SAN FRANCISCO -

Apple

(AAPL) - Get Report

's guidance was a sore point in its earnings report Monday.

Apple's stock plunged after the company issued a conservative guidance that was far off the mark of what analysts were expecting.

Unlike most technology companies whose earnings beat come in a few percentage points above their forecast, Apple usually reports numbers that diverge substantially from the bar it sets, leaving many analysts and company watchers wondering why Apple cannot offer better estimates.

In the last nine quarters, for example, Apple has beat its EPS numbers by an average of 22%, ranging from a high of a 45.3% EPS beat for its first-quarter fiscal 2007 results to a low of an 8% EPS beat during the second-quarter fiscal 2008.

That has worked in the past, as Wall Street loved to watch Apple trounce its outlook.

But with a weak economy, jittery investors, already worried about a bear market and factors such as the health of CEO Steve Jobs and succession planning, are unsure how much of the company's outlook is its traditional conservatism and how much of it is related to fears around the strength of the economy.

On Monday, Apple offered its guidance for the fourth or current quarter, saying it expects revenue of $7.8 billion and earnings of $1 a share. Analysts were expecting revenue of $8.32 billion and earnings of $1.24 a share.

Most

media reports

said Apple's outlook missed analysts' numbers and that among other factors took a toll on the company's stock.

Shares of Apple were down $12.88, or 7.8%, to $153.29 in recent trading. The stock is down about 21 % since the beginning of the year.

"Given that Apple is a hardware company mostly, it has a reasonably aggressive valuation and investors are going to get worried about guidance," says Darren Chervitz, director of research at Jacob Internet Fund. The fund has shares of Apple in its portfolio. "The overlay of a weak economy tightens those fears."

In its third quarter fiscal 2008 results reported Monday, Apple posted earnings of $1.19 a share for the third quarter on revenue of $7.46 billion. That compares to the company's guidance of $1 EPS and revenue of $7.2 billion. Analysts polled by

Thomson Reuters

had been expecting earnings of $1.08 a share on revenue of $7.36 billion.

Apple ended up beating its EPS guidance for the third quarter by 19% and revenue forecast by 1.3%. The company's EPS numbers were about 10% higher than analysts' estimates.

"This is the way Apple does it," says Chervitz. "They never put a number out there that they cannot hit."

Apple's shares are aggressively valued compared to some its rivals. Its stock trades at about 25 times forward earnings, while its smart phone rival BlackBerry maker

Research In Motion

(RIMM)

trades at about 21 times earnings. Handset maker

Motorola

(MOT)

has a forward price-to- earnings ratio of about 20 while

Nokia

(NOK) - Get Report

has a forward P/E ratio of about 10.

Apple's extremely conservative guidance has not gone unnoticed. Some analysts have questioned the company during its earnings call. On the company's third-quarter fiscal 2007 conference call, UBS analyst Ben Reitzes

asked

, "With regard to guidance, you just guided 66 cents (EPS) and came up with 92 cents, why should we believe that this 65 cents (EPS) this time when you have been so conservative?"

Apple's CFO Peter Oppenheimer's answer, "We give you guidance that we have reasonable confidence in achieving." It's the same line that Oppenheimer has said for every analyst question related to guidance on all Apple's earnings calls.

Apple likes to play it safe but in a tougher stock market environment, it is more difficult for a stock to bounce back, says a portfolio manager who did not want to be quoted. And it is something that Apple might want to consider while issuing its forecast.

Apple can make a few choices to when it comes to issuing better guidance. The company could offer better estimates to give investors a more realistic idea of where it is likely to be next quarter.

Or it could do away with guidance like tech giant

Google

(GOOG) - Get Report

has done.

But it is unlikely Apple will take either route. The company doesn't work closely with Wall Street. Apple does not even hold an annual analysts' day meet, something which most technology companies such as

Microsoft

(MSFT) - Get Report

to

Intel

(INTC) - Get Report

have.

But analysts say Apple's guidance won't really matter for long-term investors. They say the guidance game, wherein companies offer really low estimates and then beat it by a huge margin leading to a pop in the stock, is of interest to short-term traders only.

In the long run, the stock adjusts to reported earnings. "I don't think Apple cares if the guidance works as a trade," says Chervitz.

Guidance aside, the decline in the company's gross margins has investors worried, says Chervitz.

Apple reported gross margin of 34.8% in the third quarter, down from 36.9% a year ago. For the fourth quarter, it expects gross margin of 31.5% and about 30% in 2009.

"Their gross margin seems to be trending down and it makes a difference to the multiple you are willing to pay for a company's earnings," says Chervitz.

As with guidance, Apple may be overly conservative on its gross margins, but directionally the company may be right in its estimate that gross margins are heading down, says Shaw Wu, an analyst with independent research firm American Technology Report in a research note.

Commodities price inflation could impact cost of raw materials and put pressure on the gross margin, says Wu. "The easy gains from favorable components costs will likely prove more difficult given rising material costs including plastics, copper, gold etc," says Wu.

For investors, the recent pull-back in Apple's stock could be a buying opportunity. Strong sales of Mac are likely to be further aided by the upcoming back-to-school season and Apple has already hinted about the introduction of new products.

"The Mac numbers were strong and I still think this is the number to focus on when evaluating Apple," says Romeo Dator, co-manager of the

All American Equity Fund

(GBTFX) - Get Report

at U.S. Global Investors. The fund holds shares of Apple in its portfolio. "So as long as they are taking market share from the PC world, I think it helps spill over to the smartphone and portable music player business."