Monday, 18 October 2010 19:56

Reggie Middleton Wasn't the ONLY Openly Apple Bear in the Blogoshpere, Was He?

The latest on Apple's earnings that went so far in corroborating what I've been preaching for months to a bunch of crazed, excitable Apple fanatics who simply refused to see facts for what they were:

From CNBC:

Apple surpassed quarterly earnings expectations again with the help of strong sales of its iPhone, but iPad sales and margins disappointed [strong demand, but the smart money is waiting to see what the Android tablets are capable of - I don't think they'll be disappointed], and its shares sank.

Weaker-than-projected gross margins [exactly as I anticipated - see 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] and iPad shipments disappointed investors who had expected more from a company that had smashed Wall Street's targets in each of the past eight quarters. Apple shares dropped 7 percent in late trading after initially being halted. The stock finished the regular Nasdaq session [AAPL  318.00  3.26  (+1.04%)   ] more than 1 percent higher. Sales of Apple's popular iPhone jumped 91 percent to 14.1 million units in the quarter. The company sold 3.89 million Macs, an increase of 27 percent. Apple sold 9.05 million iPods, marking a decline of 11 percent year over year. The company 4.19 million iPads in the quarter....

"Ipad, a little bit disappointing there. Street was expecting closer to 5 million units," he said. "The problem is supply, they can't make enough of them. iPad will shine in the December quarter. I believe it will be the holiday gift of choice." [The problem is more than supply. Yes, bottle necks affect sales, and there is more than ample demand to drive said bottenecks, but as I stated earlier, the "smart money" is waiting to try out the fleet of Android tablets that are coming. I am a consumer of these products, I can speak from personal experience.]

Gross margins in the fiscal fourth quarter came to 36.9 percent, a tad below Wall Street's average forecast of 38.2 percent. [Uhhh,, that's a bit more than a "tad", see Apple on the Margin]

"It's an incredible phenomenon—not only did they beat our heightened expectations but they've blown past forecasts, and it's primarily driven by the iPhone," said BGC's Colin Gillis. [and as expected, unbridled Apple optimism without bothering to even glance at the trend that is forming. After the fact, the next statement will be peppered all over the media - An "unexpected" plunge in Apple's margins caused a crash sell off in the NASDAQ today, as nearly all stocks save Google fell"]

From Bloomberg: Apple Forecasts Profit That May Miss Predictions

Oct. 18 (Bloomberg) -- Apple Inc. forecast profit for the current quarter that may miss analysts’ predictions amid supply constraints that hampered sales of the iPad computer. Profit will be about $4.80 a share in the current period, which includes the yearend holiday shopping season. Analysts surveyed by Bloomberg had predicted profit of $5.03. Apple fell in extended trading.

Apple sold 4.19 million iPads last quarter, fewer than the 4.5 million predicted by Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis. Sales may have been impeded by difficulty in getting access to the parts needed to make the device, said Giri Cherukuri, chief investment officer of Oakbrook Investments. “People may be a little disappointed with the weaker iPad sales,” said Cherukuri, whose firm owns Apple shares. “Apple also had conservative guidance for the next quarter. The market is trying to digest that.” Apple, based in Cupertino, California, slumped 5 percent to $302.02 in extended trading. It had climbed $3.26 to $318, a record, at 4 p.m. in Nasdaq Stock Market trading. The shares, up 51 percent this year, surpassed $300 for the first time last week.

Smartphone makers using Google’s Android operating system took share from Apple during the second-quarter [Yep, Competition May Take a Bite Out of Apple], researcher ISuppli Corp. said in a report last week [Exactly as forecast on BoomBust -iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!]. Google’s Android software, used by manufacturers including HTC Corp., Motorola Inc. and Samsung Electronics Co., is the most popular smartphone software in the U.S., according to a study from Gartner Inc. [See Android Increases the Revenues of Those That Adopt It, to the Detriment of Those That Don't?]. Samsung, HTC, Motorola and Dell Inc. are among the companies using the Android operating system in tablet computers to rival the iPad. Hewlett-Packard Co., the largest computer maker, also is developing a tablet computer. Apple Chief Executive Officer Steve Jobs may get a sales boost by expanding the availability of the iPhone in the U.S. Verizon Wireless may begin selling the device in January, two people familiar with the matter said in June.

I actually gave a warning of Apple's potential for margin compression on CNBC (about 3 minutes into the video) a few hours before they reported. So, take a look at how the market reacted...

Was this an "unexpected" occurrence? Hell no! BoomBustBlog clued you in last month. Actually, it wasn't a clue - I stated it EXPLICITLY! Reference "

...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.

Those that are interested in my take on Apple's potential and actual margin compression issues should subscribe and download File Icon Apple iPhone Profit Margin Scenario Analysis Model. For those that thought the BoomBustBlog was just finance and real estate, to date we are 3 for 0 in the technology space, and I have quite a few more companies to go. In the mobile computing cue is still Apple itself, quite a few component companies and potentially even Microsoft.

The Research In Motion Forensic Valuation and Analysis is Released to the Public

For those who want a sample of our analysis, I have made the RIM model available for free download now that it has hit our initial price targets

The Complete, 63 pg Google Forensic Valuation is Also Available for Download to all paying subscribers.

More 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
Last modified on Monday, 18 October 2010 20:16

2 comments

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  • Comment Link Reggie Middleton Tuesday, 19 October 2010 02:48 posted by Reggie Middleton

    Additional comments on Apple:
    n Bloomberg today - http://noir.bloomberg.com/apps/news?pid=20601108&sid=a.21BFqoJxAw
    Some realistic money managers were interviewed and Steve Jobs made a few comments, and this is what they had to say...

    "The rising popularity of devices using Google’s Android software may hurt Apple in the long term, said Michael Obuchowski, chief investment officer of First Empire Asset Management, which holds Apple shares.

    “Everyone is closing in and it’s a huge question of how they are going to respond,” said Obuchowski, whose firm oversees $4 billion. “I’m really worried about Apple; I’m not convinced that I’m going to hold Apple two years from now.”"

    "‘Commodity’ Experience
    Jobs dismissed the threat of rivals. Apple’s approach of designing the software and hardware for its devices results in a better user experience, he said. By contrast, Google gives Android free to handset makers including Motorola Inc. and HTC Corp., creating a “commodity” experience, he said. “We are very committed to the integrated approach, no matter how many times Google tries to characterize it as closed,” Jobs said. He said Apple is outselling BlackBerry-maker RIM and he doesn’t “see them catching up with us in the foreseeable future.""

    Notice how he failed to say Apple was outselling Android. This is material, because they were materially outselling Android 2 and 3 quarters ago. Androids growth rate is simply phenomenal, and its business model may prove unassailable unless Apple makes some drastic changes (ex. allowing cloning) - changes that I doubt management will be willing to make. Jobs also (understandably) failed to mention that the "commodity' Androids materially outperform the iOS products in terms of features. This is pretty much in direct contravention to the concept of the term "commodity", isn't it????

    "Munster, who estimated Apple would sell 11 million iPhones, said last week that supply shortages likely held back sales of both the smartphone and iPad. The cost of making the iPhone may be increasing, said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. The device accounts for 43 percent of Apple’s revenue. ‘‘We saw what we think is a pretty remarkable increase in iPhone costs,” and that’s fueled concern over margins, Hargreaves said in an interview with Bloomberg Television."

    Good to know he's been reading BoomBustBlog. Remember, supply shortages can very well stem from competition for suppliers and supplier's attention. Is it Android again. Here's a hint... Does the sole patent holder and sole manufacturer of Apple's branded IPS Retina Screen plan to become one of the most prolific Android phone vendor's in the world? If so, where does that leave Apple? Margin compression!!! Or worse. Read up on your proprietary Apple content BoombBustBlog subscribers!

    "Verizon Phone - Even so, competition is increasing. The Android operating system was the most popular smartphone software in the U.S. in the second quarter, according to Gartner Inc.

    Samsung, HTC, Motorola and Dell Inc. are among the companies using Android in tablet computers to rival the iPad. Hewlett-Packard Co., the largest computer maker, is developing a tablet computer.

    Apple may get a sales boost by expanding the availability of the iPhone in the U.S. Verizon Wireless may begin selling it in January, two people familiar with the matter said in June."

    You can bet your left nostril hairs that the deal Verizon cut is NO WHERE near as sweet as the one AT&T gave Apple. What does this spell? Margin COMPRESSION in the quest for wider distribution to prevent Android (to late) from gaining critical mass and taking over.

    "Jobs also said he’s been surprised by iPad purchases by business customers. “We haven’t pushed it real hard in business and it’s being grabbed out of our hands,” Jobs said. “The more time that passes, the more I am convinced that we’ve got a tiger by the tail.”

    I agree that the business adoption for the iPad is cool and big positive development. I don't see why Jobs would be shocked, for simple consumption the iPad is truly a marvel. But, the caveat still remains... Will Android devices outperform and the same or lower price points? Probably. Will Android proliferation drive up costs and drive down margin? Most definitely!

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