Apple's Soft Spot - The iPod

There are a number of rumors about the Apple event scheduled for September 9. One is that the company will launch its own netbook, which it will call a “tablet.” This has become less and less likely as the press and analysts have found little evidence among component suppliers and retailers that the consumer electronics firm is ready to launch a completely new product like before the holidays.

Speculation about the event now focuses on Apple’s (AAPL) plan to update its aging iPod line. Steve Jobs may even show up to make the presentation which would turn it from a mundane gathering to a meeting that would get global attention.

The iPod has become Apple’s potential Achilles heel as investors look at future quarters. Trading at $170, Apple’s stock is near a 52-week high. Shares are up 100% this year, which has easily outpaced PC firms like Hewlett-Packard (HPQ) and even smart phone market leader Reseach in Motion (RIMM), maker of the Blackberry. That makes the stock especially vulnerable to any earnings or product disappointment.

Apple’s earnings are expected to be higher over the next four quarters compared to the previous four, but the company’s fast-growing products, the Mac and iPhone, may not be the key to Apple’s success. It may be that the perception of the value of Apple’s shares will rest with the growth potential of the iPod, which is now eight years old.

Apple’s revenue was up sharply last quarter from $7.5 billion in the year ago period to $8.4 billion. Net income rose from just under $1.1 billion to $1.2 billion. It is a testament to the strength of the firm’s product line that sales in the Americas were up 11% to $3.8 billion and that operating income for the region was up 20% during the depths of the recession. iPhone sales were critical to the improvement. Worldwide, iPhone units shipped moved up 626%. That figure won’t be sustainable now that the handset has been on sale in the U.S. and much of Europe for over a year. But, the iPhone is likely to be the primary contributor to revenue growth for the company going forward.

The question about Apple’s earnings is whether iPhone sales can offset dropping numbers for the iPod. iPod unit sales dropped 7% in the last quarter and revenue for the portable media player dropped 11% from the same quarter last year, falling to $1.5 billion. Apple has sold over 220 million iPods worldwide, so the question becomes when will it reach market saturation? The recent sales figures for the product indicate that the point has already been reached.

Mac sales are not likely to offset the trouble with the iPod. Unit sales rose only 4% last quarter. Industry data show that almost all of the growth in the PC market is now in the netbook category and Apple will not have a product to address that until next year, if industry analysts are correct. The netbook field is already crowded. Hewlett-Packard offers them as does Dell (DELL), but the real competition in the market is from China, particularly from Asus and Acer.

Apple is spread as thin as it has been in its history. It now competes with scores of PCs, gaming devices, media players and handsets. It may not have another hit product in its pocket. It success has made it a ready target for consumer electronics firms from all over the world. As Apple matures, it will be harder and harder for the company to improve earnings, especially when the company’s top-selling product line by units sold is losing its growth potential.

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