will have completed its changeover to Intel chips in its computers and probably will have introduced or upgraded several products, they say.

Last year, the company's stock saw similar softness in the first half of the year before taking off in the second half as the company's earnings and revenue soared, they note.

Although Apple's stock may be stuck in a range in the short term, the company has "huge drivers" for the holiday quarter, says Erick Maronak, chief investment officer of Victory Capital Management, which is long Apple. "I don't think people's long-term expectations for what drives the company have changed."

But others are less bullish. Schamens worries that the iPod is Apple's one-hit wonder, and that the company's stock and results could take a turn for the worse if it can't find a new hit product.

"If it doesn't do that, it's going to fall flat on its face," he says. "There's a lot of fluff in the stock right now."