CUPERTINO BUSINESS REPORT
Apple Floats, but Will It Fly?

Take a look at your favorite online stock tracker site and check out the year's activity for Apple (Nasdaq: AAPL), starting at the beginning of August last year. Then compare that with Tuesday's closing price.

On Aug. 8, 2008, Apple's closing price was US$169.55. At Tuesday's close, it was $169.40.

After a year of new gadgets and a stock market crash (or two), the per-share loss is 15 cents.

Lots of companies out there would love to return to the stock prices they held a year ago, but could things improve for Apple? Right now, the company's feeling the heat as never before. The SEC is investigating it over its portrayal of CEO Steve Jobs' health; the Federal Communications Commission is investigating it in two separate matters; and the recession is hurting sales .

Despite all this, analysts are positive about Apple.

No Garden of Eden

The Securities and Exchange Commission (SEC) is looking into whether or not Apple misled investors in the matter of Jobs' health. Jobs, you will recall, claimed in January that a relatively simple hormone imbalance had caused his weight loss over last year. A week later, he said the problem was more complex than he had thought and went on medical leave.

It took sleuthing by the media to discover that Jobs, who was treated for pancreatic cancer in 2004, had undergone a liver transplant. Apple's and Jobs' silence on the matter angered some investors, who felt that the public should have been better informed, as Jobs is perceived as a key factor to the well-being of Apple, a public company.

Meanwhile, the FCC is going after Apple for not approving the Google (Nasdaq: GOOG) Voice app for distribution on its App Store and, separately, for its wireless exclusivity deal with AT&T (NYSE: T).

Over in Europe, the European Commission is investigating stories that a handful of iPhones and iPods have exploded. Meanwhile, here in the United States, the KIRO 7 television station has run a story saying that several iPods have burst into flames, injuring people and damaging property. KIRO 7 says Apple tried to stall the investigation for seven months by battling attempts to get documents about iPods from the U.S. Consumer Product Safety Commission.

No Money, No Mac

Apple is also lagging on the sales front. At its second-quarter earnings call in July, COO Tim Cook warned that demand has fallen in the education markets this year and expressed doubt that things would turn around in the third quarter.

That statement was bolstered by the results of a survey of more than 300 visitors to consumer electronics marketplace Retrevo's Web site. The study, conducted by Gadgetology, found that 34 percent of students buying computers plan to purchase netbooks, while another 49 percent plan to buy desktop PCs.

Students are opting for Windows PCs and netbooks because they're much cheaper than Apple's products and the recession is cutting consumers' purchasing power, said Vipin Jain, Retrevo's president and CEO.

Things could take a turn for the worse with the release of Windows 7 in October. "We have seen very attractive netbooks recently coming out of companies like HP (NYSE: HPQ), Dell (Nasdaq: DELL) and Sony (NYSE: SNE) that are priced much lower than a MacBook," Jain told MacNewsWorld. "Combined with a good OS (Windows 7) and an Apple-ish look and feel, these machines can really give MacBooks a run for their money."

Hope Springs Eternal

Despite all the bad news, Thomas Weisel analyst Doug Reid has upped his estimates on Apple after meetings with its management. He's holding onto his revenue estimates but has increased his earnings per share estimates for fiscal 2009 and 2010.

Why? Because he's assuming Apple will make higher gross margins from iPhone sales.

Apple indicated it would move away from exclusive carrier agreements for the iPhone, Weisel also said. Cupertino, he thinks, is looking to get in bed with Verizon, the largest wireless carrier in the United States.

This will not only defuse the FCC investigation but would also give many iPhone users what they have been clamoring for -- a choice in wireless carriers. AT&T's wireless service has been the focus of complaints from many iPhone users.

If Apple were to switch to Verizon or add Verizon as a second carrier, that could possibly send iPhone sales through the roof. AT&T's contract with Verizon reportedly ends in 2010, but both companies have refused to comment on this.

Cupertino, Reid expects, will also launch a new MacBook in the $700 to $800 range.

Gotta Keep on Moving

Meanwhile, rumors about an Apple tablet have fired the imaginations of countless Mac fans. Over the months, several stories have been published on this topic.

Some have said there will be two tablets; others have insisted there will be only one; and still others have focused on the date of the tablet's launch, with many saying it will be Sept. 9, when Apple is scheduled to hold a media event.

The Wall Street Journal on Tuesday published a story saying Jobs was micro-managing work on the new tablet. In an e-mail to the Journal, Jobs said much of the information in the story is wrong, but that raises even more questions.

"It makes you wonder what part of the story is correct," ITIC principal Laura DiDio said. "Where there's smoke, there's fire.

"They've got to come out with the tablet in the next two quarters because this market segment is too incredibly lucrative and expansive for Apple to ignore," DiDio told MacNewsWorld. She expects Apple to price the tablet at about $750 when it's launched, then drop the price.

"It's in Apple's and Steve Jobs' best interests to come out with some very big announcement and help people forget or ignore any of the potential bad news coming out," DiDio said.

Perhaps more importantly, Apple CFO Peter Oppenheimer told analysts at a briefing last month that the company has in the wings a significant product announcement which will positively impact fourth-quarter earnings, DiDio said. Whether or not he was referring to the tablet is not clear.

Still, Piper Jaffray analyst Gene Munster has said that Cupertino is on track to sell 2.7 million to 2.8 million Macs and 9.5 million to 10 million iPods in the fourth quarter. He based his projections on U.S. retail sales data from the NPD Group.

True, the market's getting more competitive and the recession has hammered Apple, but if it remains true to tradition, it will provide investors a pleasant surprise in the third quarter.