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iPod Talk Boosts Apple Shares

Apple rises on speculation about a new iPod.

SAN FRANCISCO -- Shares of

Apple

(AAPL) - Get Apple Inc. (AAPL) Report

held onto early gains amid choppy markets.

The share boost helps Apple continue to rebound from recent lows and ride anticipation that the company will soon unveil a new iPod. Apple shares have been volatile all year as investors have tried to factor the intangible buzz surrounding the iPhone, new iMacs and possible new iPods into their valuation models.

Shares were recently trading up $3.03, more than 2%, to $137.11, but are still below their 52-week high of $148.92 reached in early July.

"Apple's valuation is a tough call especially with the iPhone business, which is a new market and we really don't know yet how it's going to affect earnings," said Darren Chervitz, director of research for the $102 million Jacob Internet Fund, which owns Apple shares.

The company has reportedly reached agreements to begin selling the iPhone in Europe. Investors have said that the company's products are catching on in developed European markets as the iPod and iTunes music downloading service has put Apple's other products in the spotlight.

Apple's valuation, based on the ratio of its

price-to-earnings forecasts, seems high if the estimates are based on the company's computer business, says Chervitz.

Investors in the Cupertino, Calif.-based company currently pay about $37 for every $1 of earnings vs. $20 for the average computer maker, according to annual estimates from Thomson Financial.

Profit margins on computers are highly sensitive to the cost of memory devices, semiconductors, liquid crystal displays and other components. This worked to Apple's advantage in the previous quarter as prices eased. But it's uncertain for how long favorable price trends will persist.

In its recent earnings conference call, Apple executives said their conservative estimates for fourth-quarter earnings reflect their expectation that

commodity prices will increase in the second half of the year, following historical patterns.

The same price concerns hold true for the iPhone. But here too, investors haven't had the benefit of a full quarter of sales to see how the iPhone affects Apple's overall profitability.

The uncertainty around Apple's iPhone profits has compounded the challenges investors face when trying to put a value on Apple's stock. Apple has closely guarded the fees it is collecting from

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, the only carrier in the U.S. offering the iPhone, to say nothing of deal terms it has reportedly reached with European carriers.

The most recent hype surrounds the iPod, one of the most stable sources of sales and profits in the recent past. Earlier in the week,

Apple invited journalists to an event on Sept. 5. Apple watchers and Web sites that follow the company's every move have been speculating that a new iPod is in the offing.

Apple's invitation seemed to confirm the rumors. It has a picture of a person listening to a music device, highly reminiscent of iPod advertisements. The invitation also has pictures of music albums.

In the last quarter, iPods accounted for nearly 30% of sales, and unit sales were rising, though at a much slower pace than in the past. The total dollar figure from iPod sales rose by a tepid 5%, down from 36% in the same quarter last year.

Analysts are giving investors reassurance that Apple will follow its pattern of issuing conservative guidance and beating its forecasts handily.

Shaw Wu, an equity analyst with American Technology Research, said that recent checks on the computer market indicate that Apple's high-end iMacs have been selling briskly. In the past quarter, iMacs accounted for 47% of the company's revenue.

Wu also expects iPhone sales to beat Apple's forecast of 730,000 in the fourth quarter.

Wu does not own shares in Apple and American Technology Research does not perform investment banking services for Apple.

In the meantime, Apple's stock has been more volatile than the broader markets as investors struggle to determine how the company's mix of hardware, software and services will affect overall profitability.

Chervitz says his firm has been trading Apple shares more frequently than usual. Chervitz is bullish on Apple in the long-term, but took a defensive stance and cashed in some shares in recent months. But Jacob recently bought back shares after the

Federal Reserve

lowered the discount rate on loans it makes to banks.

"We decided that even on a short-term basis, defensive wasn't the place to be," said Chervitz.