Apple Stock Soars on Surging Mac Sales

| About: Apple Inc. (AAPL)
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Three months after the debut of the most-hyped technology product in history, the jury is in on Apple's (NASDAQ:AAPL) iPhone:

While it's a "beautiful and breakthrough" product, as Wall Street Journal columnist Walt Mossberg wrote in his influential review of the touch-screened smart phone, it simply isn't worth its initial $599 price tag—a fact that Apple CEO Steve Jobs all but admitted earlier this month.

"This is life in the technology lane," Jobs said of his decision to slash the iPhone's price by $200.

You might have thought such capitulation would send shivers down Apple investors' spines. Indeed, after it had surged to a record high of $146 a share in July, rumors that the iPhone wasn't selling like hotcakes sent the stock down by nearly 10 percent after Apple's price-cut announcement. (It was off by twice as much during the stock market's mid-August swoon.)

New outlook for earnings. Yet for smart investors, it appears the recent sell-offs were, in fact, buying opportunities. Thanks in part to a raft of analyst upgrades over the past few days, the stock hit a new all-time high of $153 on Tuesday as news arrived that the company's core products—its Macintosh computers—are selling far better than the iPhone.

"Despite an overhyped phone, in our opinion, we believe Apple's business continues to accelerate and is firing on all cylinders," W.R. Hambrecht analyst Matthew Kather wrote last week of his decision to up his earnings estimates for the company.

Citing "stronger than expected iMac momentum," as well as falling costs for the memory chips needed to make them, Citigroup analyst Richard Gardner followed on Monday, not only upping his estimate but also his 12-month price target for the stock, to $180 a share, a 20 percent premium over its current price.

In fact, many believe Apple is finally succeeding at doing what it has long failed at: convincing the bulk of personal computer users to shell out as much as twice the price of a comparable Windows-based machine for the elegant functionality—and the pure "bling"—of owning a Mac. Indeed, although the Mac has long enjoyed a cult-like following, its overall market share has only recently vaulted toward the double digits, more than tripling the paltry share it had three years ago.

Running Windows on the Mac. While there's certainly been a "halo effect" from Apple's wildly popular iPod and, to a lesser extent, from the iPhone, the growth in Mac sales is thanks mostly to Apple's decision a few years back to switch to industry-standard Intel microprocessors. With the help of special software, they allow PC users to run all their software applications on the Mac. For many converts, it's been a revelation: no viruses to deal with, no crapware to fact, some technologists have argued that Windows actually runs better on the Mac—faster and with fewer crashes—than it does on Windows machines.

Despite fears that last fall's release of Microsoft's Vista operating system would dampen Mac sales, the unimpressive, memory-hogging Vista has only given longtime PC users more reason to make the switch. And with Apple's new "Leopard" operating system due out in October, many believe Mac sales are finally on the verge of the sort of breakthrough that the iPhone promised but has yet to deliver.

Meanwhile, Apple continues to roll out new products, from a touch-screen version of the iPod to a much-rumored sub-laptop-size Mac, which is expected to be released in time for Christmas.

The takeaway: While Apple's sky-high stock price doesn't leave much room for mistakes as the critical holiday season approaches, the company's long-term profit outlook is as good as it has ever been, giving investors plenty of reason to buy the next time the stock pulls back.