Google posted robust 1Q results topping the consensus estimates by a wide margin – revenues increased 24% to US$10.6 billion as against US$8.6 billion in the same period, a year earlier. This was significantly higher than the consensus estimate of US$8.2 billion for the period.Revenues were in line with our estimates – we expect full year revenues to total US$43.1 billion. Revenues from Google websites accounted for around 69% of total advertising revenues while that from the partner websites contributed to around 27% of revenues. The remaining 4% of revenues were accounted for by licensing and other fees. Geographically, the US generated around 46% of total revenues, UK accounted for 11% of total revenues while other markets accounted for the rest 43% of revenues.

Growth in revenues was driven by an increase in click volumes, especially in the US market. The number of clicks increased by a significant 39% year-on-year and 7% quarter-on-quarter during 1Q highlighting the increasing popularity of the search engine. However, on the flip side, the cost-per-click or the average cost paid by advertisers declined 12% year-on-year during the period – largely due to the growing business in the emerging markets and mobile space, which usually carry lower margins. Nonetheless, Google's strong position in the mobile space – including both smartphones and tablets – is enabling the company to generate robust revenue growth. The Company also continues to benefit from the success of its DoubleClick ad exchange as well as the overall improving quality of advertisements. Google also witnessed growth in the European and Asian markets. Japan registered strong performance largely on account of higher contribution from SMB segment.

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Total costs increased 16% year-on-year to US$3.8 billion as against US$2.9 billion in the same period, a year earlier. This was largely due to the fact that the Company made investments in new products, increased its advertising expenses as well as increased wages. Further, higher amortization charges, the data center operations cost as well as content acquisition costs drove the overall cost of sales higher. As a result, higher costs had a negative impact on gross margins which contracted by 136 basis points to 64.4% as against 65.8% in the year earlier quarter.

Operating expenses increased 16% year-on-year to US$7.3 billion as against US$6.3 billion in the same period, a year earlier. A 25% jump in selling and marketing expenses was largely responsible for the spike in operating expenses. The R&D expenses in fact declined as a percentage of sales during 1Q. Higher operating expenses had an adverse affect on margins which contracted 77 basis points to 31.8% during 1Q.

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From the profitability perspective, Google outshone nearly all its competitors as earnings increased by a significant 61% to US$2.9 billion (or US$8.75 per share) as against US$1.8 billion (or US$5.51 per share). Further, the Company continues to have a strong balance sheet with cash balances at an enormous US$49.3 billion at the end of 1Q.

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Apple has started exhibiting the behavior that I have been warning about, dropping four and five percent over the last 24 hours or so, then regaining a third of the same.

NAsdapple_or_Appldaq

This volatility should be of no suprise. If you look at the chart above, you will clearly and unequivocally see Apple (or AppleDAQ or NASDApple - regardless of the nomenclature) is essentially the NASDAQ, as was pointed out in previous posts from BoomBustBlog, ex. When The Most Contrarian Trade Of The Year Is No Longer Contrarian, It's About That Time - Enter The Rotten Apple and that of ZH Apple Responsible For 90% Of Intraday NASDAPPLE Gain - to wit:

Or perhaps the 209 hedgies who rely on this stock for their year will play prisoner's dilemma (and free ride) one too many times and dismiss their recency bias to remember that the first one to migrate wins when prices go vertical.

Again, as pointed out in When The Most Contrarian Trade Of The Year Is No Longer Contrarian, It's About That Time,  this process of Apple purging may have already started...

3h8sj2p

This interesting observation was brought up up in my Twitter feed, to wit:

# of funds in this order (%) since 12/2010: +1.4%, -4.0%, +8.7%, +4.3%, +5.4%, +3.2%, -25.8% (1st big drop) 

@PierreLeroux28 @ReggieMiddleton I just find it interesting (if the data is accurate) that more than 1,000 funds sold out during rise 

PierreLeroux28 Pierre Leroux So if institutions dump some $AAPL on strenght after that THEY ALSO BUY THE DIPS Like i will rebuy my 10 calls 

Of course the lovefest with Apple dictates the BTD will reign, but suppose the dips are accompanied  - better yet caused - by widespread use of technologies known as calculators, spreadsheets or BoomBustBlog subscriptions?

Correction, courtesy of @cperruna, author of the chart above: 

The MarketSmith chart I uploaded was not correct but I have revised my feed with the correct data. I actually questioned MarketSmith when I saw a large drop in another leader I have been tracking. In any event, the updated data is as follows, as I posted on my twitter feed:

"Although Institutional #'s were incorrect, $AAPL still down 8% from 4/7 chart stks.co/3FrS| sponsorship is now 4,196 from 4,308"

This isn't just about quantitative analytics uber blind hedgefund managers reaching for cap gains. There are very fundamental reasons for Apple owners to expect a pullback or slowing of growth. After all, that margin compression theory is ready to come into its own. We have created a very realistic scenario analysis that shows what could happen, and when, and topped it off with what we feel should happen. Interesting indeed! Subscribers, reference the Apple Margin & Valuation Note. I gave free readers an example of the evidence we uncovered showing Apple already experiencing margin compression and a loss of market share in one of its flagship products (Apple's iPad Is Losing Market Share And …).

If the biz class 101 rules ring true, this could very ugly very fast... The Company had a slam bang quarter last, but much of that is essentially unrepeatable in the near term, reference Anecdotal Observations On Apple's Recent Quarter.

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I have decided to allow those who are curious or who may not have not heard of me, and those oft celebrated MUPPETS (see Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Rip Off Clients) to actually see what I keep behind the BoombBustBlog paywall by distributing our premium research for free. Why do such a thing? Well, to be honest, I do it in celebration of the man quoted as saying "Lets start having fun... lets get funky... let's announce everything... let's be WILDLY positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO LOSE..." (hint, this is the current Groupon CEO) in addition to the underwriters of said wonderful company. Read on and you'll see why such independent research is desperately - and I do mean desperately - needed. As a matter of fact, there's no valide reason why (after reading this rather meaty article) my servers should not be overloaded by the deluge of ex-muppets looking for some guidance through the fog of muppet master bankers stateside. To wit...

Wall Street Rakes in $42 Million From Groupon IPO - Deal Journal ...

And just so you don't think this is a personal vendetta against said muppet master pulling the strings that do God's work (it's probably more like an impersonal vendetta), let's sprinkle a little yellow stream on the Morgan Stanley parade shall we? After all, Morgan Stanley can be expected to pay up to 60% of those (ill-found? Depending on where your values lie...) gains in compensation, namely bonuses - apart from whether said bonuses were ever really deserved in the first place.... Yes, I'll go back there again, see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!":

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost about 2/3rds of their clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics....

... Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

re_fund_returns.png

Okay, enough the Muppet Manipulating, Money Marauding, Doing Work in God's Name Brand Bank Bashing... Let's get down to the nitty gritty of the report that I said I will give away for free. I am offering the report, earnings advisory addendum and accompanying simplified model to show what we're made of. Of course paying subscribers, and even casual blog readers, cannot say that I didn't thoroughly warn you! Early shorts on this stock as per our research notes valuation matrices would have given pleasant Christmas presents and would have also stuffed one hell of an Easter basket as well!!!

In case you still don't get it, the sell side research departments of these banks did not offer BoomBustBlog research to their clients. Oh no, then how in the hell can they dump their stock??? They issued glowing reports from their own analytical cum soft sales staff.

On that note, let's reminisce.... In June of 2011 I release proprietary research to BoomBustBlog Subscribers. You can now download said report absolutely free, here  Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36). After reading said report, prepare for some real comedy, as reported by Dailypolitical.com:

Groupon (NASDAQ: GRPN) was downgraded by equities research analysts at Stifel Nicolaus from a “hold” rating to a “sell” rating in a research note issued to investors on Monday.

Other equities research analysts have also recently issued reports about the stock. Analysts at Bank of America (NYSE: BAC) downgraded shares of Groupon from a “buy” rating to a “neutral” rating in a research note to investors on Monday. They now have a $20.00 price target on the stock, down previously from $30.00. Separately, analysts at Benchmark Co. cut their price target on shares of Groupon from $32.00 to $28.00 in a research note to investors on Monday. They now have a “buy” rating on the stock. Finally, analysts at Goldman Sachs (NYSE: GS) reiterated a “buy” rating on shares of Groupon in a research note to investors on Thursday, February 9th.

Groupon traded down 3.20% on Monday, hitting $14.54. Groupon has a 52-week low of $14.85 and a 52-week high of $31.14. The company’s market cap is $9.376 billion.

Whoa!!! Goldman Sachs reiterated their "buy" recommendation just in time for their damn Muppet Clients to lose ~40% by the close of the market today. Go ahead, stuff those damn Muppets, fellas!

Groupon_Crash_warnings

For the record, in June of 2011, a full ten months ago, I made clear to my subscribers the following (as excerpted from the now free download)...

We value Groupon at $6.6bn using DCF. The current valuation is based on 10 years of revenue projections which are overly optimistic in our view.  We have forecasted revenues of $4.0bn in 2011 and expect revenues to nearly double to $7.5bn in 2012 and reach $35bn by 2020. We have assumed cost of equity of 12% and terminal growth of 3% from 2021 onwards. We have kept gross profit at stable levels and assumed operational gearing to (∆ Operating Profit / ∆ Revenue) to improve considerably. Despite these optimistic projections we were still not able to justify a valuation close to $10bn let alone $20-25bn. We only see downside risks to valuation of $6.6bn and believe that Groupon’s rejection of Google offer of $6.0bn was a mistake in first place. Google’s valuation of $6.0bn most assuredly included a premium for synergies that Google could have achieved with Groupon which would be clearly absent in the standalone entity. We see the fair value of Groupon close to $3.0-4.0bn if we assume a more realistic picture. Given all kinds of questions surrounding Groupon’s business regarding the sustainability of revenue growth, costs control and even the business model itself (i.e., the relationship with merchants) and external competition, we remain deeply concerned even on the sustainability of a successful IPO for Groupon. 

For the record, at about $14 per share, Groupon is market-valued at about $9.1 billion dollars!!!! Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

1. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
2. Groupon Revenue Restated 09/26/2011

1. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It

Groupon revenue restated Page 1Groupon revenue restated Page 2

Groupon Valuation redacted Page 03Groupon Valuation redacted Page 04Groupon Valuation redacted Page 05

Semantic Housekeeping

I noticed in the comment columns of some of the blogs that there was some controversy concerning my dressing up as a Zulu warrior in my hunting of the giant Vampire Squid. I wish to correct thee. I did not dress up as anyone but Reggie. I had shorts on from the Gap. As for the weaponry donned, yes I did grab a little something from my personal stash, but it was not Zulu, it was Masai in origin. I suggest all brush up on their African warrior history. Why don weapons at all? Well as intellectually and physically capable as I desire myself to be, hunting Vampire Squid can be a dangerous occupation, therefore one should go into the fray fully packed. Was I somehow regretfrul of marketing my brand as who I actually am? Of course not. If anything, I suggest many of you institutional asset manager types don intellectual weaponry of some sort or fashion, be it of Zulu, Masai or other origin. After all...

Who would rather be, a 45% to 62% capital LOSS MUPPET or a Masai (or Zulu) Warrior? Should I even have to ask?

Shaka kaSenzangakhona (aka Shaka Zulu)
KingShaka
The only known drawing of Shaka—standing with the long throwing assegai and the heavy shield in 1824, four years before his death
Reign	1816 - 1828
Born	ca. 1787 KwaZulu-Natal, near Melmoth
Died	c. 1828 KwaZulu-Natal
Occupation	Monarch of the Zulu Kingdom

Masai Warriors 

Bundesarchiv_Bild_105-DOA0556_Deutsch-Ostafrika_Massaikrieger

Maasai warriors in German East Africa, c. 1906-1918.

For some reason, it appears that there are still many monied interests that would literally want to be a little green (yet cute) victim versus an entity that would stand up, arm itself intellectually and defend its own economic interests. Alas, to each their own....

Goldman Clients aka MUPPETS!!!

Click any and all graphics in this post to expand to print quality

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

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?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?	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...
Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!	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 The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!	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 
• What Was That I Heard About Squids Raising Capital Because They Can't Trade?
• Reggie Middleton vs the Squid That Can't Trade!

And back to Groupon for a minute... Way to Go Muppet Masters Goldman et Morgan, eh? Let's not fret too much about the $42 million  in fees. My assumption is that it is both expensive and fraught with red tape, you know getting a Ponzi scheme authorized by the SEC!!!

Groupon IPO Scandal Is the Sleaze That's Legal

Izard Nobel LLP Announces Class Action Lawsuit Against Groupon, Inc.

MarketWatch - 17 hours ago

Izard Nobel LLP Announces Class Action Lawsuit Against Groupon, Inc.

Reuters Key Development - 17 hours ago

Bernstein Liebhard LLP Announces That a Class Action Has Been Filed Against <...

MarketWatch - 19 hours ago

Pomerantz Law Firm Has Filed a Class Action Against Groupon, Inc. -- GRPN

Girard Gibbs LLP Launches Groupon Legal Investigation

MarketWatch - Apr 3, 2012

Girard Gibbs LLP Launches Groupon, Inc. Legal Investigation

Reuters Key Development - Apr 3, 2012

Newman Ferrara LLP Investigates Groupon, Inc. for Possible Breaches of <b>......

MarketWatch - Apr 3, 2012

Robbins Geller Rudman & Dowd LLP Files Class Action Suit Against Groupon,...

Reuters Key Development - Apr 3, 2012

Groupon to Settle Class-Action Lawsuit for $8.5 Million

Bloomberg - Apr 2, 2012

Groupon Inc. (GRPN) Faces Accounting Issues, Why is Anyone Surprised?

ValueWalk - Apr 2, 2012

Rigrodsky & Long, P.A. Announces an Investigation of Groupon, Inc. for <b...

MarketWatch - Apr 2, 2012

Rigrodsky & Long, P.A. Announces Investigation 

Harwood Feffer LLP Announces Investigation of Groupon, Inc.

MarketWatch - Apr 2, 2012

Harwood Feffer LLP Announces Investigation Of Groupon, Inc.

Reuters Key Development - Apr 2, 2012

Groupon Revisions Highlight New Model's Risks

BusinessWeek - Apr 2, 2012

Groupon Inc. (GRPN) Is Declining After Q4 Revision

NASDAQ - Mar 30, 2012

A quick visual op-ed courtesy of williambanzai7...Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

 Reggie_on_Max_Keiser

The full Max Keiser Show which aired Yesterday in Europe. My interview starts at 14:30 in the video.

A topic drill down of what was discussed in the video above.

Yes, there is a US Treasury Ponzi scheme as afforded by the Federal Reserve in an era of what seems to be perpetual ZIRP...

But wait a minute, isn't ZIRP actually killing the banks slowly but surely? If so, why has the sell side been so bullish on ZIRP in for the banking industry???

Oil prices spike in the face of slack economic demand and the face of recession - again?

The US Education Ponzi causes rampant tuition inflation in the face of tepid if not non-existent increases in actual education quality - of course all of this is financed by a credit/loan bubble where you have a ~trillion dollar market that already has a ~25% delinquency rate. Exactly how is this expected to end?

Speakng of education...

Municipalities have been burnt and bent over by big Wall Street Banks on a regular basis.

So, what happens when you do derivative business with Goldman Sachs as a municipality or sovereign state? Here's nearly an hour worth of answer for you, from countries and municipalities around the world!

Now, Reggie Middleton on Goldman Sachs' business model

• The Goldman Grift Shows How Greece Got Got
• Name brand investing in the WSJ - BoomBustBlog
• Quickly revisiting name brand investors... - BoomBustBlog
• Are you hooked on name brands? - BoomBustBlog
• The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...
• What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!
• The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

Facebook CEO Running From Investors 'Cause He's The Only Invest That He Actually Needs To Respect…

Facebook CEO Running From Investors 'Cause He IS The Only Investor Whose Opinion Actually Counts?

Is Facebook's CEO Running Away From Investor Responsibility Because He IS the only Investor Whose Opinion Actually Counts? Last month I released an update to our Facebook IPO analysis (subscribers may download it here FaceBook IPO & Valuation Note Update). In its caveats section, I made pains to make very clear that one of the biggest threats to Facebook investors actually emanates...

Every now and then, there's a company that I simply find as having an unsustainable business model. It's not so much an issue of not respecting the company, it's just that the business (as it is currently operating) cannot be seen as an ongoing concern. The Street.com reports: Groupon Plunges on Revised Results

Groupon shares plunged in extended trading on Friday after revising its reported fourth-quarter and full-year results, its first as a public company. The daily deals site reduced its fourth-quarter revenue by $14.3 million after initially reporting sales of $506.5 million. The revision also resulted in an increase to fourth-quarter operating expenses that reduced the company's operating income by $30 million, net income by $22.6 million and earnings by 4 cents a share. Groupon blamed the change on a shift in the company's fourth-quarter deal mix and higher price offers, which have higher refund rates. Investors baulked at the revision, pushing Groupon's shares down $1.68, or 9.14%, $16.70 in extended trading.

 Groupon_Crash

Of course paying subscribers, and even casual blog readers, cannot say that I didn't thoroughly warn you! Early shorts on this stock as per our research notes valuation matrices would have given pleasant Christmas presents and would have also stuffed one hell of an Easter basket as well!!!

On that note, let's reminisce....

1. Thursday, 16 June 2011 What Does Groupon and The Matrix Have in Common?
2. Monday, 26 September 2011 I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them
3. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
4. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It

It's 2011(2), Groupon, LinkedIn, Facebook, Banks, Brokers & REITs are all partying like its 1999! Subscribers, feel free to download  Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36)

Groupon_Valuation_Page_03

CNBC's Herb Greenberg brought this article to my attention: The checkered past of Groupon's chairman

FORTUNE -- "Lets start having fun... lets get funky... let's announce everything... let's be WILDLY positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO LOSE..."

Eric Lefkofsky

Eric Lefkofsky, serial entrepreneur

This is a quote from the dot-com era. It's pretty much what you'd expect a novice executive to say back then, when it was all about money and not at all about creating something good. It was written in an email by the co-founder of a company called Starbelly.com, which labeled itself a B2B provider -- back when people greeted that phrase with a straight face.

In early 2000, Starbelly sold itself to another company called Ha-Lo Industries for $240 million, much of which went to the author of those words, a man named Eric Lefkofsky. Not long after that transaction, Ha-Lo declared bankruptcy. Shareholders and others blamed the Starbelly deal, and a series of lawsuits ensued.

Eric Lefkofsky is the co-founder and chairman of Groupon, which filed last week for an IPO valuing the company at $30 billion, as well as its largest shareholder, with a pre-IPO 22% stake in the company.

Archived articles of interest...

1. A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…
2. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
3. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

In the early spring of 2010, while trading at over $60 per share and still a darling of the street and corporate users, I warned that RIMM not only would not be able to compete with Android and iOS, but will be a phenomenal short. Well, two years later, while trading in the low teens the RIMM research is still pushing out profits. Research in Motion reported a minutes ago and...

• RESEARCH IN MOTION 4Q REV. $4.19B, EST. $4.51B
• RESEARCH IN MOTION 4Q ADJ. EPS 80C, EST. 81C

• RESEARCH IN MOTION SAYS BALSILLIE RESIGNS FROM BOARD
• RESEARCH IN MOTION SAYS JIM ROWAN TO LEAVE

• RIMM WONT' GIVE QUANTIVE VIEWS DUE TO LONG TERM FOCUS

• RESEARCH IN MOTION REVIEWING STRATEGIC OPPORTUNITIES 

RT_regggie_abu_dhabi

My latest appearance on RT's Capital Account last night brought about many topics that are making headlines today. Reference the video at the 3:20 and 16:05 markers.

 Arab influence and the worsening EU situation 

Reggie_Middleton_at_Emirates_Palace_in_Abu_Dhabi

Yesterday, I made announced that Abu Dhabi & the UAE Can Leverage PetroDollar profits to capitalize on the plight of EU nations. This is becoming more and more true day day as these quasi-"sovereign" nations become increasingly forced to part with strategic and financial assets to pare debt. I explictly stated that Greece would have to either default or restructure again, possibly immediately after the default/restructuring that took place week before last, rendering the entire exercise moot nad relative useless (it did kick the can down the road for a few quarters). See Beware The Overly Optimistic Greek Speculators Fall Like Icarus From the Sky in Flames,  then realize that after reading the BoomBustBlog piece we have the ever reliable ratings agencies following suit - reference this piece from Bloomberg: Greece May Have to Restructure Again, S&P’s Kraemer Says.

Of course, we all know how reliable and timely the rating agencies are, right? See Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

I am having my analysts work on the Spanish and Italian default/ bailout scenario now (we have worked up a scenario two years ago, but things are much worse now). Even a Citi analyst has chimed in to that effect. Let' not forget the Portuguese Liquidity Trap: Prime from the actions of Greece. As a matter of fact, it's evident that Greece Is Trying To Convince Portugal To Make FIRE Hot, hence I answered the inevitable question, So, What's The Next Step Towards The Eurocalypse??? 

The continued Apple lovefest conceals key facts

The MSM is still engorged on its lovefest with Apple, comparing the latest iPad 3 to the Transformer Prime (my current workhorse tablet) favorably, despite the fact that the Transformer runs circles around it in almost every category. Notice the comments from those who have actually used the Transformer, which was consistently sold out for a reason. The fact is, at least from my own research and personal observation, Apple's iPad Is Losing Market Share As Margins Compress (Click this link for the research behind this assertion): 

Again, as with the smartphones, the Android tablet tech is superior to that of iOS products and as iOS normalizes the difference, margins will suffer. Margins will drop (is dropping) faster for tablets because prices are coming down as fast as tech is increasing.

image061

Apple's Decision To Return Capital to shareholders is an indication that it feels the capital is put to better use in the shareholder's hands than that of management using it to actively grow. Granted, the amount is de minimus in the grand scheme of things, but the move marks a transition away from Steve Jobs' mantra immediately after his departure. 

Now, we have other analysts jumping in the BoomBustBlog bandwagon, after the fact of course...

Apple Inc. (Nasdaq: AAPL) is weak this morning and according to some this could be related to a negative research note at Wedge Partners.

According to tweets from Notable Calls, the analyst said:

"Taking the Sidelines Until March Qtr Report on Possible iPad Slide"
"We're concerned iPad sales may not be as strng as expectations, and we believe March cld disappoint."
"Full year production iPad expectations/forecasts may be pulled down as a result."
"Looking at overall demand picture, there doesn't appear to be much of a frenzy for the new iPad."

"The stock may be priced for perfection at current levels, but we feel we are seeing some scratches on the glass"

Our Apple analysis is now available to subscribers Apple Margin & Valuation Note (those who wish to subscribe should click here). This is a more comprehensive, more "scientific" update and approach to our piece from last year Apple - Competition and Cost Structure and contains extensive valuation scenarios considering several what if scenarios for Apple, including the likely events that I've been warning of for some time now. Next week (this was pushed back two weeks due to my middle east excursion), pro subscribers will see a downloadable version of the model behind this that will deliver more Apple stuff than you can ever digest in one sitting.

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Is Facebook's CEO Running Away From Investor Responsibility Because He IS the only Investor Whose Opinion Actually Counts?

Last month I released an update to our Facebook IPO analysis (subscribers may download it here FaceBook IPO & Valuation Note Update). In its caveats section, I made pains to make very clear that one of the biggest threats to Facebook investors actually emanates from within, to wit:

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Those who do not subscribe to BoomBustBlog yet purchased shares in the private (or soon to be public) market may be in for a rather disrespectfully rude awakening, as illu:strated in this piece from the NY Times - Face Time With Facebook CEO Stirs Concerns on Wall Street:

SAN FRANCISCO (Reuters) - Mark Zuckerberg wants at least $5 billion from Wall Street investors, but those investors will not be getting much face time in return. 

The Facebook co-founder and CEO made that clear when he skipped the social networking company's first major briefing for analysts and bankers last week. The meeting was the first of many that will take place in the run-up to an IPO that could value the company at close to $100 billion.

Zuckerberg's dismissive approach is hardly unique among elite Silicon Valley companies, but it could become an issue with investors because of the enormous control he exerts over Facebook via special shares.

"We don't think that he should be hiding from the investors," said Carin Zelenko, the director of the capital strategies department for the International Brotherhood of Teamsters, whose pension and benefit funds have more than $100 billion invested in the capital markets. 

Pissing off a $100 billion investor is an absolutely horrible way to kick off life as a public company. Suppose, just suppose, said investor becomes activist... Oh yeah, on that note...

According to Zelenko, the Teamsters will send a letter to the trustees of the various Teamster funds advising them to be wary of long-term risks associated with investing in Facebook as a result of its "anti-investor" corporate governance structure.

Maybe he should send BoomBustBlog subscriptions and custom advisory services to said teamster funds, eh? :-)

Two people who attended Facebook's March 19 meeting remarked on the young CEO's absence and privately said they expected at least a cursory appearance. One analyst asked how involved Zuckerberg would be in future. In response, the company said expectations should be set pretty low, according to one of the two who was at the meeting.

"Investors are crazy to want to get in bed with a company where the guy who controls it doesn't even pretend to care about the rest of the shareholders," said Greg Taxin of activist investment firm Spotlight Advisors, who will not buy shares. "That seems like a recipe for disaster." 

And now is the time to pretend that investors prefer to consider what the best long term investment is as opposed to what the sell side peddles them???

As a private company backed by mostly venture capital, Zuckerberg enjoyed great leeway in choosing how to spend his time. But Zuckerberg will control 56.9 percent of post-IPO voting shares thanks to a dual-class stock structure and voting agreements with some early investors, and may face pressure to be more available to investors.

I think these guys are missing the most salient point. Zuckerberg IS the "investor[s]", at least from a control perspective. He just wants your capital, the actual control behind the capital is, and apparently will be for the foreseeable future, his! Will this be a good deal for the guys who part with their capital yet get no control or rights in return? Well, of course it is if Facebook goes to the moon and back in regards to growth and valuation. But will it???

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For the moment, with investor enthusiasm for Facebook burning hot, the dual-class structure and Zuckerberg's lack of engagement are not likely to have a big impact on demand for the shares.        

Of course Facebook enthusiasm is burning hot. The coals in the "investor" (and I put this lightly) fire are being stoked by none other than the sell side agents doing God's work, among others...

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011) as well as the following free blog posts on the topic:

1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

image015As most who follow Apple know by now, management has decided to return approximately $45 billion of cash to shareholders over three years. Of course, given Apple's recent historical free cash flow generating performance, this is not a very big sacrifice assuming Apple can continue its meteoric growth (which we actually doubt).

Observations and opinions of interest:

1. Cook et. al. have made it abundantly clear that they plan to run Apple differently than that of Steve Jobs Company. This can be gleaned from Jobs insisting that Apple accumulate cash for a rainy investment fund as a growth company. This would have actually have been my preference as a shareholder, assuming I believe management had both the clarity and the vision to foresee new revenue streams as well as the managerial execution to see said revenue streams through. Under Steve Jobs' reign, Apple excelled in such. Under Cook's helm, I fear less so. Contrary to popular opinion, I don't necessarily believe that this is due to Jobs being materially superior to Cook in execution and/or vision, but due to the fact that Apple's primary revenue driving product lines are maturing and competition has increased immensely (read as Google, Samsung, HTC, etc.) in the very short period since Steve Jobs incapacitation.
2. Apple's management as openly and obviously declared their days as a "high growth" company are most likely numbered. This is evident because Apple has made the managerial decision that best interest of the shareholders would be better served in returning a substantial portion of its cash horde than attempting to invest it directly in ongoing (or new) operations or M&A. In other words, they believe that investors could make more or better use of the money than Apple management can. This is typical behavior for maturing companies, those that are leaving the high growth stage and entering the mature corporate phase. What is not so typical is to have a company that has been growing at the rate of Apple make such a decision, unless of course I was correct in my assumption that Apple's growth will see material growth headwinds in the near to medium term. If that is truly the case, then Apple's management is doing (by far) the best thing as per the interests of the shareholders.
3. If one has to return cash to shareholders, then the actual and explicit "return" of cash is the way to do it, ex. pay a dividend. Share buybacks, although hugley popular amongst the Fortune 500 crowd, is an ineffecient and in my opinion unproven method increasing shareholder value over the long term.

Listen up you Muppets!!!!! I'm rehearsing from my Goldman Interview, applying for retail stock broker, pushing Apple inventory :-)

The update to our Apple analysis is now available to subscribers Apple Margin & Valuation Note. This is a more comprehensive, more "scientific" update and approach to our piece from last year Apple - Competition and Cost Structure. Next week, pro subscribers will see a downloadable version of the model behind this that will deliver more Apple stuff than you can ever digest in one sitting. In review, it is interesting to note certain viewpoints in the previous Apple research note, particularly considering Apple's stratospheric rise in price, ex:

"At current price of $347 Apple trades at 2011 calanderised PE of 12x on our estimates and 14x on consensus estimates. Yes, we are more optimistic than consensus, but more realistic concerning future prospects as well."

We were considerably more bullish on Apple's fundamentals than the consensus, but alas we were off the mark, and Apple's share price has went stratospheric - stratospheric to the point that it deserves its own conversation (more on that later). But (yes, there always is a but), the hypothesis behind the afore-linked note still holds. As a matter of fact, not only is it as strong now as it ever was, it is actually playing out now as I type this. I will delve into this, but before I go on I must acknowledge that the mere topic of Apple seems to bring out the immature and impolite in the blogoshpere. So much so, many are literally afraid to mention anything that is no "Pro Apple". That's right, literally "AFRAID", as was pointed out in this recent WSJ article "Apple: Deutsche Dares to Doubt".

The subscriber document is evident on its face with a variety of valuation scenarios, an indepth that the original research document didn't have - an error in execution. So, for those that don't subscribe, let me toss out food for thought, and even more telling, proof that clearly proves the premise behind articles such as: 

• How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
• Sliced Apple Margins For Dinner?
• Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 

What many fail to understand is that what Google as released with its reincarnation of Android is not a new mobile OS, or a flexible handheld technology, but an innovative business model that harnesses to open source software to profitability turn the suppliers and vendors of fat margined leaders against it - literally ingenious and very, very difficult to counter without compressing your own margins. Those interested in reading more can reference Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android. So, let's get started by reviewing portions of my hypothesis from last year...

Did Android overtake iOS in marketshare and growth – Yes,  Even With Apple’s Successful Launch On Verizon, Google Continues To Increase It’s Lead In The Smarthphone Space 

Did Apple miss in 4 to 8 quarters – Yes, as a matter of fact, they missed exactly 4 quarters later. The Only, and I Mean the Only, Investment/Research House To Warn Of An Apple Miss Is Vindicated!!! 

I've had many commenters say things such as "You've been crowing about Apple crashing for two years!" The fact of the matter is simply "no", I have never said such a thing. What I did say was that Apple will deliver an unpopular and unforeseen miss and margin compression due to competition. I said this in Oct. of ’10 live on CNBC, and I also said on BoomBustBlog that miss will occur 4 to 6 quarters. It is telling that they couldn't get anyone else to say what should be obvious (reference the fear and loathing surrounding the Deustch Bank analyst note, Deutsche Dares to Doubt). Well, they did miss and they are starting to feel the effects of margin compression from competition. this effect on margins is well hidden due to management's excellent execution (Kudos to you guys, btw) combined with the fact that the mobile market is growing so wide, fast and deep that it easily conceals margin compression behind massive unit sales. Although I did start to issue warnings in 2010 about Apple margins, but I made it very, very clear that this will occur over many quarters. I also made it clear I was not short at the time of the declaration. Short term traders were able to profit from my initial short notes with tight stops that I suggested...

.. but alas, the time to short was premature for a strategy guy (as opposed to a trader), and obviously so. That does not obviate the validity of the compression theory though.

I’m a fundamental and forensic strategist, not a short term trader. In addition, I run a subscription site, hence I do not – and will not – give valuation bands or price targets to the public for free – plain and simple. As a strategist, I make medium term projections, and they have been – on balance – rather accurate. This article started out with For some absurd reason, the mere topic of Apple brings up the most immature in the blogosphere. For instance, I started saying Greece would default considerably before I warned of Apple margin compression –both stances indicated that this would be a medium term occurrence. Well, exactly two years (8 quarters) later Greece defaulted, see Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!! For some reason, that is a lot easier to swallow than waiting even less time for Apple margins to shudder, even though the miss that I called for came at the first month of the window that I anticipated and market share and margins are exhibiting behavior congruent to what I anticipated. Of course I know what the issue is, the share price has spiked. Alas so did Greek bonds at a point, and so did the shares of RIM, who faced the same margin compression scenario that Apple faces, see RIM Gets RAMMED! Again... Remember That Contrarian Call 1st Quarter of 2010. Apple's management is head and shoulders over that of RIMM's (who should have been replace two years ago, alas it's too late now), but compression is still compression. 

Now, I hear many saying, "... but Apple's margins are at all time highs!!!" Really? Did iPad margins shrink due to competition – Yes. 

Okay - This is the part that the immature are bound to ignore, so I can save some of you some time and you can stop reading now. Those who are actually curious about how I come up with margin compression while others state record margins...

As it stands now, Apple is rapidly (much more so than can be gleaned from sell side analyst reports and the media) losing market share in both tablets and smartphones!

As Apple loses market share, its costs to manufacture are actually increasing due to massive competition…

Apple's losing tablet market share faster than it lost smartphone market share

Android has moved to over 44% market share in tablets from less than 3% in less than a year and a half. That's amazing and much faster growth than it exhibited in smartphones – a category in which Android literally dominated in worldwide and US smartphone growth (as well as installed base re: US) in just a few short years. Apple dropped from just over 96% to just under 55% in the same time frame. Again, as with the smartphones, the Android tablet tech is superior to that of iOS products and as iOS normalizes the difference, margins will suffer. Margins will drop (is dropping) faster for tablets because prices are coming down as fast as tech is increasing.

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Prices are dropping…

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Costs are increasing…

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So what does all of this add up to? Margins dropping!!! Just as I said last summer... Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 

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Hey, I would hope that I raised the specter of margin compression just now in all but the staunchest of fanboys, but why isn't it showing up in the reported numbers? Because Apple had what appears to be an unrepeatable blowout quarter that allowed them to shovel large quantities of deprecated iPhones to consumers at full price. In said quarter iPhones where just over half of the company revenue. With stiff competition from Android, they will have to show and prove in terms of R&D and/or discounted pricing and that's going to cost some margin reducing, real money. The upside? The iPhone 5 should be an amazing device. You see what a little competition provides?

Still, the iPad is 20% of revenues and if it grows, margins drop even more...

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Have I been wrong on Apple? – Not yet, at least not any more wrong than I have been on Greece, or RIMM. Granted the share price has soared, but remained within 10% to 13% of the recommended valuation bands for about 5 months, with benefits to nimble traders (of which I am not). The stock price has performed well, but I never said the stock price wouldn’t do well. I don’t discuss stock prices outside of paid subscriptions. If or when I’m wrong, I’ll be the first to admit it. In 4 quarters if there’s no further sign of my thesis bearing out I’ll admit it, but guess what’s happening already….

Will I be wrong on Apple? Of course its possible, but things are looking like they are following the thesis rather well. 

This is the story. Apple is a phenomenal story that makes a lot of money…. But… They make supranormal profits through supranormal margins in a highly competitive space wherein they have extremely competent competition since Google arrived on the scene. Until Google, everybody else was fumbling so Apple printed money Bernanke style!. Most importantly, though… They compete directly with their own suppliers! Does anybody who is not the staunchest fanboy truly believe their profit position is sustainable competing against the very same companies they have to rely on? They can still be wildly successful, and just have a normalizing of sales growth combined with a slip in margin and there goes the rosy share price projections. Is there a chance of this happening? Once more then, shall we

Well, they are currently losing marketshare (which the media never reports)

They are forced to drop the prices of their key products (which the media seldom reports).

They are losing margin (which the media never reports)

Despite this, the company is growing profits and revenues like bananas. Why? Because the market in general is growing like bananas. There’s a lot of risks to this growth though:

1. Patent litigation (the company was forced to remover the iPhone from German shelves just a month or two ago, and got it overturned)
2. Natural competition (should be self explanatory)
3. Margin normalization (ditto)
4. Direct competition with suppliers
5. Heavy macro headwinds (high unemployment, Euro crisis, China hard landing) for its two primary products, both of which are essentially luxury products

Despite this. Apple as a retailer, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500), as per Zerohedge: It's Official - Apple Is Now Bigger Than The Entire US Retail Sector

If the biz class 101 rules ring true, this could very ugly very fast... The Company had a slam bang quarter last, but much of that is essentially unrepeatable in the near term, reference Anecdotal Observations On Apple's Recent Quarter.