SAN FRANCISCO (CNN/Money) -
Apple has become quite the investor darling. Since June 9, the company's stock has risen to three new 52-week highs.
Anticipatory buying ahead of an earnings call is nothing new, of course, and some of the activity may be attributable to shorts trying to cover earlier calls. But the next Apple earnings report isn't until July 14 -- well beyond the usual pre-earnings-spike time frame.
This frenzy appears to be based not on anticipation of the next quarter, but on product announcements that, at this early stage, don't warrant the excitement (the most recent high-price watermark on June 16 saw trading volume soar to twice the three-month average for the stock).
With the stock already trading with a trailing P/E north of 70, what upside is left for a strong earnings announcement next month? Or are investors merely building a higher ledge from which to fall if these new products don't live up to expectations?
What's driving enthusiasm?
The two products driving investor enthusiasm are the new AirPort Express and the opening of the iTunes Music Store to France, Germany, and the United Kingdom. Let's look at these two products and assess their growth prospects.
First, the AirPort Express unit. I don't think that this product launch is responsible for much of the recent investor enthusiasm, but it's a great addition to Apple's entertainment-hub idea. The AirPort Express lets users stream their iTunes collections directly into stereos and beam wireless signals throughout their houses.
The best thing about this product from an investor perspective, however, isn't its abilities but the fact that it's made for both Mac and PC users. And at $129, it's relatively cheap.
The European market
What's causing most of the excitement is the European premiere of the iTunes Music Store. And it's this launch that could potentially increase Apple's value. While the iTunes store may or may not be profitable in the United States -- Steve Jobs says he's making nada on the downloads, though others say he's sandbagging -- one thing's clear: The store is a terrific sales generator for iPods, those wildly profitable portable music players.
With one-third of total iPod sales already coming from abroad -- even though until now the only iTunes store was geared toward the U.S. market -- you can bet that the launch of European iTunes will spur more sales of the device.
You can also bet on a significant leap in downloads.
"The song sales at the iTunes store are growing at a near-exponential rate," says Charlie Wolf, an analyst with Needham & Co. "A successful launch of the European store could bring its weekly total to 5 million songs from 3.5 million." Wolf has owned shares in Apple for seven years and has held a "buy" rating on the stock for more than a year.
Apple's success in the European market, however, is far from guaranteed. When the iTunes store launched in the United States, it was the first of its kind.
That's not the case in Europe. Peter Gabriel's OD2 is the big player in various European markets, and even Napster set up shop on the Continent before Apple. What's more, Napster just announced a promotion whereby new subscribers to the Napster service will receive a free MP3 player. It's the first step the market has seen toward the commoditization of the devices.
The final possible factor in the recent stock run-up is next week's Apple Developer Conference, at which Steve Jobs is expected to announce new products.
Most observers I spoke with predicted that the big introduction would be a 60-gigabyte iPod, while others hoped it would be a low-cost Macintosh computer to compete in the expanding low-end PC market. With IDC reporting further erosion of Apple's share in the PC market, now down to 2.8 percent from 4 percent, it appears that a bet on Apple is now a bet on its music prospects.
"Investors are betting on Apple's music story and not the Macintosh story," Wolf says. "If they were betting on the Mac story, the stock would be in the teens."
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