More Sweet Music for iPod

Summer ought to be a time to slow down and relax, right? Not if you're Apple's (Nasdaq: AAPL  ) white-hot iPod. Yesterday PortalPlayer (Nasdaq: PLAY  ) , which makes the intelligence that powers the cultish digital music player, said it expects big sequential sales gains in the third quarter, which ends in September.

The news came in PortalPlayer's second-quarter earnings release. CEO Gary Johnson said in a statement that gains from new designs built for flash-based music players -- such as those from iRiver, Creative (Nasdaq: CREAF  ) , and Samsung -- could boost revenue to between $50 million and $60 million. That would equal gains of at least 12% sequentially and nearly 100% year over year. Certainly the flash players will have some impact, but remember, this is a company that gets close to 90% of its sales from Apple. It's easy to believe that much of PortalPlayer's expected Q3 upside comes from pent-up demand for the iPod.

Analyst estimates bear this out, too. A check of Yahoo! Finance shows the Street was expecting $0.30 per share in non-GAAP earnings for the third quarter and $51.22 million in sales. Both are at the very bottom of the company's projected ranges. Yet neither number has pleased investors. Instead, the stock trades roughly 6% lower as I write.

I think I know why: A look at the Q2 financials reveals that revenue was flat sequentially. That seems odd when Apple sold 800,000 more iPods over the same period. And even if product cycles don't quite align, sequential growth between Q1 and Q2 iPod shows similar unit growth gains. Apple's iPod revenue was also up 8.8% during its fiscal third quarter. PortalPlayer can't be expected to ape those gains precisely, of course. But it ought to get at least within spitting distance. It didn't -- and investors probably noticed.

PortalPlayer is an interesting company at the center of a remarkably popular market. Some have undoubtedly sought the shares as a way to get in on Apple's meteoric rise without paying the same premium. Sorry, but that's just plain silly. Much as I remain impressed by its growth, inventiveness, and -- even to some degree -- valuation, PortalPlayer is entirely subject to the whims of Apple and flighty consumers. And, as the numbers bear out, it doesn't always get the full benefit of the popularity of its chief customer.

Bottom line: If you really want to make money off the Pod people, Apple is still your best bet. Period.

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Fool contributorTim Beyersstilldoesn't have an iPod. Geek. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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