What's Its Recipe?

    There's also something more fundamental and more sustainable in Apple's profit growth than chip prices or product mix. The latest quarter shows that Apple is gaining leverage from its unique cupboard of technologies. While many large rivals have scores of products with little in common with each other, Apple increasingly is creating its products from the same set of ingredients. The iPhone illustrates the point: It runs the same Mac operating system software, the Safari browser, and the same iTunes music software as all of the company's computers. It also utilizes many of the same chips as the iPod. "Apple's ability to develop, launch, and support new products, using the same R&D and sales and marketing investments, creates [earnings] leverage that is substantially greater than people thought even six or twelve months ago," said Goldman Sachs (GS) analyst David Bailey in a recent interview.

    What's more, the company is expert at outsourcing the rudimentary work to suppliers and manufacturing partners. "They're mainly in the business of defining architectures," says Kathleen Eisenhardt, an engineering professor at Stanford University. "We're talking about a small number of people—maybe ten—that think about how all the pieces go together. [Apple is] more the thinker bees than the worker bees, and that scales a lot better than trying to do everything yourself."

    The result: Apple should be able to continue to boost profits faster than its sales growth, which may keep analysts scrambling for ways to justify higher and higher targets for Apple's share price.   

    "A Solid Start"

    Of course, that's a double-edged sword for investors. Sky-high expectations mean the stock can plummet even on a hint of bad news. Take the iPhone. On July 24, analysts fretted when AT&T (T) said it had activated only 146,000 iPhone accounts in the two days after the product went on sale on June 29. That was well short of projections, which spanned from 300,000 to as high as 700,000.