Should Apple's Shareholders Worry?

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Shareholders at computer and music appliance maker AppleComputer (Nasdaq: AAPL) have to be shaking their heads. First, their beloved company made it to the Final Four in the Motley Fool's Stock Madness 2005 but lost to earnings-challenged Sirius Satellite Radio.

Then there was yesterday's stock market action, where the expectation of a spectacular earnings report today could not stop the stock from somehow falling 3.8% in an admittedly weak stock market.

Well, earnings were outstanding and beat analyst expectations. Quarterly revenue was up a healthy 70%, and net income increased more than 500%. The stock, however, was down 7% in early-morning trading.

Why?

Hard to know for sure, actually. One culprit may be that while the number of computers sold was up 2% compared with last quarter (a 43% increase in CPU unit sales compared with the year-ago quarter), revenue per unit declined 16%. And while the company said iPod unit sales increased 588% compared with the year-ago quarter, more recent news took center stage: The number of iPods sold increased 16% compared with last quarter, but revenue per unit declined 16%. But this is to be expected, I suppose, given that Apple's newer, cheaper products -- the iPod Shuffle and iPod Mini -- have been coming into their own and will naturally bump down revenue-per-unit figures.

Apple's CFO, however, made comments in a later conference call suggesting overall revenue growth wouldn't be so torrid in the future -- another possible culprit for what's a fairly mysterious price decline.

In profit margins, Apple scored top marks by posting a whopping 11% net margin for the quarter. That's head and shoulders above the 3%-4% neighborhood it's loitered in during recent quarters.

While EPS is expected to triple (to $1.11) this year, the stock trades at 35 times forward earnings, which is rich compared with the 20ish forward P/Es sported by industry heavyweights Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and Dell (Nasdaq: DELL).

Why?

In a word, iPod. The company may be called Apple Computer, but perhaps it should be called Apple Computer and iPod, given that while computer sales were $1.5 billion, iPod revenues weren't far behind at a cool billion.

But the same market newness that's opened the door for the iPod's growth has invited competition into Apple's arena -- an arena with fickle tastes, to boot.

Giants like Motorola (NYSE: MOT) and Sony (NYSE: SNE) are asking: Why walk through life with an iPod and a cell phone when you can have your music in your cell phone? Nokia (NYSE: NOK) has also announced it will be offering a music download service using technology from partners Loudeye and Microsoft. Ask yourself what the iTunes Music Store has, beyond a strong early sales lead, that will help it compete in the long term.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.