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Apple's big week
In which an earnings announcement today may be overshadowed by a product announcement tomorrow.
October 15, 2003: 1:36 PM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - It's a big day for Steve Jobs and his Cupertino crew. Today, Apple will announce its fourth-quarter results. Most analysts are expecting a pretty solid report, with earnings estimates averaging about 8 cents a share on $1.8 billion in revenue.

Many investors' eyes, however, will be on the next announcement: Apple is scheduled to unveil the Windows-compatible version of its popular iTunes Music Store tomorrow.

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Call it the Steve Jobs rock-star effect. Even though the "over 10 million" songs sold on the Apple version have resulted in only about a million dollars in total profit, according to some analyst estimates, investors have gone gaga for the service.

Investors shot the stock north by 25 percent after Apple (AAPL: Research, Estimates) announced on May 5 that it had sold 1 million songs in the service's first week. Since then, the stock has continued a more gradual slope upward.

A one-two punch

How will investors react to Apple's one-two punch of an earnings announcement and the unveiling of an iTunes store for the other 97 percent of the computing market?

Investors shouldn't necessarily expect a repeat performance. Though the earnings announcement and its typical lowball analyst earnings estimate shouldn't scare investors away, the digital-music landscape has changed even in the five months since Apple launched its iTunes Music Store.

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For starters, Napster's back, with features and pricing similar to the first iTunes store. What's more, other companies have launched their own Windows la carte music-downloading services. As such, Apple is actually a latecomer in the game.

A second key factor is that when Apple announced its music store in May, the company's stock was trading at just barely above its cash value. The price was driven down in good part by rumors that the company was considering purchasing Universal Music Group. When those rumors dissipated and the iTunes Music Store launched, investors jumped to Apple like groupies rushing toward a closing backstage door.

"I don't think the investors did the math on that move," says Charles Wolf, an analyst with Needham & Co. "The per-download profitability is pretty minimal." Wolf personally owns Apple stock, but his company has not done banking business with Apple. Right now, Apple's stock is trading in the mid-20s, above most analyst target prices for the year.

Although Apple's iTunes store might not generate much earnings on its own, it is assisting the company in two other critical -- and more lucrative -- areas.

First, it's helping to sell more iPod portable music devices. These devices carry profit margins estimated between 25 and 35 percent, according to Wolf. Apple doesn't break out individual-product profitability.

Second -- and less tangible but no less important -- the service is helping to drive brand awareness at the same time that Apple is ramping up its retail efforts. The positive reviews of the company's products and services are bringing more and more foot traffic into its stores, Wolf says.

Gateway, another company that is pursuing its own retail-store strategy, averages about 250 people per week in each of its eponymous stores. Apple, says Wolf, claims that it sees 4,000 people per week in its stores. (Neither company releases store-traffic figures.) The company currently operates 65 stores and is expected to hit 70 by year's end.

With this digital-music announcement, Apple investors will want to avoid getting caught up in Jobs's cult of personality. Hype and positive product sentiment don't guarantee sales.

Instead, pay attention to unsexy details such as same-store sales improvements -- never before a metric to consider for Apple -- to gauge the company's success in attacking its perennial challenge: increasing its market share and relevance in the computing world at large.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.