Subscribers can expect fresh banking research to be released this weekend. In the meantime, CNBC reports that our (lone) bullish outlook on Google is on point: Google Earnings Blow Past Expectations; Shares Surge 13 Oct 2011

Google earnings and revenue blew past expectations, sending its shares sharply higher in after-hours trading.

Google shares finished the day at $558.99 and jumped more than 5 percent after-hours. 

"Christmas came early for Google shareholders," said Colin Gillis, an analyst at BGC Partners. "It was a great beat on the bottom line. It's not necessarily because they are controlling expenses. It's because they are driving more revenue," he said.

This driving of revenue is not inclusive of several multi-billion dollar start-up ventures that Google appears to be successfully nursing to the point of generating earnings. We are very, very optimistic about the Android initiative, which in three short years has become the dominant mobile OS in the world, up from virtually nothing (see below). Their expanding cloud services now offer a credible challenge in the enterprise SaaS space, actually winning large municipal and corporate accounts from Microsoft's Exchange Server. Display ad revenues are expanding rapidly as is their core bread and butter search ads (which they are wisely, aggressively and relatively rapidly diversifying away from).

The technology company reported earnings excluding items of $9.72 a share, up from from $7.64 per share a year ago. Net income rose to $2.73 billion from $2.17 billion. Net revenue, which excludes fees that Google shares with partner websites, increased 37 percent to $7.51 billion from $5.48 billion last year.

Analysts had expected Google to post earnings of $8.74 per share on net revenue of $7.22 billion.

Again, a total misunderstanding of how this company operates and the massive value embedded within in the form of a series of implicit, premium free call options.

"A lot of people were expecting spending to be out of control, but they had good control," said Herman Leung, an analyst with Susquehanna Financial Group.

That's because they couldn't differentiate between spending and investing. The investments are paying off quite handsomely, both in a vaccuum and in comparison to historical results, and the company has kicked investment into overdrive. If a similar ROI can be achieved over the next year or two, this company will be minting value and owning even more spaces in the Web, the Cloud, social media, advertising and mobile computing.

Google said they're getting a good  response to their Google Plus social-networking site, which just passed the 40-million user mark.

By far and large, the only credible extant threat to Facebook (see Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!).

Aggregate paid clicks, which come from ads on Google sites and its AdSense partners, rose 28 percent from a year earlier and the average cost-per-click increased 5 percent from a year earlier. Though, cost-per-click was down sequentially by 5 percent from the second quarter.

"The digital economy is still strong. Google is capturing all the economics from this and we are moving into the sweet spot when investors want to own Google," Gillis said.

And to think, this is the core revenue driver that the skeptics feared Google would lose control of, and be subject to excessive competition.

As excerpted from my diatriabe illustrating Google's performance from the 2nd quarter: Did A Blog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepeneur & Less Like A Wall Street Analyst July 19th, 2011

First of all, congratulations to all BoomBustBlog subscribers that have recieved windfall profits on their researched Google positions for the second time in less than a calendar year. Google traded down to a 4 handle as recently as a couple of weeks ago and the January 880 calls (which I kept in inventory) were trading as cheap as 5 cents each. As I type this, those same options last traded at $1.40 each (now down to 1.05)- that's a 21x-26x return! 

Google's latest quarterly results should lead many - if not most - to believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research. For previous examples (a lot of them), reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

It is now well known that Google has once again knocked the ball out of park with their performance. Those who follow my blog know that I have been bullish on Google since the spring/summer of last year, with signfiicant profits being taken along the way. Many on the Street have turned rather negative on Google despite some of the most positive results and promising actions of its history, and in the industry! Why is that? How did I see so much value in Google while the Street was remiss, only to be taken totally and utterly by surprise? Let's take a historical traipse of my take on Google, but first we peruse the "short term-ities", looking forward only three months at at time mentality of Wall Street to ascertain why only Reggie Middleton's BoomBustBlog screamed on the The Gross Misvaluation of Google. [Subscribers, please follow along with the subscription documents - Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).]

....

Has Google given investors a reason to believe in Page's diatribe?

Reference the BoomBustBlog post, A Realistic Look At The Success Of Google's Investment History

As promised, I am presenting historical justification of the logic behind my call of absurdity in the drastic drop in share price after Google announces a redoubled effort in investment and marketing of its nascent businesses. I went into the logic in detail via our Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

To begin with, Google apparently realized early on that it could better realize returns by investing shareholder capital through acquisitions. It has actually been quite acquisitive, making 88 purchases over the last 13 year. Last year was Google's most acquisitive year, ever!

While many of the referenced acquisitions have been to bolster existing products, several have literally become home runs - rising to the top of their respective categories and even threatening to go farther in that hey have the distinct potential to creatively destroy the status quo of several multi-billion dollar industries. Let's walk through a sampling.

Doubleclick + Youtube + Google TV (organically grown)

This combination is probably the closest thing to a direct replacement for TV as we know it. Even if Google TV does not succeed, YouTube is currently the most watched video site, by far and Doubleclick (for monetization, along with adsense style ads) is the 2nd largest display ad entity. Again, the potential to reconfigure the TV industry. Google is already seed funding original content and cutting licensing (streaming rental) deals with the large established studios. The ability to threaten TV as we know it was purchased for just over $1 billion. A pretty good investment, no? Would the NY Times parent co., Fox, Disney, NBC/Universal have considered this a wise purchase?

Admob and Android

For a mere $250 million (plus ongoing support and development costs and investments), Google now commands the largest global footprint of mobile phone OS, the fastest global mobile phone OS growth rate, the largest (by a very, very wide margin) mobile ad presence, and inarguably the most disruptive force in mobile computing. What tech, media, telecomm or strategic investment company would NOT by the Android/Admob combo now for 10xor eve 15x what Google paid for it? Microsoft, Nokia, Apple, Samsung, LG, RIM, Oracle, IBM, HP, anyone???

The list of strategic acquisitions that have paid off in spades goes on, as well as the requisite flops that go along with a high volume strategy.

So, assuming that Google has done a good job at spending its shareholder's money and sprouting several billion dollar businesses to assist in the diversification away from pure web search advertising - and realizing that last year was Google's most acquisitive to date, and realizing that Google is dumping more money into research, marketing, headcount and acquisitions now than in any time in its existence (including last year), should you be bullish on the stock? Three or four more Androids, YouTubes, Admobs and Doubleclicks to disruptively take over 5 or six more multi-billion dollar industries is a reason to lop 15% off of this stocks price (which currently barely accounts for just the search engine potential)???

As excerpted from Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google:

For the quarter ended March 31, 2011 Google reported gross revenues (before traffic acquisition costs) of $8.58bn, an YoY increase of 26.6% and QoQ increase of 1.6% while net revenues (after traffic acquisition costs) increased 29.1% YoY and by 2.6% sequentially to $6.54bn. The YoY growth in gross and net revenues was the highest at least since 2008 demonstrating a increasingly momentum in the growth of Google’s digital ecosystem. The increase in net revenues (after TAC) was actually stronger than the increase in gross revenues, indicating that Google has not only packed in growth but lowered aggregate top line expenses.

 However, despite a strong set of results the stock took a severe beating and was down c8% as the results were short of analyst expectations. The market’s reaction to Google’s numbers clearly reflects the very myopic view of US public markets wherein a stock is dumped if it fails to beat consensus – even when this view clearly overlooks the broader picture.

Google’s adjusted earnings came in at $8.08 a share below the $8.17 expected by the markets. However, a closer look at the results reveals that the perceived shortcoming was not a result of a revenue miss or margin compression but on account of Google’s entrepreneurial (and quite applaudable – at least from this investor’s perspective) endeavor to invest heavily in future projects. The miss was principally due to higher research and development expenses as the company continues to invest in new emerging businesses like Display, Mobile and Enterprise. Research and development expenses (including stock based compensation expenses) grew 50% YoY to $1.2bn and was 14.3% of gross revenues in Q1 2011 vs. 12.5% in Q4 and 12.1% in Q1 2O10. Had research and development expenses at 12.5% of gross revenues, the earnings would have been $8.51 per share, a clear beat to consensus and stock would have seen a roller coaster ride – despite the fact that future prospects would have been a fraction of that they are now due to lower investment in the future. Google has proven that their investments yield superior returns to that of cash holdings, ex. Youtube, Android, Admob, Google Voice, Teracent, etc. Instead, the stock was pushed down 8% as the shorter term players in the market reacted. Players such as sell side analysts whose employers benefit from the shorter horizon churning of stocks vs. a longer horizon and outlook, and traders who act on price movement and not value, were(are) clearly tangled between web of OPEX (ongoing cost for running a product, business, or system) and CAPEX (expenditures creating future benefits).

You see, the Street has become so accustomed to playing the earnings management game with their favored companies that most of them have actually lost the ability to ascetain true value outside of quarterly accounting earnings!

Published in BoomBustBlog

This post is an example of what a little investigative reporting should look like. Let's attempt to recast pop media in the form of a smart ass blog. First, a glimpese of what's in the news today, as the NYT Deal Book column reports: Accounting Change Cuts Groupon’s Revenue

Groupon disclosed a major accounting change on Friday, essentially halving its once-jaw-dropping revenue after it encountered resistance from regulators with its filing to go public.

Groupon, the online coupon titan, announced separately that its chief operating officer of about five months, Margo Georgiadis, had stepped down.

The changes in the revised filing and the executive departure are likely to spur additional questions about Groupon, a much-envied rising star in the constellation of new Internet companies. The company has grown rapidly, but its ability to sustain that growth, the ways it measures growth and the eccentric public persona of its chief executive have come under fire at times.

Despite those criticisms, and the current turmoil in the stock market, Groupon is still aiming to go public next month, people briefed on the matter have said. That offering could value Groupon at more than $15 billion.

The company’s revised filing for an initial public offering also incorporated portions of a memorandum sent to employees by the company’s chief executive, Andrew Mason, that were subsequently leaked to the press. Analysts had questioned whether that letter ran afoul of a mandatory “quiet period” for companies seeking to go public.

The revenue accounting change is Groupon’s second since it filed to go public in May. Early last month, it removed references to an accounting metric that critics said misleadingly showed the company turning a profit.

In its latest filing, Groupon says that it has restated its financial results for the last three years “to correct for an error” in the way it reported revenue. Before, the company reported as revenue all the money it collected from customers, including cash that was later paid out to Groupon’s merchant partners.

Now, Groupon is reporting what it calls “net revenues,” which exclude the retailer payouts.

For example, in a version of the prospectus filed last month, Groupon reported $1.52 billion in revenue for the first six months of the year. In Friday’s filing, that number is now called net revenue and is $688 million. The original $1.52 billion figure is now counted as gross billings.

Groupon’s accounting change is the inverse of what Google did before its own public debut in 2004. The search giant initially excluded cash that was shared with distribution partners in its revenue figures. It later changed its revenue to include those payouts.

Groupon: Accounting Shenanigans That Can Make A Leprechaun Blush! - OR - I Told You Not To Trust These Guys!!!

Social networking stocks are the current obsession for Wall Street bankers. Groupon, LinkedIn and Facebook - a trio of Internet darlings, are absorbing market value and could even eclipse the market value of internet gaint Google. There are also host of other internet startups including Pandora (a music streaming service), HomeAway (online vacation-rentals company) Zynga and PopCap (social gaming sites) that are planning to test their fortunes at Wall Street. After LinkedIn which debuted as one the most expensive IPO (yet one of the most successful) in the American history based on the ratio of its market value to its yearly sales, Groupon has filed its IPO filings to test the market appetite for internet start-ups.c

In our June blog post and forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?we contend that the company’s revenues were not an appropriate measure to compare with its peers for valuation purpose as the company was overstating its revenues in its books of accounts as the revenue from Groupon were on gross basis while the appropriate comparable measure was gross profit which was the amount the company retained after paying its subscribers. Our contention was valuing the company on price-to-sales and looking at the “hyper” sales growth would make valuation look overly optimistic; besides other investment theses that were highlighted – falling revenue per subscribers, slowing growth rate, the flawed business model and competitive pressures, investors disconnect between value and risk, and of course the valuation.

Abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

image037

In the latest S-1 registration statement, the company has revised its revenue figures by more than half. The company has restated its 2010 revenues from $713m to $313m while Q1-11 revenues were restated to $296m from $645m previously. The company has restated its financial results “to correct for an error” in the way it reported revenue. The revenue accounting change is Groupon’s second since it filed to go public. The company has also changed the presentation of certain expenses to be consistent with reporting revenue. Clearly, such errors and frequent change in the accounting policies clearly puts strain on the credibility of management – and that’s putting it lighlty, especially for a company that is contemplating an IPO, not to mention that such changes are top line numbers such as revenues. In another blow to Groupon, the company’s COO Margo Georgiadis is leaving the firm to join back Google.

BoomBustBlog subscribers (click here to subscribe) who are being pitched this IPO by their all so trustworthy bankers and brokers should feel free to download our update to the Groupon piece File Icon Groupon Revenue Restated, and don't forget to show a copy to those who are all so trustworthy. Speaking of the "Oh so trustworthy", my next post will DROP THE BOMB  on said industry as the guy with a pretty good track record in calling bank failure updates the post The Next Step in the Bank Implosion Cycle! Oh, those Name Brand Banks are going to get bashed as BoomBustBloggers get enriched!

Published in BoomBustBlog

research-in-motion-headquartersI believe I was one of the earliest bears on Research in Motion, and the thesis still bears fruit - although a tad more bittersweet than the average Blackberry. On Monday, 25 July 2011 I wrote As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over, with the RIM bear position throwing off plenty of alpha. Today Bloomberg reports RIM Drops as Investors Disappointed With Earnings Report for Third Quarter:

Research In Motion Ltd. (RIMM), struggling to compete against Apple Inc. (AAPL)’s iPhone and iPad, plunged in extended trading yesterday after its earnings report disappointed investors for the third consecutive quarter.

Interestingly the first statement in this article is patently false. Not only does the data disprove it, but the articles own assertions disprove it as well. It goes further proving that the pop media appears to have a near permanent "market Apple by all means" mentality. 

Apple has gained about 4 percentage points of market share while Android has literally (and I do mean literally) taken the mobile platform over by both taking pole position as market leader and crushing margins - while simultaneously besting all competitors in growth, combined. What do you think this does to RIM's margins? Reference Google's Android Now Leads In Market Share, Growth Rate and Potential Buyer PreferenceAdding to that Apple's dominance in tablets and RIM's failings in the same, and well... Back to the article....

 “Credibility sinks further,” said Mike Abramsky, an analyst with RBC Capital Markets in Toronto, who rates RIM “sector perform.”

Profit, excluding some costs, fell to 80 cents a share, RIM said yesterday in a statement. Analysts predicted 88 cents, according to a Bloomberg survey. Revenue fell to $4.17 billion in the three months through Aug. 27, compared with the average estimate of $4.47 billion.

The company’s PlayBook is struggling to gain ground against the iPad, with the Apple Inc. device outshipping the RIM tablet 46 to 1 in the latest quarter. A range of new BlackBerrys with more advanced touch-screen features, RIM’s first new models in a year, have to lure customers away from Apple’s iPhone and others running Google Inc. (GOOG)’s Android software.

“It’s about growing the footprint and that’s where I think they’ve got problems,” said Mark McKechnie, a ThinkEquity LLC analyst in San Francisco who has a “hold” rating on RIM. The new versions of the BlackBerry Bold and Torch “are not really gathering new users,” he said.

RIM, based in Waterloo, Ontario, fell as much as $5.75, or 19 percent, to $23.79 in extended trading after closing yesterday at $29.54 on the Nasdaq Stock Market. The stock dropped 49 percent this year at yesterday’s close of regular trading.

Disappointing Shipments

The company shipped about 200,000 PlayBooks, compared with the average estimate of 490,000 units. Analysts have cut estimates for full-year PlayBook sales to an average of 2.2 million. In its last quarter Apple shipped 9.25 million iPads.

RIM shipped 10.6 million BlackBerrys last quarter. Analysts predicted 11.9 million, according to the average of 10 estimates compiled by Bloomberg.

Co-Chief Executive Officer Jim Balsillie attributed the sluggish shipments to lower-than-expected demand for older devices that have struggled to compete with the iPhone and Android devices such as the Samsung Galaxy. He also said on a conference call yesterday that RIM’s latest handsets, which run on a new BlackBerry 7 operating system, are “having an excellent reception.”

Co-CEO Mike Lazaridis said RIM will issue a software upgrade for the PlayBook next month that will include dedicated e-mail, contacts and calendar programs, as well as software to allow the PlayBook to run Android applications. RIM drew criticism for introducing the PlayBook in April without e-mail and a shortage of apps like Netflix Inc. (NFLX) movies.

Lazaridis also said prototypes of phones built on a new QNX operating system that already underpins the PlayBook will be available “in the not-too-distant future” and that he will give more details at a conference in San Francisco next month.

“RIM is still going to have a challenging next few months until the QNX products are out and the Android app products are available,” said Alkesh Shah, an analyst at Evercore Partners. “The transition probably doesn’t finish until sometime mid to late 2012.”

RIM forecast third-quarter revenue of $5.3 billion to $5.6 billion and shipments of between 13.5 million and 14.5 million BlackBerrys. Earnings excluding charges related to job cuts will be in the range of $1.20 to $1.40.

Analysts estimated sales of $5.3 billion, 13.8 million units shipped and earnings per share of $1.38.

RIM also said that earnings for the year, excluding some costs, would be at the low end of its previous forecast of $5.25 to $6 a share.

...RIM’s share of the global smartphone market dropped to 12 percent in the second quarter from 19 percent a year earlier, according to Gartner Inc. In the same period, Apple climbed to 18 percent from 14 percent, and Google’s Android, used in phones from Samsung Electronics Co. and Motorola Mobility Holdings Inc., rose to 43 percent. Net income fell 59 percent to $329 million, or 63 cents a share, from $797 million, or $1.46, a year earlier.

 Zerohedge, never failing to add some humor to the situation adds...

Like any good sequel, RIMM's earnings tonight did not disappoint (those looking for a disaster flick). Expectations were high (low), but we all suspected that it might not quite live up to the pre-quel, same actors and three months later. Well the reviews are in and RIMMberrr II is a winner (major loser) -18.5% (beating - to the downside - the measly -14.5% initial reaction in the prior release).

EPIC headlines include:

*RESEARCH IN MOTION 2Q OPER EPS 80C, EST. 88C            :RIM CN

*RESEARCH IN MOTION SEES YR ADJ. EPS TOWARD LOW END OF VIEW

*RESEARCH IN MOTION 2Q REV. $4.17B, EST. $4.47B         :RIM CN

*RESEARCH IN MOTION 2Q GROSS MARGIN 38.7%               :RIM CN

*RESEARCH IN MOTION 2Q PLAYBOOK TABLET SHIPMENTS 200,000

and the real winners are (drum roll please)...though we note some have been lightening up:

Chart: Bloomberg

 Hmmm... Do you mean to tell me that no one in that table above subscribes to the BoomBust?

Let's try this again: As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over

Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:

    1. BoomBustBlog Research Performs a RIM Job!

    2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

This is a snapshot of RIMM as of the writing of this article...

image002image002

As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.

A 50% drop in price later... On that note, Bloomberg reports: RIM to Cut 2,000 Jobs as BlackBerry Loses Share to IPhone

Research In Motion Ltd., maker of the BlackBerry smartphone, plans to cut 2,000 jobs, or about a tenth of its workforce, as sales slow amid market share losses to Apple Inc.’s iPhone.

The reductions, across all functions, are part of a plan to “focus on areas that offer the highest growth opportunities,” RIM said today in a statement. The job cuts will leave the Waterloo, Ontario-based company with about 17,000 employees.

RIM predicted last month that sales this quarter may drop for the first time in nine years. The company is losing market share in the U.S. to the iPhone and handsets running Google Inc.’s Android software, in part because it hasn’t introduced a major new BlackBerry model since August. Cheaper Google phones are also making inroads in Latin America, Asia and Europe, threatening the popularity of less expensive BlackBerry models like the Curve.

... RIM fell 85 cents, or 3.1 percent, to $27.06 at 10:26 a.m. New York time in Nasdaq Stock Market trading. The stock had dropped 52 percent this year before today.

Notice, the same error being made in granting the cause of RIM's problems to Apple instead of its empirical cause....
The headline grossly mischaracterizes RIM's problems. Google's Android has, by far, inflicted much more damage to RIM than Apple ever has. This was easily seen over 13 months ago, at least by BoomBust Bloggers, referencing BoomBustBlog Research Performs a RIM Job!...

Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional or File Icon RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....

As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document File Icon Smartphone Market Model – Blog Download Version:

As you can see above, for the full year of 2010 RIM has trailed smartphone market penetration growth and that trail has increased each and every quarter with the rate of decent rapidly increasing.

RIM’s share price has benefited from an increasing equity market as well as the announcement of new products. The Torch, although possessive of redeeming new qualities, is essentially still a generation behind Apple and 1.5 generations behind Android. See RIM Smart Phone Market Share, RIP?

Research in Motion is following the EXACT path we at BoomBustBlog had laid out for it since the 3rd quarter of 2010.

More on Research in Motion from the BoomBust! 

  1. Research in Motion Drops 10% After Hours, Precisely As We Warned Two Months Ago - MARGIN COMPRESSION!!!
Published in BoomBustBlog

rimm.goog.aapl

Apple reported blowout numbers and a record quarter yesterday. Not one, that's right, not one Wall Street analyst got it right! As a matter of fact, not only did no one get it right, they were all wrong to the downside - every single one! Doesn't that sound fishy after 11 previous quarters of analysts missing the mark to the downside? In a descriptive post yesterday, I detailed how I beat the street on Google's earnings, step-by-step by "thinking more like an entrepeneur and less like a Wall Street analyst".  In said missive, not only did I illustrate in relatively fine detail how the Street totally missed the massive value that Google is building, I also outlined in similar detail the voluntary game that the Street is playing with Apple and earnings guidance. Yes, it's a game, and an obvious one at that. Despite being so obvious, retail investors and institutions alike are playing along. Let me excerpt a few choice lines from said post:

 

Since I started covering mobile technology on BoomBustBlog, things have pretty much occurred precsiely as we anticipated - with Google, Microsoft, and Research and Motion (a 6x to 7x gain on select puts) following their prescribed paths...

Next up is Apple, whom we predicted our analysis would reach frutition in the 4 to 6 quarters. Apple reports today, and we fully suspect a blow quarter that (again, just like the last 12 quarters) surprise the unsurprisingly inept analyst estimates that somehow could not get it right for nearly 2 years straight see above). We also expect indications of our margin compression thesis to start peeping their little eyes out of the footnotes, of course to be totally ignored by the cheerleading sell side of Wall Street and pop tech and financial media, as the Apple lovefest marches on.

Hmmm! That was awfully prescient wasn't it? No! It wasn't. It was simply blatantly honest. Here is a further excerpt from a previous post describes in complete detailt the Analyst/Apple earnings game...

Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document File Icon Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: .

Page 16 of the aforementioned document (which was released several months ago) pegged an uncannily accurate estimate of iPhone sales at 77 million for the year. Being that Apple sold ~20.3 million for the most recent quarter and said quarter was a company record, I think it's fair to say that we have a realistic grasp on Apple.

I syndicate my free content to several other sites, the vast majority of which are rife with Apple fanatics. These fanatics are literally incapable of parsing the logic of the preceding statement and the leading paragraph to this post. I have been more optimistic on Apple's nearer term accounting numbers than virtually the entire sell side, and have been proven accurate. As a matter of fact, this is actually a null feat that is absolutely nothing to brag or boast about since you simply have to look at the history of Apple's performance, guidance and analyst forecasts to see a needlessly consistent trend of error on the part of the sell side. Honestly, an elementary school student could have figured it out. I have also been correct on the underperformance and overvaluation of RIMM and the undervaluation and over performance of Google. Again, not a feat of superior intellect, but a much more mundane accomplishment of following the facts without bias and not having ulterior motives in producing analysis. In this case, an elementary school student may not have been able to do it, but I'm damn sure an astute high schooler could piece it together. In closing I will repost (for the 4th time) the earnings guidance snippet and challenge readers to possibility that we may have a very valid point.

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: File Icon Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

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 is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why...

Published in BoomBustBlog

First of all, congratulations to all BoomBustBlog subscribers that have recieved windfall profits on their researched Google positions for the second time in less than a calendar year. Google traded down to a 4 handle as recently as a couple of weeks ago and the January 880 calls (which I kept in inventory) were trading as cheap as 5 cents each. As I type this, those same options last traded at $1.40 each (now down to 1.05)- that's a 21x-26x return! 

Google's latest quarterly results should lead many - if not most - to believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research. For previous examples (a lot of them), reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

It is now well known that Google has once again knocked the ball out of park with their performance. Those who follow my blog know that I have been bullish on Google since the spring/summer of last year, with signfiicant profits being taken along the way. Many on the Street have turned rather negative on Google despite some of the most positive results and promising actions of its history, and in the industry! Why is that? How did I see so much value in Google while the Street was remiss, only to be taken totally and utterly by surprise? Let's take a historical traipse of my take on Google, but first we peruse the "short term-ities", looking forward only three months at at time mentality of Wall Street to ascertain why only Reggie Middleton's BoomBustBlog screamed on the The Gross Misvaluation of Google. [Subscribers, please follow along with the subscription documents - Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).]

Larry Page did an excellent job on his first full debut performance as Google's new CEO during the conference call. One of his most important accomplishments? Convince the Wall Street crowd to realistically look at value creation and look away from short term, quarterly this-and-that-itis. A true high growth company is willing to sacrifice some margin to grow the business. This is Page on one of the most recent ventures, Google+:

I see more opportunities for Google today than ever before, because, believe it or not, we are still in the very early stages of what we want to do. Even in search, which we have been working on for 12 years, there has never been more important changes to make. They said there is no money to be made in search over and above a bit of banner advertising. Most new Internet businesses have had that same criticism. Fast-forward to today. It feels like we are watching the same movie again in slow motion. We have tremendous new businesses being viewed as crazy — Android. And actually have a new metric to report in Android of 550,000 phones activated a day. That is a huge number, even by Google’s standards. Chrome is the fastest growing browser. We have over 160 million users. Now people rightly ask, how will we monetize these businesses? Of course, I understand the need to balance the short-term with the longer-term needs, because our revenues and growth serve as the engine that funds our innovation. But our emerging high usage products can generate huge new businesses for Google in the long run, just like search. And we have tons of experience monetizing successful products over time. Well-run technology businesses with tremendous consumer usage make a lot of money over the long term.

Google+ is most likely a game changer and definitely has hurt those Goldman clients who allowed the Squid to convince them to fork over all of that money in a private offering, ex. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned! (more on that in a post later on today).

Google is a very aggressive Internet investment company who just so happens to operate its investments. Thus, it is a strategic acquirer. The problem with that, and the reason that there was a "Gross Misvaluation of Google" is that the Street cannot fully appreciate strategic investment when their entire world is measured 3 months at a time!!! In reference to aggressive investment, Page said:

Overall, we are focused on long-term, absolute profit and growth, as we have always been. And I will continue the tight financial management we have had in the last two years, even as we are making significant investments in our future. I would like to finish on our people. Great companies are no greater than the efforts and ingenuity of their people. We are continuing to hire the best. Keeping them happy and well-rewarded is crucial to our future. Many of you will be interested in hiring, whether we hired a few hundred more or less than you expected this quarter. But we will optimize headcount for the long term and the opportunities we see. It’s easy to focus on things that we do that are speculative, e.g., driverless cars. But we spend the vast majority of our resources on the core products. We may have a few small speculative projects happening at any given time, but we are very careful stewards of shareholder money. We are not betting the farm on this stuff.

Has Google given investors a reason to believe in Page's diatribe?

Reference the BoomBustBlog post, A Realistic Look At The Success Of Google's Investment History

As promised, I am presenting historical justification of the logic behind my call of absurdity in the drastic drop in share price after Google announces a redoubled effort in investment and marketing of its nascent businesses. I went into the logic in detail via our Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

To begin with, Google apparently realized early on that it could better realize returns by investing shareholder capital through acquisitions. It has actually been quite acquisitive, making 88 purchases over the last 13 year. Last year was Google's most acquisitive year, ever!

While many of the referenced acquisitions have been to bolster existing products, several have literally become home runs - rising to the top of their respective categories and even threatening to go farther in that hey have the distinct potential to creatively destroy the status quo of several multi-billion dollar industries. Let's walk through a sampling.

Doubleclick + Youtube + Google TV (organically grown)

This combination is probably the closest thing to a direct replacement for TV as we know it. Even if Google TV does not succeed, YouTube is currently the most watched video site, by far and Doubleclick (for monetization, along with adsense style ads) is the 2nd largest display ad entity. Again, the potential to reconfigure the TV industry. Google is already seed funding original content and cutting licensing (streaming rental) deals with the large established studios. The ability to threaten TV as we know it was purchased for just over $1 billion. A pretty good investment, no? Would the NY Times parent co., Fox, Disney, NBC/Universal have considered this a wise purchase?

Admob and Android

For a mere $250 million (plus ongoing support and development costs and investments), Google now commands the largest global footprint of mobile phone OS, the fastest global mobile phone OS growth rate, the largest (by a very, very wide margin) mobile ad presence, and inarguably the most disruptive force in mobile computing. What tech, media, telecomm or strategic investment company would NOT by the Android/Admob combo now for 10xor eve 15x what Google paid for it? Microsoft, Nokia, Apple, Samsung, LG, RIM, Oracle, IBM, HP, anyone???

The list of strategic acquisitions that have paid off in spades goes on, as well as the requisite flops that go along with a high volume strategy.

So, assuming that Google has done a good job at spending its shareholder's money and sprouting several billion dollar businesses to assist in the diversification away from pure web search advertising - and realizing that last year was Google's most acquisitive to date, and realizing that Google is dumping more money into research, marketing, headcount and acquisitions now than in any time in its existence (including last year), should you be bullish on the stock? Three or four more Androids, YouTubes, Admobs and Doubleclicks to disruptively take over 5 or six more multi-billion dollar industries is a reason to lop 15% off of this stocks price (which currently barely accounts for just the search engine potential)???

As excerpted from Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google:

For the quarter ended March 31, 2011 Google reported gross revenues (before traffic acquisition costs) of $8.58bn, an YoY increase of 26.6% and QoQ increase of 1.6% while net revenues (after traffic acquisition costs) increased 29.1% YoY and by 2.6% sequentially to $6.54bn. The YoY growth in gross and net revenues was the highest at least since 2008 demonstrating a increasingly momentum in the growth of Google’s digital ecosystem. The increase in net revenues (after TAC) was actually stronger than the increase in gross revenues, indicating that Google has not only packed in growth but lowered aggregate top line expenses.

 However, despite a strong set of results the stock took a severe beating and was down c8% as the results were short of analyst expectations. The market’s reaction to Google’s numbers clearly reflects the very myopic view of US public markets wherein a stock is dumped if it fails to beat consensus – even when this view clearly overlooks the broader picture.

Google’s adjusted earnings came in at $8.08 a share below the $8.17 expected by the markets. However, a closer look at the results reveals that the perceived shortcoming was not a result of a revenue miss or margin compression but on account of Google’s entrepreneurial (and quite applaudable – at least from this investor’s perspective) endeavor to invest heavily in future projects. The miss was principally due to higher research and development expenses as the company continues to invest in new emerging businesses like Display, Mobile and Enterprise. Research and development expenses (including stock based compensation expenses) grew 50% YoY to $1.2bn and was 14.3% of gross revenues in Q1 2011 vs. 12.5% in Q4 and 12.1% in Q1 2O10. Had research and development expenses at 12.5% of gross revenues, the earnings would have been $8.51 per share, a clear beat to consensus and stock would have seen a roller coaster ride – despite the fact that future prospects would have been a fraction of that they are now due to lower investment in the future. Google has proven that their investments yield superior returns to that of cash holdings, ex. Youtube, Android, Admob, Google Voice, Teracent, etc. Instead, the stock was pushed down 8% as the shorter term players in the market reacted. Players such as sell side analysts whose employers benefit from the shorter horizon churning of stocks vs. a longer horizon and outlook, and traders who act on price movement and not value, were(are) clearly tangled between web of OPEX (ongoing cost for running a product, business, or system) and CAPEX (expenditures creating future benefits).

You see, the Street has become so accustomed to playing the earnings management game with their favored companies that most of them have actually lost the ability to ascetain true value outside of quarterly accounting earnings! Case in point - Apple's valuation

As excerpted from

Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document File Icon Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: .

No, Google is not in the mobile space for search ads, it's looking to become the next Microsoft with Android as the next Windows. It is thinking big, simultaneously going after both the consumer and the enterprise space with cloud-based software and services - and advertising!

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: File Icon Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

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 is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why...

Of course, this inability of the Street to see the forest for the trees magically stops at the retail and insitutional customer. Once it comes to its own accounts, the Street miraculously start's to agree with Reggie's analysis... Miraculously! Reference: Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client's Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! and read very carefully!

Since I started covering mobile technology on BoomBustBlog, things have pretty much occurred precsiely as we anticipated - with Google, Microsoft, and Research and Motion (a 6x to 7x gain on select puts) following their prescribed paths...

Next up is Apple, whom we predicted our analysis would reach frutition in the 4 to 6 quarters. Apple reports today, and we fully suspect a blow quarter that (again, just like the last 12 quarters) surprise the unsurprisingly inept analyst estimates that somehow could not get it right for nearly 2 years straight see above). We also expect indications of our margin compression thesis to start peeping their little eyes out of the footnotes, of course to be totally ignored by the cheerleading sell side of Wall Street and pop tech and financial media, as the Apple lovefest marches on.

Published in BoomBustBlog

The mobile computing field is growing by leaps while potential casualties are already limping across the battle field before the second round of ammunition has been fired - see Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute! We all know of Apple's spectacular performance, but the media still seems to allow such to overshadow the amazing progress of Android and those entities that have embraced it over the last year or two. Let's take a look...

Google employs the "negative cost" business model through Android where manufacturers and carriers are actually paid to use and sell it after getting it for free (before any customization or special app licensing). The result of such is a very compelling business proposition, a business proposition that (shockingly) many people who would be expected to know better believe does not make anyone money. Well, the carriers seem to make better money on Android than they do  on Apple products - reference AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free? and Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability. If one were to review My Thoughts on Roger McNamee’s View of Google and Mobile Computing, you can see where I am coming from. I answered his comments in detail in the following posts:

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As competition that is as inevitable as gravity itself both validates our contrarian thesis and causes Research in Motion's stock to imitate amateur base jumpers, sans parachute...

From CNBC: RIM Shares Plunge After Firm Lowers Guidance

Research In Motion shares were hammered in after-hours trading Thursday after the BlackBerry maker lowered its earnings and revenue guidance for the first quarter. Shares resumed trading at 4:30 pm ET after being halted for more than 20 minutes. Get after-hour quotes for Research in Motion here.

The company said it expects first-quarter earnings of between $1.30 to $1.37 a share short of analyst expectations of $1.48 a share.

Also, RIM said it sees first quarter revenue slightly below its previous guidance of between $5.2 and $5.6 billion.

RIM blamed the move to weak shipments of its BlackBerry phones and a shift toward handsets with lower price points. The firm has been struggling to compete against Apple's popular iPhone and other rivals of the smartphone market.

From Bloomberg: RIM Plunges as Analysts See Lost Credibility With Forecast Cut

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I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

Here we go...

There's Something Fishy at the House of Morgan

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues went was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

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Verizon inched past estimates, but actually turned lower subscriber growth than AT&T, despite getting the iPhone and AT&T losing the exclusive. Verizon's net gain of post paid subscribers was much larger than that of AT&T's (who aggressively pushed high end Android phones for the first time last quarter) - largely due to the introduction of the iPhone, but the economic advantage of the iPhone in regards to Verizon's business appears to have be significantly overestimated. As a result, AT&T is trading up on the news and Verizon is trading down.

This goes to vindicate my thesis that Google's killer "Less than free" business model is extremely difficult to compete with and is very, very profitable to those who have embraced it - which is now almost everyone. Remember, there is most likely more profit in an Android phone sold (due to Google's revenue sharing model) than there is an iPhone sold, and the iPhone probably engenders more expense to the carrier in terms of data network usage. It doesn't take a genius to determine where the focus of carrier marketing dollars will be focused in the upcoming quarters, not that this real time experiment has produced results.

As reported on CNBC.com

Verizon reported a profit Thursday that topped analyst estimates.

The telecommunications company said it earned 51 cents a share in the first quarter, compared with 16 cents a share in the same period last year.

Revenue edged up slightly to $26.99 billion, from $26.91 billion a year ago.

Equity analysts who follow Verizon had expected earnings of 50 cents on sales of $26.9 billion.

In the company's wireless business, the company added a net 1.8 million subscribers, including 906,000 retail post-paid customers. Earlier this week, rival wireless provider AT&T reported a 2.0 million net gain in wireless subscribers, including 62,000 retail post-paid subscribers.

Shares of the company, which closed regular Wednesday trade at $37.79 were last lower in pre-market trade.

It is very important to note that until reliance on carriers is broken, carriers pretty much make or break handsets due to their connection to the consumer through subsidization. Apple (and I'm sure Google as well) are working on breaking that reliance (as Google tried with the initial Nexus business model, and as Apple is allegedly developing a software SIM), but until then, carriers rule.  It should be quite obvious to most that carriers and vendors alike consider Android to be a goldmine.

See also:

Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Googl

AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free?


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In support of my post, ", as well as "My Thoughts on Roger McNamee’s View of Google and Mobile Computing", I bring you news that "AT&T Earnings Solid Despite Loss of iPhone Rights".  From CNBC:

AT&T posted record first-quarter subscriber growth, despite giving up exclusive US rights to sell the iPhone.

This statement is quite, quite telling. With all of the brouhaha over the iPhone, the quarter that AT&T loses exclusivity was also (coincidentally of course, for since Apple is the best thing in the whole wide world AT&T's record performance was due to the surge in superior iPhone screen protectors for the legacy customers). Realistically, AT&T's results illustrate the power of Google's "significantly cheaper than free" business model as well as demonstrates how accurate I was in challenging Roger McNamee’s View of Google and Mobile Computing. Mr. McNamee said that no one is making money with Android. Samsung, LG, HTC, Motorola, Sprint, T-Mobile, Verizon and AT&T beg to differ. Witness HTC's "no money" on Android:

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