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Apple Earnings: Are Great Numbers' Days Numbered?

Is it time for Apple to release quarterly earnings again? It seems as if only three months have passed since the last time.

There's virtually no doubt that the figures that Apple announces after the stock market closes today will exceed forecasts. It's also a fairly safe bet that its stock (AAPL), which set an all-time high on Monday, will keep rising - Apple is very good at managing down expectations so that whatever impressive results it reports look even more impressive - but the adoration that investors have for Apple obscures some long-term risks for the company and the stock.

For the record, Wall Street expects Apple to earn $5.73 a share on revenues of $24.75 billion for the three months through June, which was the third quarter of the company's financial year. Apple always seems to beat estimates, but even if it does so today, it's likely to become harder to turn in repeat performances. It all comes down to the facts of commercial life and simple arithmetic.

Smartphone penetration was 38 percent in the United States in May, according to the Nielsen research firm, and is rapidly approaching 100 million users. Penetration rates are even higher in many parts of Europe. There is still room to grow, but the pace of growth is bound to decelerate.

The iPhone continues to be the smartphone that people talk about most, but its popularity relative to phones using Google's (GOOG) Android operating system is on the wane. As the research firm comScore reported recently, the iPhone's market share rose a modest 1.4 percentage points during the three months through May, compared to the three months before that, and stood at 26.6 percent. Android phones' share went up 5.1 percentage points, to 38.1 percent.

That's not a fluke, either. As I noted at the time, Apple's share was essentially flat in the previous comScore quarterly report, rising to 25.2 percent from 25.0 percent, while Android's rose to 33.0 percent from 26.0 percent. The Nielsen report mentioned above contends that Android's momentum is ebbing, but the comScore data suggests otherwise.

On the next page: iCloudy with a chance of a margin squeeze.

The use of tablet computers is not as widespread as smartphone use, but growth here is slowing, too, albeit from crazy fast to regular fast. Yet another research firm, eMarketer, foresees worldwide tablet sales nearly doubling in 2012 after nearly tripling in 2011. It predicts that the share of the market accounted for by the iPad will continue to shrink. The firm's forecast for 2011 iPad sales, 34 million, is substantially below Apple's own estimate of 40 million.

Apple will still make good money, even as the law of large numbers continues to reduce the pace of growth of its main product lines. A more serious threat to Apple and its stock comes from the compression of profit margins that the company could suffer as products from rival manufacturers hit the market and Apple cuts prices to slow the decline in its share.

A new whiz-bang product, the next iPhone or iPad, could give Apple's earnings enough of a boost to overcome the margin erosion, but the company's latest big new offering, iCloud, is unlikely to fit the bill. What Apple traditionally has done exceptionally well is marry software and hardware in ways that compel customers to buy both, but with iCloud there is no new device to buy.

Apple has a mystique about it that few companies have ever enjoyed. Its fan base - of shareholders as well as customers - is extremely loyal. If you want to infuriate iPhone users (a very worthy goal) show them how much faster and better your Android phone is. I do it all the time, and I never tire of it.

Apple's investors are similarly inclined to react with fury when someone suggests that the stock will not continue to rise forever at a breakneck pace. The time to invest in something is when skepticism about it is widespread, not when owners refuse to consider any alternative but continued spectacular success.

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