SAN FRANCISCO Apple Inc should affirm next week that its six-month-old iPad tablet computer is selling well despite a shaky consumer market, while the iPhone continues to fend off a strong challenge from rival Google Inc.
Analysts expect fourth-quarter earnings to showcase Apple's powerful one-two punch of the iPhone and the iPad, although some still question whether, with a plethora of rival products set to hit store shelves, Wall Street can justify Apple's stratospheric valuation.
The shares of the second largest corporation in the S&P 500 jumped more than 4 percent on Friday as anticipation mounted ahead of Monday's report.
As has been the case for many quarters, iPhone growth will be the main driver, even as anticipation builds over an iPhone early next year tailor-made for the network of top mobile carrier Verizon Wireless Inc -- a move that would instantly boost Apple's consumer reach in the United States.
Apple's shares stand at a record high after breaking through the $300 mark for the first time this week. The company has so far proved resilient in the face of weak U.S. consumer spending. At the same time, gross margins should get a boost from falling component costs.
Although there is little doubt September quarter numbers will be strong, investors have come to demand an out-sized performance, so the bar is raised every three months.
Analysts say a big upside surprise may be tougher to achieve this time around given constraints in iPad and iPhone supply.
But the iPad is playing a bigger role in Apple's business and could be a wild card this quarter, and Wall Street is eager to gauge consumer enthusiasm for the tablet. While demand has been strong, manufacturing bottlenecks have limited production.
Apple trades at nearly 21 times forward earnings, a healthy premium over smartphone and PC rivals.
(For a table comparing Apple's valuations and estimates against its rivals, click here: link.reuters.com/ruc78p)
A SECOND LEG
Investors are looking at the iPad as the second pillar of growth along with the iPhone, which has keyed Apple's surge over the past few years, but is facing stiff competition from smartphones based on Google's Android software.
"It's going to be a combination this time of their two most important products, iPhone and iPad, and both are going to do very well," said Gleacher & Co analyst Brian Marshall, who expects Apple to pass Exxon Mobil Corp as the largest company in the S&P 500 in short order.
Apple launched the iPad in April and sold 3.3 million units in the June quarter. Analysts expect sales of 4.5 million to 5 million units for September.
Susquehanna Financial analyst Jeff Fidacaro noted that because investor expectations are so high, there may be some disappointment if the iPad number is below 5 million.
Fidacaro said that, despite Apple's size, there is still room to grow because its key markets -- smartphones and tablets -- are young and expanding.
"You've got two huge product cycles going on right now," he said. "And the iPad has no competition."
IPhone sales should continue to be strong following the June launch of the iPhone 4, with estimates in the 11 million to 12 million unit range.
Fidacaro said Apple is building a CDMA iPhone for expected launch early next year, potentially with Verizon, that would add more than 10 million units to his 2011 sales estimate.
But the threat from Google looms and new rivals are emerging. Android was the most popular platform among U.S. smartphone customers in the past six months, according to Nielsen.
"There's going to be no shortage of competition next year," said Pacific Crest Securities analyst Andy Hargreaves.
Apple, famous for its low-ball forecasts, stunned investors in July when it set a revenue outlook for September that was $1 billion higher than Wall Street's target.
The company has beat the consensus estimate in each of the past eight quarters by a minimum of 13 percent and has bested revenue estimates for the past seven quarters.
Hargreaves said investors should expect another beat this time around.
"I don't think it will be a big as what we've seen in the past, at least relative to our numbers, because of supply constraints early in the quarter," he said.
Apple is expected to post earnings of $4.08 a share on revenue of $18.9 billion, according to Thomson Reuters I/B/E/S.
According to StarMine's SmartEstimate, which places more weight on recent forecasts by top-rated analysts, Apple should post EPS of $4.17 on revenue of $19.1 billion.
Analysts expect a gross margin of 38.2 percent. Apple's margin has been pinched by the iPad, but falling prices for components such as NAND flash, which Apple consumes in huge amounts, could help in the September quarter.
Wall Street expects Apple to report sales of roughly 10 million iPods and 3.5 million to 4 million Mac computers.
Macs have been a steady source of strength for Apple over the past few years. Sales surged 24 percent in the United States in the July-September period, according to industry tracker IDC, a far stronger performance that its rivals.
Apple could dominate the headlines next week. After its earnings report on Monday comes a media event on Wednesday focused on Mac computers. That is followed by quarterly results from AT&T Inc, the exclusive U.S. iPhone carrier, and Verizon.