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Apple Bulls, Prepare for Disappointment

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A tablet computer presents a unique design and pricing challenge.

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Apple (AAPL) reported first-quarter earnings yesterday, with somewhat confusing results. Headline EPS came in above consensus at $3.67 a share, but that figure was boosted by an accounting change that's making an apples-to-apples (bad pun intended) comparison difficult so soon after the report. So investor focus has quickly shifted to exactly two things: unit numbers, and the highly-anticipated Apple tablet computer.

Mac sales skyrocketed by a whopping 33% to 3.36 million in the quarter, doubling the wider PC industry's growth rate. That's a heck of an achievement when you consider the Mac's average selling price of $1,324 -- a huge premium over the low-priced notebooks and netbooks driving the Microsoft (MSFT) Windows-powered computer world. Even crazier is the fact that Mac desktop sales rose 70%. I thought desktops were on the way out!

However, while iPhone sales doubled year-over-year at 8.7 million units, the Street was looking for a number in the 9-million-unit range. I would have expected the stock to sell off on the light iPhone number, but Steve Jobs kept it above water with one carefully crafted sentence:

"The new products we are planning to release this year are very strong, starting this week with a major new product that we're really excited about."

This major new product, to be unveiled Wednesday, is almost certainly Apple's highly-anticipated Tablet computer. Nobody knows exactly what the Tablet is, or even what it will be called, but it's already hotter than hell. Some intrepid Wall Street analysts are already incorporating it into their earnings estimates, while Google (GOOG) search queries for "Apple Tablet" have gone through the roof. The entire CES show that just passed didn't deliver a fraction of the Tablet's buzz.

Mark Wednesday on your calendar -- it's the biggest day of the year in tech, and it's all for a product without a name or face.

That said, Apple bulls should be ready for a disappointment. Not every Apple product is a killer, and a tablet computer is a unique design and pricing challenge. Apple does industrial design and software engineering better than any consumer electronics company on the planet, but we're talking a whole new class of gadget. It has to fit somewhere between an iPhone and a Macbook in size, price, and functionality. Otherwise it could be dead in the water.

There will be early adopters and Apple-maniacs that will buy anything the company puts out. But the mass market is another story -- they didn't buy the AppleTV and they didn't buy the iPhone at its original $500 price tag. Apple did $15 billion+ in sales this quarter. They're at a point where every new product must do BIG numbers to move the needle.

Apple's a buy for the long term. Just be aware that we're in for a roller coaster this week, depending on what's announced Wednesday.

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No positions in stocks mentioned.
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