Stop Worrying About Apple

It was a rough Thursday morning for investors in Apple Computer (NASDAQ:AAPL). The stock was off nearly 3% on what appeared to be concerns over the Mac maker's ability to sustain its remarkable sales and earnings momentum.

The worries stem from comments made in Apple's first-quarter earnings announcement. Therein, CFO Peter Oppenheimer said that sales for the second quarter would come in at $4.3 billion, while adjusted earnings per share would be $0.42. Both projections are well below Street estimates.

Are the worrywarts justified? No and yes. No, because Apple had a great quarter by any measure. The iPod maker sold more than 14 million of the cultish digital-media players during the holiday season, accounting for more than 50% of sales during the quarter. That's the first time Apple has achieved such a feat since the iPod made its debut in 2001.

Moreover, Apple's consolidated results show a company still making money hand over fist. Sales were up 64% year over year. Net profit was up 91% over the same period. And the Mac maker's cash balance ballooned to more than $8.7 billion.

Alas, there's more to the story, and it may inform as to why Apple's estimates are lagging those of the Street. Put simply: Apple's business has changed. No longer is it a premium-priced vendor -- at least not the way it was in the days of yore. Have a look at the year-over-year decline in average selling prices for the company's primary product lines:

Quarter ended Dec. 25, 2004

Quarter ended Dec. 31, 2005

This helps explain why Apple's gross margin continues to decline. But media and analyst reports have suggested that the freefall was to be expected with the lower-margin iPod. And they weren't wrong. At least not completely.

What they didn't anticipate was that Apple has undergone a bit of a transformation into a company with quite a bit of consumer-electronics exposure, a volume-driven sales model, and the lovable Mac at the center of it all. Which, in turn, would create lower margins for all products -- remember the Mac Mini? -- and, thereby, more risk.

Today's Q2 forecast suggest that scenario is close to being fully realized, but that doesn't mean Apple is a bad stock. Indeed, while I know it sounds loony to say so, the shares could even still be a buy, especially if Apple remains in tune with what consumers want -- Mactel anyone? -- and sustains its torrid growth rates. Yeah, I know, there's a huge risk in that assumption. How long can a winning streak last, anyway? Answer: Till it ends. Don't be so sure Apple's is over yet.

If related Foolishness is the Apple of your iPod, look no further:

• Could Google (NASDAQ:GOOG) really eat Apple?
• The Mac maker is already having trouble growing into its valuation.
• We spread some Apple seeds in time for Macworld.

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Fool contributor Tim Beyers thinks Apple struck a coup with the new MacBook Pro. Nice job, guys. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile . The Motley Fool has an ironclad disclosure policy .