As is usual, I'm receiving inordinate amounts of Apple Fanboi mails and comments asking me to admit how wrong I was on Apple. Of course, these emails fail to articulate exactly what I was wrong about, or relate to what I was/am right about. Apple is a company with a heretofore unheard of cult following. If its Apple, it can do no wrong, and anyone who disagrees is wrong. Well for investors, that is a dangerous perspective. Apple's share price has been on a tear, but its tearing in an equity market that is devoid of true fundamental market pricing. This, alone, should be enough to give the prudent man (or woman) pause. If that's not enough, there's always the commons sense perspective.
Apple is minting money, that's for sure, but it's minting money based off of a single product. That product has been been totally eclipsed in functionality by its competitors. Those competitors also happen to be Apple's primary vendors and suppliers for that very same product that Apple relies on for ~70% of its profits!!! If that's not a recipe for disappointment, I don't know what it is? This was explained fully in my post The Mobile Computing Wars Are Progressing Exactly As Anticipated - Google Is Killin' Them!!!
In 2010, I said it will probably take up to 8 quarters for the Apple competition to cause earnings misses. I believe that I was the only one to say so, and Apple has missed expectations twice in less than a year. Reporters and armchair analysts (this includes much of the sell side) have blindly swallowed Apple's mesmerizing marketing BS in chanting with the chorus "these misses stem from the unwashed masses waiting with bated breath anticipation for the next, greatest (and already obsolesced by the Android competition) iPhone model to be released). I find this bullshit to be virtually intolerable when reiterated by would be professionals. If you do a Google (or Bing) search for Apple Misses Earnings, you get something like the following:
Apple misses earnings targets, Street reacts • The Register Apple released its earnings report for the third quarter of its 2012 fiscal year, and its numbers came in well below most Wall Street moneymen's projections ...
SHOCK: Apple Misses Earnings After iPhone Sales Come In …The Business Insider Oct 18, 2011 · Apple's just missed earnings estimates for the first time in a really long time. The reason? Lighter than expected iPhone sales dragged the whole sucker ...
Apple Misses on Earnings, Revenue, iPhone Sales, Stock Tanks ...Wall Street Journal Oct 18, 2011 · The mixed-bag earnings season continues. Apple reported third-quarter earnings of $7.05 a share, on revenue of $28.3 billion. Analysts, on average ...
Apple Misses Q4 Earnings Estimates, Blames Excessive Rumors ...Wired News Oct 18, 2011 · For the first time in six years, Apple’s quarterly earnings missed analyst estimates. Apple’s explanation? iPhone sales slowed down as consumers ...
Apple misses earnings. Stock punished in after-hours trading ...Fortune Tech Oct 18, 2011 · Mac and iPad sales set new records, but iPhone sales disappoint Apple (AAPL) reported disappointing results for its fourth fiscal quarter on Tuesday ...
What did all of these esteemed news outlets have to say? They all towed the Apple damage control investor relations line, "iPhone sales fell short of expectations due to customers waiting for the next generation of the iPhone!" Did any analyst or reporter or even blogger bother to sit down and ponder the veracity of said statement?
Just for the record, this is what BoomBustBlog headlines looked like: Apple Once Again Surprises The Unsurprisingly Inept Analyst Estimates: When Will Investors Catch On To The Earnings Management Game? Those interested in learning more about Apple's earnings management practices should click said link. In regards to the misses, the headline (predictive) went like this Reggie Middleton Wasn't the ONLY Openly Apple Bear in the ...
Apple has been pushing the iPhone out since early 2007. It became a hit by 2008, and started dominating the smart phone market by 2009. It had mucho demand and became the sole product pushing Apple's out-sized earnings. Since 2007, Apple has released a new iteration every year, and this annual release was no surprise. By 2010, Android functionality caught up to and surpassed that of the iPhone - even as Android's market share eclipsed that of the iPhone (today Android stands at ~62% global market share and its still growing like a weed). Despite all of this, there were no earnings misses due to this so-called "iPhone release expectation effect" (IREE) in the years 2007, 2008, 2009 nor 2010! Why is that? It's because there is no IREE! Apple missed expectations because observers seem to be totally oblivious to the fact that Android has not captured WAY over half the market, and is growing like gangbusters against a macro backdrop that sees LESS disposable income for shiny toys like the iPhone - not more! Notice how the IREE effect only occurred after Android captured majority market share???
Again. No miss due to IREE in 2008, 2009 or 2010 despite telegraphed and obvious upgrade cycles, yet there were TWO BIG misses in the year spanning 2011 to 2012, the same time period that Google took more than half the pie. Why has noone bothered to espouse such? Because if Apple says it so, it simply must be so!
The following is a comment from a fellow BoomBustBlogger:
A lot of people consider your articles panning apple to be hot air. I think you are right... its just the stock market has not yet figured out what is going on. My understanding is that the markets believe this entire missing earnings is about apple customers waiting for the new release so everyone expects that apple will have a stellar quarter after the new product launches. What if thats not the case and the revenue misses are actually prospective customers switching to the android ecosystem??? Thats what the stats are saying...
So where is apples growth going to come from... overseas.. really?? Lets analyze. A smartphone like iphone is not a necessity, its either a comfort or a luxury. To buy one, you have to be able to afford it. Check out wikipedia for the per capita income across countries. I state that iphone at the current prices can compete with android only in Canada, US, Mainland Europe, Scandinavia, Aus and the oil rich states in the middle east. ROW will simply not see large scale adoption of iphone / ipad as the vast majority lack sufficient disposable income.
You have stated that apple is losing ground in the western markets too. I see a wildcard that might accelerate this - a crash in europe. A monetary union without a fiscal union is unsustainable. Its a question of when rather that if one of the PIIGS defaults. Mostly financial institutions buy sovereign debt so US / EU banks should be exposed and there should be contagion. So there just might be less disposable income in the US to fill up apples coffers in the coming quarters.
Let me state I am not a fanboy for either side. I think competition is good and will give consumers better products at even better prices. I dont own a smart phone. I work for a fortune 500 company who has provided me with a regular corporate cell ( sprint) and a laptop. I recently bought a Nexus 7 to server as a pda + journal. And yes, you were right about the add on effect for google. After getting the nexus 7, ive cancelled vonage and use google voice, Ive started using google drive and google docs, gmail( had yahoo since 2002), google finance and blogger. I'm also impressed with offline maps in google maps and the navigation options it has. All these services just seem to work seamlessly on my nexus. I just might switch over completely to gmail!
Let's go over some additional marketing mantra turned unassailable dogma from the marketing muscle machine known as Apple...
Then there's the group who say, but you said Apple's tablet margins will slip (which they have) and their market share in tablets and phones will slip (which both have), but you are wrong because.... Well, look at their share price! In this market, do you really believe that share price is truly indicative of likely future fundamental performance? I have engaged in this price spike argument for the followiing situations as well (keep in mind that securities prices in the short run don't mean everything and all of these situations had price spikes, some lasting years, ex. housing bubble):
- The housing market crash in the spring of 2006 and publicly in September of 2007: Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
- Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
- The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008
- The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner filed bankruptcy] in particular (November 2007):
- The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
- The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
- The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
- The overvaluation of Goldman Sachs from June 2008 to present): “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look”, “When the Patina Fades… The Rise and Fall of Goldman Sachs???“andReggie Middleton vs Goldman Sachs, Round 2)
- The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
- Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!I
Despte all of this, Apple's share price has actually performed about where my research has anticipated. This is an excerpt from a post made last quarter...
For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of Apple Margin & Valuation Note) and the price of Apple today (click here to subscribe). I also urge the same for Google using our latest Google Q1-2012 Valuation Summary.
It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth ******* in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters.
Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.
What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.
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