Friday, 26 October 2012 09:20

After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years Featured

Since I have released so much opinion and analysis on Apple over the last few weeks, I can keep this post short, sweet and to the point. Apple missed earnings expectations yesterday, exactly as I anticipated and expressed to readers and subscribers. This is the third miss by Apple that I called. What makes the call so interesting is that it's actually quite an obvious call and doesn't deserve much credit. That's the point! Despite the obvious evidence that Apple is following in the footprints of Research in Motion and the Blackberry, Apple is still held (and actively bought) by every hedge fund, arm chair investor, cab driver and his grand aunt's cousin's dog walker!!! Remember Research in Motion, they had very strong static fundamentals and everybody used Blackberriers (even the newly elected President who was addicted to his "Crackberry") when I first suggested my subscribers short them in early 2010 as well, reference the following:

  1. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  2. RIM Smart Phone Market Share, RIP?

If you go through all three of the posts above, you will see an iconic example of Apple and the iPhone, declining market share, ever so slight pressure on margins amid tense competition, but bulging fundamental performance and a strong brand following. Just two years later RIMM is a single digit stock. Why? Management refused to do what Microsoft is doing now (reference Microsoft Is Doing What The "Has Been Giants Of Yesteryear" Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE!). Pooh pooh MSFT if you wish, they were one of the only recent tech companies to successully remain dominant and relevant through a tech paradigm shift. As this next paradigm shift approaches, you'd be a fool to discount and dismiss that company out of hand! RIM simply refused to accept the fact that the market demanded a larger, touch-centric screen with ample multimedia capabilities. To date, they still don't have a credible offering - THREE years later.

Well, with the advent of the iPhone 5 it appears as if Apple doesn't understand that the market demands bigger, higher res screens either. Despite the fact that the iPhone is responsible for ~70% of Apple's profits, it's offering its flagship with last year's Android tech while its competitors are innovating like bananas, offering 5.5 inch screens and 1080p resolutions with 32 hour battery lives! Both RIMM and Apple are refusing to slash their own margins, and rather would ride those fat margins out along their natural lives. The problem with this mentality - as RIMM investors can attest, is that if you don't cut your margins, your competitors will happily do it for you! Ask Samsung and Google if I'm joking... 

I have been most accurate in tracking Apple over the last couple of years, as I have been with Google and RIMM (and from a tertiary perspective, MSFT) - the only tech companies that I have analyzed since the great crash. I'm more well known as a banking/finance/global macro/real estate guy, but my success in tech is comparable.

aapl research accuracy copy

The latest Apple valuation bands (including the advanced pessimistic bands) can be accessed by paying subscribers below (click here to subscribe):

This most recent miss is more telling than most considering Apple management's extreme earnings expectation management (subscribers see file iconApple Earnings Guidance Analysis 08/12/2010, non-subscribers reference “How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue“).

Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it was quite obvious that Apple would deliver a miss this quarter in its battle with the Android! The following is the reason why - Margin Compression

Key take aways from this quarter:

iPad sales came in low

This is a trend, not an excusable one time event as Tim Cook attempt to assert, blaming it on "expectations". See the excerpts from our subscriber docs below.

apple product chart growth

Apple 2Q2012 results analysis Final - redacted Page 2

Enterprise-wide margins came in lower than expected and lower than last quarter!

I discussed this in detail with Lauren Lyster on Capital Account. The margin discussion started at 7:55.

See how my subscribers read about the situation in detail two quarters ago!

Apple 2Q2012 results analysis Final - redacted Page 1

 

Apple 2Q2012 results analysis Final - redacted Page 3

Apple 2Q2012 results analysis Final Page 4

For those who haven't heard my description of Apple's arch competitor, Google's, business model, look here:

See Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money! for more on the mechanics of the margin compression theory for Apple.

In short, nearly 70% of profits concentrated in one, single product - the iPhone 4/5, whcih is so far behind the Samsung Galaxy Note 2 and S3 (roughly two years behind) that the only real sales they will get will come from extreme brand loyalty or from those who have never tried the Samsung and other competing Android products. The earnings diversification route taken was the massively successful iPad, which is already succumbing to massive margin compression AND is losing market share to superior tech at lower prices at the same time. For the first time since the iPod was released, Apple is playing catchup to Google et. al., by releasing a smaller tablet - after the fact. A tablet that, upon launch, will already be obsolesced and under priced by the competition. While these tactics may permit Apple to grow at impressive rates, basically they will start to simply cannibalize their existing user base and many new users will opt for the best and the newest tech. Just ask Research in Motion!!!

Apple may feel "Blackberried" or "RIMM"ed sooner than expected.

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Last modified on Friday, 26 October 2012 10:50

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