After a confusing 24 hours in which Apple watchers struggled to reconcile a Feb. 26 press release from the company that proclaimed iTunes the No. 2 music retailer with NPD data that showed iTunes in the No. 1 spot six weeks earlier (see here), Apple (AAPL) on Thursday issued a new press release declaring itself No. 1 for both January and February. The key sentence:

Apple® today announced that the iTunes® Store (www.itunes.com) surpassed Wal-Mart to become the number one music retailer in the US, based on the latest data from the NPD Group*. (link)

Note the footnote, which reads:

*Based on data from market research firm the NPD Group’s MusicWatch survey that captures consumer reported past week unit purchases and counts one CD representing 12 tracks, excluding wireless transactions. The iTunes Store became the largest music retailer in the US based on the amount of music sold during January and February 2008.

Guess that clears it up.

Coincidentally, three of the four big music labels also made a big music announcement Thursday afternoon: a deal with MySpace to build what a spokesman describe as a one-stop music site that will offer downloads, ad-supported streaming and music sharing services. Downloaded music would reportedly be compatible with all MP3 players, including iPods. See here.

Apple (AAPL) by all accounts had a terrific holiday season. The Apple Stores were packed, and Macs, iPods and iPhones were shipping in record numbers. On Christmas day alone, Steve Jobs announced at Macworld last week, the company sold 20 million songs.

Then the market tanked, and Apple’s shares, having more than doubled in 2007, went into free fall. As the Dow dropped 10 percent, Apple dropped more than 20 percent, from a record high of 202.96 to just over 161.36 last Friday.

This will presumably change on Tuesday, when the company reports its quarterly earnings. If nothing else, day traders are likely to load up on the stock and it options, anticipating that Apple will easily beat its projected $1.42 earnings per share on sales of $9.2 billion — guidance that was considered uncharacteristically unconservative when it was offered three months ago. The street consensus is now $1.62 EPS on $9.47 billion. Piper Jaffray’s Gene Munster, always the optimist, is looking for $1.73 on $9.73 billion, and as of Jan. 14 was still calling for a price target of 250.

Even Munster doesn’t expect that kind of bounce when earnings are announced after Tuesday’s market close. What he and the other analysts will be tuning in for is the conference call that starts at 5 p.m. ET. (You can listen to the webcast here.) How Apple’s shares behave in the weeks ahead will depend on a handful of key numbers to be revealed in that call. Here are the ones the traders who hang out at The Mac Observer’s Apple Finance Board will be listening for:

• Earnings per share. Beating guidance and meeting the street consensus is a given. The traders here are whispering about $1.80 per share, and even that wouldn’t equal the 73 percent year-to-year earnings growth Apple has achieved over the past four quarters. To do that, it would need $1.94 EPS.
• Forward guidance. Apple tends to be cautious when projecting future earnings, preferring to under-promise and over-deliver. But traders are abnormally sensitive these days to recession signals, and if the company’s forward guidance is too conservative, it could be read as a sign that even Apple is starting to feel the pinch.
• Gross margins. As the AFB moderator who calls himself DawnTreader puts it: “Volume is nice. But high-margin volume is better.” He’s watching how much of each sales dollar flowed to cover operating costs and to the bottom line after manufacturing costs.
• Mac sales. This is the key to the quarter, according to Piper Jaffray’s Munster. “If Apple sells 2.3 million units, it would be a significant positive,” he wrote in a report to clients issued last week. “2.3 million Macs represents 43% y/y growth compared to 28% y/y in Dec-06 and 20% in Dec-05.”
• Deferred revenue. I don’t pretend to fully understand the significance of the tricky way Apple accounts for its iPhone and Apple TV revenue. But this is what DawnTreader says about it: “One of the most important numbers IMHO is the net pick-up in cash exclusive of deferred revenue liabilities. Net income and EPS is impacted by a number of non-cash expenses including depreciation and amortization. How much net cash exclusive of deferred revenue and other liabilities flowed to the balance sheet?” (link)

Got that? Good luck.

The buzz among Apple (AAPL) traders today is a thought experiment that Matt Haughey worked up at A Whole Lotta Nothing. He writes

A few months ago I was thinking about Apple’s rise in value after the iPhone and how Steve Jobs does a great keynote every year, and naturally I thought “I wonder if there’s a way to make money off quick investments around the keynotes?” Then I thought “What if you did this every year, for just a day or two of investment?”

Haughey worked the numbers and the result is the chart above, which he calls the Keynote Index Fund (click chart to view full size). His conclusion: if you had invested in his hypothetical fund for the past two years, you would have realized a healthy 7.3% profit over 24 hours and 11.9% over 48 hours. The longer term results are not quite so impressive. Over the past decade, the fund gained 1.2% over 24 hours and 2.2% over 48.

Of course, long-term Apple investors have done considerably better. Haughey points out that if you had bought $10,000 worth of Apple stock in 1997 and held it the whole time, it would be worth $525,187 today.

Haughey’s methodology has been raked over the coals rather thoroughly at MetaTalk, where it has been pointed out in several ways that hindsight is enormously seductive but not much help in picking stocks.

Curiously, Piper Jaffray’s Gene Munster performed a thought experiment similar to Haughey’s last month and arrived at the opposite conclusion. Reviewing Apple share prices in the month before and the month after Macworld over the past three years, he noted that the stock tends to rise in advance of the keynote and to fall afterward — or at least it did two years out of three (see chart at right). His analysis suggests the old Wall Street adage: buy on the buzz, sell on the news.

UPDATE: Speaking for the bulls at The Mac Observer’s Apple Finance Board, reader Tommo_UK looks beyond the Macworld effect to offer this sensible advice:

The “clever” trade for early 2008 was to buy sub-$200 and sell in the run-up to Macworld, and then buy the “sell the news reaction” afterwards for a run-up into earnings, but this strategy has now become so well-discussed and widespread that its pretty much a given and is probably itself going to be the subject of predatory manipulation by larger players. Perhaps the alternative trade is simply to recognise that the earnings growth machine is only just revving up, courtesy of the Mac market share increase and iPhone deferred revenue/subscriber revenue sharing and step aside from being whipsawed by these crooks, and simply hold as large a position as you can comfortably achieve which won’t result in you being whipsawed/liquidated by wild 10-20% swings. (link)

There’s a fascinating discussion underway on The Mac Observer’s Apple Finance Board — one of my favorite places for tracking the sentiments of Apple (AAPL) investors.

The participants on AFB tend to be bullish on Apple and long the stock, but they’re smart investors and have good antennae for anything that could affect their holdings — up or down. So I was interested to see how they would respond when a member who calls himself (or herself) “lumi” opened a new thread early this morning with these questions:

What are the chief potential stumbling blocks, things that *could* either delay or derail AAPL’s projected growth trajectory? What events would be red flags or precursors to correction or erosion?

The early responders have taken the challenge seriously, as they usually do on AFB, and offered answers that are quite insightful. The most interesting so far was posted by Alexis W. Cabot, an investor based in Rome. With his permission, I quote it in full:

Steve Jobs continued leadership of the company is still essential. We all know how his idea of what works and what doesn’t permeates the decision thinking process at Apple, but Apple must learn to do without him, otherwise it will not be a great company. General Electric has done a great job at creating internal leaders that are excellent managers and have kept the company at the top of corporate America for a century. Apple must have it’s own management creation process in place.

Corporate hubris. Signs that the company starts believing it can do no wrong and that customers will buy anything they produce will be when the company has peaked. Apple went through this phase in the late 1980’s and we all know how that ended. Apple’s insistence on revenue sharing with the networks just to sell a Jesus Phone would be nice for us shareholders, but there is a wider world out there that has laws against such restrictions on trade. I hope that Apple/SJ doesn’t shoot itself in the foot if it insists too much on these revenue sharing deals.

Inability to build lasting partnerships. As SJ himself said at All Things Digital that Apple has to learn how to make better partnerships. Never has Apple needed more content and networking partners than before. It needs to work with music and movie companies, with it’s own set of histrionics, and then with the highly regulated and staid cell-phone networks.

Souring US relations with China and the rest of the world. A trade war between the incumbent superpower and the aspiring one are likely to derail Apple’s (and most of corporate America) growth. It will be more expensive to outsource and then sell to China, which has one of the most rapidly growing and homogeneous middle classes of the world. Given the poor job the US has done in managing its international relations, this is a growing possibility. (link)

You can follow the discussion on AFB. It starts here.

UPDATE: This topic is still going strong on the Apple Finance Board, and includes some remarks that were ported over from the comments here. Below the fold, a summary by “lumi” of the first day’s posts.