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Apple analysts take sides

The Mac maker's stock is on the upswing after a strong earnings report, but analysts are split on the company's ability to stay on top.

Investors are rallying behind Apple Computer's second-quarter results, but analysts are split on the company's future with some questioning its ability to stay on top of expectations.

Apple shares rose $2.29, or 10 percent, to $25.08 in afternoon trading Thursday.

Lehman Brothers analyst Dan Niles upgraded the stock to "buy" from "neutral," based on "truly differentiated new products, low inventories and compelling valuation that should help future quarters."

But not everyone was so optimistic. Credit Suisse First Boston analyst Kevin McCarthy compared Apple to "a small independent film company, in terms of predicting market acceptance" of future products.

"A blockbuster product could increase unit volumes 50 percent," he wrote in a research note, "while another Cube could put Apple's credibility on life support approaching the important consumer selling season. Given Apple's niche focus and lack of predictability, we believe the stock is currently overvalued."

Apple earned $40 million, or 11 cents a share, on sales of $1.43 billion in its fiscal second quarter, vaulting over analysts' consensus prediction of 1 cent a share.

But Apple also lowered guidance for its fiscal year, saying it now expects to see revenue of $5.6 billion to $5.83 billion, lower than previous predictions of $6 billion.

SG Cowen Securities analyst Richard Chu downgraded the stock from "buy" to "neutral."

"Despite the heart-warming showing in (the second quarter)," he wrote, "we think it gets somewhat tougher from here, and we have no reason to be particularly optimistic regarding the overall consumer PC buying climate."

Apple is hardly the only tech giant hurt by a slowdown in computer sales. On Wednesday, Hewlett-Packard warned that profits would be well below consensus, which it blamed on a "rapid deterioration" in consumer spending.

Apple did say Wednesday that it shipped 751,000 Macintoshes during the quarter, adding that it reached its goal of having only four weeks of inventory in the hands of retailers and distributors. CFO Fred Anderson said the company had previously expected to take a few quarters to reach those inventory levels.

However, UBS Warburg analyst Don Young wrote that his data indicated much higher levels of channel inventory--or products shipped to distributors and retailers, but not yet sold to consumers--than the company stated.

"The lower revenue guidance means one of two things," Young wrote in a research note. "Either more channel inventory needs to be dropped or management expects global consumer demand to deteriorate. It is probably a combination of the two."

Young maintained a "hold" rating on the stock, saying he was "hesitant to become more aggressive until we get confirmation of management's low channel inventory claims from our own channel-tracing data."

According to market researcher NPD Intelect, Apple's inventory claims are on target. NPD said Apple started March with just over three weeks of inventory, with no sign of any unusual buildup.

Analysts also appear worried about pricing pressures on Apple from the PC makers.

PC makers "appear to have decided to permanently alter their business models going forward to accept lower product margins to try to boost demand," J.P. Morgan analyst Walter Winnitzki wrote. "This may make it difficult for Apple to maintain product margins at current levels, especially as we enter the company's (next fiscal year) when the Mac OS X upgrades cycle starts to decline."

"Our concern, simply stated, is: What is Apple's next big growth driver to reach new users?" Winnitzki asked. He maintained a "market performer" rating on the stock.