Leading analysts believe iPod holds the key to Apple's fortunes in 2005.

Goldman Sachs analyst David Bailey estimates that iPod will contribute 32 per cent of Apple's revenue and 26 per cent of its gross profit this quarter.

Much of this optimism is rooted in iPod sales translating into Macs sales – the so-called "halo effect". Thanks to iPod, Apple saw its share price triple in 2004.

The Street.com reports Jacob Internet Fund's Ryan Jacob as saying that "the wild card is how well will iPod sales translate into computer sales".

Top analyst Charles Wolf is not confident that there will be a massive "switching" of Windows users to the Mac platform – he cites the cost and difficulty of switching platforms, but adds: "Apple's leadership in software applications that manage digital content could translate into a much higher switching rate than we're forecasting and, in turn, a much higher valuation."

More than iPod
Not all of Apple's success in 2004 was based on iPod. Goldman's David Bailey said: "Apple has dramatically improved several of its balance-sheet items, specifically its cash-conversion cycle and inventory, to levels that rival industry leader Dell.

"At the same time strong revenue growth should unlock Apple's operating leverage in fiscal 2005 and 2006, even as the company increases spending on R&D and its retail outlets."

But Bailey doesn't believe now is the time to move money into the company. He writes: "Apple's premium valuation is well deserved in our view, but does not leave enough room to justify new money entering the name at this point."