Thursday, 03 November 2011 02:40

Reggie Middleton vs the Squid That Can't Trade!

thumb_image001_copyLearning to fly with tentacles instead of wings may prove difficult for the Squid!

Note: Subscribers can download the GS 3rd quarter review with the updated valuation opinion hereicon Goldman Sachs Q3 update Final (482.35 kB 2011-11-03 03:03:51)

In our Goldman Sachs update note, “Show me how to trade” (August 2011), we challenged Goldman Sachs’ ability to create alpha. Besides Goldman’s apparent lack of skill in generating returns in downward markets, we also presented an analysis on how its share price is driven by momentum (equity markets) instead of the commonly accepted metric of book value. Those who would have followed the traditional school of thought (sell side) by bidding the price up instead of down would have seen their capital erode by 9%; the stock is down 9% since our most recent publication. Below are some of the extracts from our previous note alongside updated charts including Q3 results to peruse before we delve further into the quarterly results the BoomBustBlog way.

Unfortunately, despite the entire start syndrome attached to Goldman Sachs, its prop desk is yet to exhibit the ability to create alpha, let alone match the returns of boombustblog.com. The table in the exhibit shows Goldman Sachs’ trading (under) performance vis-à-vis S&P

Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarter

‘Goldman Sachs’ share price is driven less by book value per share and is driven more by momentum (multiple)”

image001_copy_copy

image008

With Goldman Sachs return on equity (ROE) already under considerable pressure to meet even its cost of capital, additional strains on capital could put further pressure on its profitability. In Q3 ROE declined to a negative 2.6% from 6.1% in Q2 and 10.4% in Q3 2010, Goldman Sachs return on equity has declined substantially due to de-leveraging in an adverse market (the absolute wrong time to deleverage, yet the time when most banks seek to do it) and is below its current cost of capital. With ROE down to sub10% from c40% during pre-crisis levels, there is no way a stock with high beta as Goldman Sachs could justify adequate returns to cover the inherent risk. For Goldman Sachs to trade back at 200 it has to resume its ROE of 20% which means it has to increase its leverage back to pre-crisis levels of c25x. With curbs on banks leverage and de-risking this seems highly unlikely. image006_copy

 

Two months or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

And for those who haven't been following my Squid Hunting series, there's a lot more to come from those boys at 200 West Street. If you want to know what will happen next, just look at the first few pages of the lastest Goldman subscription docs (click here to subscribe):

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

 

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

 

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

Discuss Finance, Investment, Blogs, Global Macro and Research with Reggie Middleton of BoomBustBlog at Salon de Ning

700 Fifth Avenue  New York, NY 10019

6:45 pm, Friday November 4th

I will bring plenty of research, debate and discussion, so put your smart caps on, be prepared to overpay for drinks and be in the company of beautiful women.

salondenong1 salondenong_copy


Previous BoomBustBlog events have been more than worth it...

47b8d631b3127cce98548a61f7ff00000047100Abs2TFi2ZsWWg

DSC06310 buddhakahn2.jpg

 I can be reached via the following channels, or directly via email:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
Published in BoomBustBlog

image018_copy

I have received SO MUCH flack over the last year for pointing out the obvious FACT that Apple's phenomenal growth will be hit by Android's extra-phenomenal growth, it has been borderline disheartening. Well, the time is hear folks, and as is usual, logic. common sense and rational thinking rule the day once again. The results should be interesting, if not immediate, for many Apple investors and consumers are beyond loyal and ede to borderline fanatic. This portends much more irrational emotion in decision making and potentially unnecessarily drastic actions in the end. What do I mean? Well, Apple is purportedly just under 7% of the NASDAQ. If the Apple religion falls out of fad... Well, look out below! This may not happen immediately, for the love affair is truly torrid, and all sorts of excuses will be made. At the end of the day (or fiscal year, to be more accurate) the reality is bound to hit that Apple is a C corporation like everyone else and is subject to market pressures and competition, and truly does not fart fairy dust.

Of course, logic would dictate that the (literally) hundreds of hate mails I received should be replaced with hundreds of "Hey, Reg, you were right" mails, but it won't happen due to the fact that the nature of those that generated the hate mails forbids them from examining fact and instead allows them to be guided by a bisection of corporate marketing, brand loyalty and emotion. It should be quite interesting to see what the responses to this article will be in the comments section. This is a long post, but more than worth you time. I urge you to read in its entirety, or at least up until the part that reminisces:

"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..."

Early last year, I started tracking the rapid ascent of ultra mobile computing in my Mobile Computing Wars series. At that time, I didn't have a favored winner, but as I researched more and dug deeper, clear patterns started to emerge. These patterns simply got clearer and stronger as time progressed, and it ended in my putting out highly contrarian research on Google in public - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and in substantially more detail in private -the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

I also issued similarly contrarian research on Apple: File Icon Apple – Competition and Cost Structure).

Of course, the mainstream media and the Sell Side of Wall Street took the opposite sides of these bets, to wit: Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past? and Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure!”. Realize that It Should Now Be Common Knowledge That Goldman’s Investment Advice Sucks. Of course, that doesn't necessarily mean that there is any credibility in said proclamations, though. Reference this priceless nugget in light of the links above... Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now!I'd also like to reiterate, I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Well, as luck would have it, the Street was wrong on Google, see 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.

There were wrong on Apple, and to be absolutely honest, they are wrong in general - reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? Not that this tidbit of fact and simple math will stop the sheeple from shoveling over billions upon billions of dollars to this industry to be recycled back into the bonus pool, versus supporting truly independent research such as BoomBustBlog, no matter HOW many times I'm right and they are proven wrong - and it has been a lot, trust me.

We also had pundits in private equity who I would have normally assumed should have know better jump on the Apple wagon, as excerpted from My Thoughts on Roger McNamee's View of Google and Mobile Computing...

Of note, pundit recommended long Apple and short Google for guaranteed profits. Google blew out numbers this quarter (Our Uber Growth Thesis For Google Is Intact and Performing Well) and Apple missed, all the while Google is strategically positioned to do much, much more damage. As for the comment about nobody makes money from Android, well those entities that make money from Android disagree. I have outlined this in the first quarter, reference Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming Monday, February 14th, 2011.

On this point, I must give props to Herb Greenberg for allowing me to espouse my contrarian, yet highly accurate mantra concerning Apple as well as US banks' derivative exposure through the mainstream, namely CNBC. The derivate issues have recently reported by Bloomberg and ZeroHedge, reinforcing my many warnings, ex. So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

Of course, as timing would have it, I predicted that Apple would miss 4 to 6 quarters after the pronouncement I made on international TV exactly 1 year ago via CNBC on the eve of Apple's earnings (3:40 into the video). Exactly 4 quarters later.... Hmmm!

Simple math, simple business logic, simply common sense, yet the Apple hordes attacked relentlessly. Listen, what Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business. Less than free was their new business model and it proved to be pretty damn effective.

Margin compression follows a slip in sales due to competition. You see, in order for Apple to maintain its unit growth, it wiill have invest more into the product, cut costs, or both. Any scenario leads to margin compression. Since I have written so much on this topic, I will not rehash, but simply point to the prophetic post I made two weeks ago in calling for what I considered to be the obvious: Sliced Apple Margins For Dinner?

In the meantime, let's parse today's news event: Apple Misses Big on Earnings, Revenue; Shares Tumble

Apple posted a rare miss on both earnings and revenue as far fewer iPhones were sold during the quarter than expected. Shares tumbled after-hours.

Again, it's Apple's expectations that will be the eventual undoing of this company as an investment. They are simply unrealistic, as I will get to in a moment, but first I'd like to point out the extreme favoritism that is still given to this company by the MSM.

Bloomberg reports: Apple Misses Estimates on Delayed Sales

Apple Inc. (AAPL) fell in German trading after profit missed analysts’ predictions for the first time in at least six years, evidence that customers delayed iPhone purchases before the release of the latest model.

This statement is bullshit. Customers delay purchases right before the release of every new model, yet that somehow didn't cause a miss for the iPhone 3G, the iPhone 3GS and the iPhone 4, did it? iPhone's sales dissappointed for one reason, and one reason only!!!


Profit was $6.62 billion, or $7.05 a share in the fiscal fourth quarter, compared with $4.31 billion, or $4.64 a share, a year earlier, Cupertino, California-based Apple said yesterday in a statement. That missed analysts’ predicted profit of $7.31 a share, the first disappointment from Apple in at least 26 quarters.

Apple sold 17.07 million iPhones, less than the 20 million projected by analysts surveyed by Bloomberg, as consumers held out for the iPhone 4S, released after the close of the period that ended Sept. 24. The shortfall underscores the growing importance to Apple for the iPhone, which was introduced in 2007 and accounted for 39 percent of revenue last quarter.

“The market was expecting very strong iPhone sales going into the product launch,” said Giri Cherukuri, head trader at Oakbrook Investments LLC, which holds Apple shares. “It stands to reason that a lot of people were waiting for the new iPhone to come out.”

Again, Bullshit! Why didn't this phenomena occur during the last three product launches? Oh yeah, that's right, because Android wasn't up to speed by then.

Apple shares dropped as much as 7.3 percent to the equivalent of $391.75 in German trading and were down 6.4 percent as of 9:03 a.m. in Frankfurt. Yesterday, the stock fell 6.3 percent to $395.50 in extended U.S. trading. The stock had closed at $422.24 in New York.

Sales of the smartphone are rebounding this quarter, and the decline in Apple shares represents a “buying opportunity,” said Cherukuri, whose firm is based in Lisle, Illinois.

Yeah, and thereing lies the problem, shares of Apple are always a buying opporutunity, no matter what the facts or circumstances are, right?

As excerpted from Apple on the Margin:

Writing about Apple is like writing about gold, despite the fact that there is a strong fundamental argument for or against it, the emotional response and lack of empirical outlook clouds the fundamentals, ex. Apple  and the iPhone vs Android or Gold and fiat currencies/inflation. I am not a Apple hater, and I am probably one of the most advanced iPad users you know of. Apple has its pluses and minuses, but people (including many professionals) are failing to look at the facts and instead are joining their respective "fanboi" clubs. Thus, in continuing with my attempt to educate my readers on the folly of believing Apple's position to be unassailable, I am illustrating exactly how vulnerable Apple is to either a compression of margin on the iPhone or a slow down in sales. Apple is just penetrating the market and has a fertile field to conquer, it is just that it will not be able to pursue that field devoid of competition as it has over the past 3 years. This should dictate an adjustment to the highly optimistic aura attached to the multiples used in forecasting economic results.

The graph below illustrates the importance the iPhone represents to Apple's franchise. Believe it or not, this graph actually understates the importance of the iPhone to Apple for while it brings in 45% of the revenues, it is responsible for about 70% of the profits. Apple has become too reliant on one product, although that reliance was borne from the fabulous success of said product. While Apple will probably derive some much needed revenue diversification from iPad sales, the iPad will face the same hurdles that the iPhone is coming up against - and that is competition from Android-based devices and potentially even Windows Mobile 7 8 (albeit this is an admittedly much more speculative statement).

Breaking the argument down even further, you see how the iPod and the iPhone have literally transformed this company. While I am sure it will continue to be fantastic company with cool products, I doubt very seriously that it will be able to grow in the future as it has in during the last 7 years.

The saving grace is that the smart phone and portable computing market will grow quite quickly, allowing companies with dwindling market share to still capture increasing revenues. The ugly reality is that those revenues will have to be burdened with increasing R&D, marketing and distribution costs since the amount of competition will probably scale faster than the market itself. That, my friends, is a very good thing for you and I, the consumer!

All paying subscribers are welcome to download the mini-model which shows Apple's earnings sensitivity to margin compression through competition. This is the very crux of determining the extent of Apple's success or lack thereof, in the near to medium term. Click here to download (File Icon Apple iPhone Profit Margin Scenario Analysis Model), and click here to subscribe.

... Apple said that while iPhone sales fell off last quarter, the holiday quarter will be its best yet. First-quarter per- share earnings will be about $9.30 on sales of about $37 billion, Apple said in the statement.

That surpassed analysts’ projections, suggesting that iPhone sales are bouncing back with the release of the iPhone 4S, which set a record with debut-weekend sales of 4 million.

“In our wildest dreams, we couldn’t have gotten off to as great a start as we did with the iPhone 4S,” Cook said on the call. The drop in demand for iPhones in the second half of last quarter was “substantial,” said Cook.

This may very well be the case. I don't doubt it, but it also doesn't negate the generally stagnating growth trend - see Google's Android Now Leads In Market Share, Growth Rate and Potential Buyer Preference. Apple released a new product on two new carriers, which at best matches (and that's at best, I believe it falls far short) the Android flaghip device from 6 months ago! This much wider distribution network coupled with the iPhone popularity is bound to boost sales, but the popularity of Android (now the number 1 OS, globally and domestically, with the highest growth rate, to boot) make it unliekly Apple can regain the growth crown through marketing alone. It is now quickly becoming common knowledge that high end Android phones such as the Samsumg Galaxy S II series handily outperform anything from Apple thus far. As a result, the sales are becoming more fad generated and less technology/usability driven. We all know what happens to very fad, don't we? Apple will have to invest heavily into the tech, and that ain't free nor is it a guarantee for success. Hence the margin compression thesis. Look to my writings from last summer to determine the common sense reasons why Apple is at risk despite the lovefest that the media, the sell side of Wall Street and the equity markets have for it: . After nearly a year of showing nearly incontrovertible evidence that Apple has seen its heyday, the mainstream media is catching on. First a quick overview of my thoughts...

    1. Look & Listen Closely As The Solitary Margin Compression Theory Slowly Bears Fruit: Apple to Drop Flagship iPad Prices?
    2. Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 
    3. Is The Evidence For An Apple Margin Collapse Now Incontrovertible? 
    4. I Absolutely Dare Anyone To Read This And Still Not Consider The Probability (Not Possibility) Of Apple Suffering From Margin Compression

Smartphone Rivals

The new touchscreen handset is vying with new smartphones from companies including Samsung Electronics Co. and HTC Corp. (2498), which use Google Inc.’s Android operating system.

As excerpted from "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?" 5/19/11:

This is going to be a much tougher fight for Apple than even that of the smartphone market, and you see how well Android did in that category as the current market leader in both footprint and growth rate. Literally98% more competition is coming down the pike this year, and products are already widely reviewed as at parity or superior in Apple's chief diversification segment (remember, derives ~70%  of its profits from the iPhone). With that, even the iPhone is supremely challenged by Apple's own parts vendors, Reference :

Apple's biggest suppliers (the most important parts vendors for the products that contributes about 75% of Apple's profits) and the companies that Apples is currently embroiled in global litigation with (no wonder why) also produce similar products, ex. the LG Optimus 3D and the Samsung Galaxy S II.

Speaking of the Samsung Galaxy, this newest refresh is nearly universally thought of to be the best smartphone available, including the Apple iPhone. I haven't found a single review yet that has said otherwise. This is an impressive feat considering how "Apple-centric" the media currently is. Reference this snippet from Endgadget:

For a handset with such a broad range of standout features and specs, the Galaxy S II is remarkably easy to summarize. It's the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. Of course, a 4.3-inch screen size won't suit everyone, no matter how stupendously thin the device that carries it may be, and we also can't say for sure that the Galaxy S II would justify a long-term iOS user foresaking his investment into one ecosystem and making the leap to another. Nonetheless, if you're asking us what smartphone to buy today, unconstrained by such externalities, the Galaxy S II would be the clear choice. Sometimes it's just as simple as that.

Endgadget is not the only reviewer to go head over heals over Android super-powered phones. Check it out, courtesy of onlinesocialmedia.net:

    1. Dan Sung of Pocket-Lint rates the phone with 4.5 out of 5 stars and calls it a “cracking experience” and like Engadget, “better than any other Android smartphone.” Very minor complaints included the 1080p DLNA streaming, which was noted could be better, plus minor quibbles with the camera lens but overall the conclusion is that “no one buying this superphone will have anything to complain about.
    2. Chris Davies over on Slash Gear. Guess what, Davies also says, “this could well be the best Android smartphone on the market today” and noted that iPhone users that were shown the Galaxy S II said they could have their heads turned by it. There were minor criticisms, such as the keyboard, but these were said to “pale in comparison to the Samsung’s strengths.” In conclusion Davies says “we’re running out of reasons not to buy the Galaxy S II.”
    3. Electric Pig by Ben Sillis, who gave the phone a staggering 5 out of 5 star rating and says “Samsung has triumphed again with theSamsung Galaxy S 2.” There are some quibbles about software in this review but not enough to get in the way of it being a “surefire contender for phone of the year,” and again the superb display gets a special mention.

... Apple’s fourth-quarter revenue was $28.3 billion, below the $29.6 billion predicted by analysts. Missing expectations caught investors by surprise since the company has so consistently beaten predictions. During the previous 19 quarters, Apple had exceeded profit estimates by an average 28 percent, according to Piper Jaffray Cos.

‘Clueless’

“Shame on me and other investors who got lulled into complacency based on how much they’ve beaten estimates in the past,” said David Rolfe, chief investment officer at Apple investor at Wedgewood Partners Inc.

Apple had said in July that it expected sales and profit to fall because of changes to its product lineup.

“It’s not the company that missed, it’s the people who follow Apple that are clueless,” said Trip Chowdhry, an analyst at Global Equities Research in San Francisco.

Analysts may revisit projections that Apple will continue to grow at a record rate and exceed estimates, said Michael Obuchowski, chief investment officer at First Empire Asset Management.

“That the company can maintain the growth rate that some of the analysts envision is not very realistic,” he said. “There will be a reevaluation of the analysts’ expectations.”

"Clueless"! “Shame on me and other investors who got lulled into complacency"!

Taken right out of the Reggie Middleton playbook! Refereince Apple Once Again Surprises The Unsurprisingly Inept Analyst Estimates: When Will Investors Catch On To The Earnings Management Game?: I will repost (for the 6th 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...

In the meantime, more inaccurate and uncalled for Apple bias in the media that will do naught but cause losses for investors that bother to pay it any attention... Bloomberg reports Google, Samsung Announce Updated Android Phone:

“Ice Cream Sandwich could provide the critical push in the race to catch Apple,” said Mark Newman, an analyst at Sanford C. Bernstein & Co., who is based in Hong Kong. “Apple’s software is still on the cutting edge.”

This is outright nonsense! Apple's most recent OS5 release simply brings iOS up to par with what Androids are currently running since the beginning of this year. As a matter of fact, as of today, Apple's tech is still behind since Google just released an OS update (Ice Cream Sandwich) that again puts it leaps and bounds above the Apple OS. 

Apple’s new iPhone was unveiled earlier this month with Siri technology, which lets users ask for weather updates, make calendar appointments or send messages without tapping on the keyboard. The iPhone is the company’s best-selling product.

The article fails to mention that this feature was available in Android from the beginning of the year, at least. Again Apple is playing catch up, but it has not yet caught up!

The latest Android incarnation also offers easier multitasking and a new People app, which helps check status updates from Google+ and other social networks.... Android controlled 43.4 percent of the global smartphone market in the second quarter, while Apple’s iOS had an 18.2 percent share, according to researcher Gartner Inc.

This is up from zero hust three or so years ago, reference:

  1. More of the Android Onslaught: Increasing Handset Revenues and Growth
  2. The Complete, 63 pg Google Forensic Valuation is Available for Download

For tablets, Apple’s iOS dominated with 61.3 percent market share in the second quarter, according to research company Strategy Analytics. Android accounted for 30.1 percent of the tablet market.

Take note that the the tablet market is taking a very similar path to the phone market where Apple started with ~90% share and dropped very, very quickly with no explicit recognition of such from the media or the sell side. Reference:

 

Archived 2010 posts on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. This article should drive the point home: 
  5. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  6. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  7. RIM Smart Phone Market Share, RIP?
  8. Android is gaining preference as the long-term choice of application developers
  9. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  10. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  11. Apple on the Margin
  12. RIM Smart Phone Market Share, RIP?
  13. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  14. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  15. More of the Android Onslaught: Increasing Handset Revenues and Growth
  16. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  17. The Complete, 63 pg Google Forensic Valuation is Available for Download
  18. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  19. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  20. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  21. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
Published in BoomBustBlog

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:

Published in BoomBustBlog

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

Published in BoomBustBlog

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.

Published in BoomBustBlog