This is a contributed piece by BoomBustBlogger "Long Short Trader". While I do not endorse, or corroborate his work, it does make for an interesting read. I also find that I share his opinion on Seeking Alpha as well. Enjoy....


In late June of this year, a friend told LST to look into shorting Organovo Holdings, (“ONVO”), a “3D printing” concern. LST missed most of the move, but it nevertheless turned out to be a decent short. ONVO naturally led LST to look into the other 3D printing names as well, such as DDD and SSYS. LST avoided shorting them at the time for various reasons, including:

  • There appeared to be a real underlying 3D printing growth story, though LST was not able to determine who would be the winners
  • Certain growth oriented investors and promoters, who had previously (and successfully) promoted names like CMG, MAKO, BNNY, MNST, etc. were saying that DDD was the real deal, the best name among its peers, etc… so LST figured the risk of a continued parabolic move up were real
  • No one mentioned the possibility of fraud or accounting issues; rather, most of the skeptical comments swirled around “overvalued”, “overextended”.

LST kept these names on the back burner…until an article critical of DDD came out this Monday: http://seekingalpha.com/article/999501-3d-systems-has-the-printer-jammed

LST is generally not a huge fan of seeking alfalfa, but was pleasantly surprised by Douglas W. House and Gray Wolf Research’s work. Not to mention, House comes across as a very articulate, objective, responsible, respectful, and overall nice guy, based on his DDD piece (See the comments section in the piece as well; He responds with clarity and wit, even as some of his detractors do not).

Flash forward to yesterday night. DDD announced the following (after market close): 

DDD announced today that it plans to hold a conference call and simultaneous webcast to discuss, fact-check and clarify several materially inaccurate statements and conclusions made in recently published articles related to various matters including its calculation of growth, accounting methods and acquisition activities on Monday, November 19, 2012, at 8:30 a.m. Eastern Time.

“We are aware of certain recent articles and their materially inaccurate and misleading conclusions.  We reaffirm the accuracy of our public filings and accounting methods in all respects, and are pursuing legal remedies to hold those responsible parties accountable for what appears to be malicious, irresponsible and self-serving articles.  We look forward to discussing, fact-checking and clarifying these inaccuracies for the benefit of our shareholders, customers and partners, who we believe have been irrevocably harmed by these articles,” said Abe Reichental, President and CEO of 3D Systems

While the Douglas House piece elevated LST’s interest in shorting DDD, it is the company’s unexpected response (so far) that has put the nail in the coffin. You can assume that LST will initiate a starter short position (in some form) in the coming days. Specific problems LST sees with DDD’s response:

  • DDD Says it is “Pursuing Legal Remedies” – Note that the stock of companies who go after critics, and pull the legal card, tend not to fare so well. These types of companies who shoot the messenger tend to betray a guilty conscious. The response is a classic Spy the Lie* moment.
  • Refers to the articles as “Malicious, irresponsible, and self-serving” – LST found the article well-intended, responsible, and not self-serving (or at least no more self-serving than DDD). LST believes the management is looking to distract and intimidate its critics. It is quite ironic that DDD is picking on one of the most even-toned skeptical pieces that LST has seen in recent memory.
  • DDD does not say the claims are false – DDD skirts around the issue with sweeping statements like “We reaffirm the accuracy of our public filings and accounting methods in all respects”, or “their materially inaccurate and misleading conclusions”. Nowhere does DDD simply say the claims are false. LST sees this, too, as a poor attempt to distract.
  • Why Not Simply Provide Supplementary Disclosure on all the Acquisitions – Sunshine is the best disinfectant, after all.

LST is likely going to do more work on this and related names. As of now, DDD reminds LST of the not-so-rare earth schemes, like MCP, REE, etc. back in 2011. The similarities are quite amazing. Just like the not-so-rare earth names in 2011, there is a legitimate business trend in 3D printing land. HOWEVER, the publicly traded names are probably not the best vehicles to benefit from the said trend. To make matters worse with DDD, looks, walks, and sounds more like a plain vanilla roll-up.

DDD, then, is not a valuation short: it is looking more and more like a Fad short, where the market has confused this roll-up for something it is not. LST leaves you with a list of concerns as identified in the above-mentioned pieces.

SUMMARY OF RED FLAGS

  • A garden variety roll-up that is perceived to be, and promoted as, a hot growth/tech play (note that roll-ups trade at very low P/E multiples)
  • Concerns that there is channel stuffing
  • Issues with poor disclosure, accuracy, and quality of organic growth; that core growth is deteriorating even as the consolidated #s look fine due to acquisitions
  • No true earnings growth (a.k.a. free cash flow)
  • Reliance on capital markets for growth; DDD needs the market, the market doesn’t need DDD
  • R&D underinvestment relative to competitors, which isn’t exactly what you find in true growth names
  • Downgraded auditors back in 2003, from a big four firm to a more regional one (went from Deloitte to BDO)
  • Most recent acquisitions’ year over year growth over comparable 9 month period (Z-corp and Vidar) is flat
  • Management says revenue from “The Cube” will be immaterial for the rest of the year
Published in BoomBustBlog

Last Friday I posted Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!!, wherein I outlined the profitability of the BoomBustBlog Apple research from a trading perspective. This crux of that article was to debunk the widely assumed notion that I was bearish on Apple's share price for 2 years. The reality of the matter was that the paid research and opinion clearly supported much of Apple's share price until right about the last earnings report, until I notably went bearish and Apple promptly lost 25%.

apple stock and front month options

Notice how this chart shows subscription research would have provided ample profits LONG and short, with the long presumed to be unleverred as a straight stock purchase. This is to put to bed any naysayers. Now, as to whether my many proclamations over the last two years regarding Apple were able to hold water, we let the facts speak on the reasoning behind the call and the accuracy of my call in the deterioration of Apple's margins, market share and status. The following was a document that was only available to paid subscribers (published in late 2010) but now is freely available since its message has come to pass. As you read this, please keep in mind that the document was published a year and a half ago, even though it does seem like it is recent. I have just released fresh research on Apple that details the lower bounds (pessimistic scenario) that I see for the share price. Subscribers can access it here Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail).

If after reading the article linked in the first sentence and the material below, and you believe that I'm the best thing since Wall Street brokerages were private partnerships that could squander other peoples capital at insanely levered levels while misleading muppets with inanely bullshit analysis and sales pitches to 89% losses on their recommendations (reference Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon) just to get paid multi-million dollar bonuses instead of jsil time, then feel free to subscribe here. 

Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

As very accurately predicted in our report published above over a year ago, Samsung has eclipsed Apple in smartphone sales and capability!applApple -Competition and Cost Structure - unlocked Page 01Apple -Competition and Cost Structure - unlocked Page 02Apple -Competition and Cost Structure - unlocked Page 03 copyApple -Competition and Cost Structure - unlocked Page 04 copyApple -Competition and Cost Structure - unlocked Page 05Apple -Competition and Cost Structure - unlocked Page 07 copyApple -Competition and Cost Structure - unlocked Page 08 copyApple -Competition and Cost Structure - unlocked Page 09 copyApple -Competition and Cost Structure - unlocked Page 10 copyApple -Competition and Cost Structure - unlocked Page 11Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

 

 

Published in BoomBustBlog

I hear so little hate on the Apple call these days. When the stock first dropped after the (3rd BoomBustBlog forecast) earnings miss and the lackluster iPhone 5 debut, all I heard was "well you've been pessimistic on Apple for years!". When I released my research to actually show that I've been one of the most realistic and accurate investor/analysts to follow Apple, I then heard "but your timing was off!". When I pointed to the specific call to move to the pessimistic band of my research in early October (when Apple broke $700, an all time high), and the stock dropped nearly 25%, all I heard was......................................................................................................................................................................................................

Let this be a lesson to one and all! Do not fall in love with a name, a stock, a company, or an idea. Save your love for your significant others and your children. Let's walk through a hypothetical BoomBustBlogger's Apple holdings, assuming he followed recommended research valuation bands, presumably pushing a 375% gain and counting, unless he decides to take profits at this point. I will do this by simply reviewing the blog posts. 

As you can see from the charts below, I have always been fairly accurate on the share price of Apple. I did personally try to short it last year as it missed earnings (and the price did drop), but it was only marginally profitable. After that my subscription research implied Apple's share price was not excessively valued in the base case scenario, implicitly riding the wave up via valuations. I even moved the optimistic valuation band higher on 3/15/12 after underestimating foreign and Asian sales. All of this does not discount the infamous margin compression theory that was the backbone of the pessimistic scenario, as we shall soon see.

As soon as I got a hold of an actual iPhone 5 I knew the real short was in. After a 42% rise in Apple's share price I publicly moved my focus towards the pessimistic valuation band in my October 12 post A Review Of The Accuracy Of Last Quarter's Apple Earnings Notes (subscribers see Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail). This post and the several subsequent posts listed the specific reasons why I knew that Apple had officially seen its heyday from a stock value perspective. Front month slightly OTM puts on Apple (strike price chosen arbitrarily so as to protect the intellectual property that is the BoomBustBlog pessimistic valuation bands, which are for paying subscribers only) have yielded 314% so far. The ride up on Apple long stock (42%) plus the timely called ride down via short dated puts (314%) make a delicious dinner for the year and window dressing at your local underperforming hedge fund, eh?

apple puts small

Simply click here to subscribe, or gift the subscription to your local brokerage and banking buddies who just don't get it how this stuff works, to wit - The Blog That Could Have Saved That Institutional Broker - Or - Beware Of Those Poison Apples!!!.

I privately (for subscribers) moved the pessimistic valuation band several days earlier in the post Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money! Here's an excerpt:

To begin with, brand new Apple valuation and forensic research is now available to all subscribers. I suggest you jump on it now while it's hot...

 apple product chart growth copy

Well, it looks as if my Apple ruminations and research have come to Fruition - and rather accurately at that. Since Apple has such a cult following, I will set the facts straight right here in a nifty little timeline as Apple tumbles in real time. This is to correct those who are comprehension challenged in saying that I've been crying to short Apple for 400 points. To begin with, I run a subscription site, I generally don't give away actionable advice for free, I charge for it. I have warned about Apple's macro and business conditions - yes, but whether to go long or short on the stock, I only opined in public once. Read below to see how that turned out. My next post will start revealing some of my actual subscription materials in order to make public the accuracy and prescience therein. Is it time for 1000s and 1000s of rose colored #iPhone sporting #iSheep and #fanbois to issue kudos to the BoomBust???

From a market and competition perspective, the writing was on the wall awhile ago. I blogged about this point often, and distributed the opinion and analysis freely. The fanboi-like naysayers apparently had a problem with differentiating fundamental reality on the street with share prices (which invariably lag). This was the case with Research in Motion, another very popular and strong performing tech darling which we also hit a grand slam on via bear run as we warned the stock will would drop from $60s and it ended up in single digits - see Hindsight Is 20/20, And As Luck Has It Our Foresight On Research in Motion Was Right On The Money Two Years Ago. The inverse came about with our Google research (Reggie Middleton currently leading the CNBC Stock Draft Pick contest, see his opinion on air here) as it went from the $400s to mid $700s to settle in the high $600s so far.

 aapl research accuracy copy

Monday, 05 November 2012 The Blog That Could Have Saved That Institutional Broker - Or - Beware Of Those Poison Apples!!!

Rochdale Trader Made Unauthorized Purchases Of As Much As $1 Billion In Apple Stock Last Month - Well, it's obvious the brokerage didn't buy that trader a subscription to BoomBustBlog.

Friday, 26 October 2012 After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years

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

Thursday, 25 October 2012 Microsoft Is Doing What The "Has Been Giants Of Yesteryear" Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE!

Friday, 12 October 2012 A Review Of The Accuracy Of Last Quarter's Apple Earnings Notes

 A subscriber convinced me to post the 1st quarter's valuation bands (subscribers, see Apple Margin & Valuation Note 03/15/2012) for Apple to squelch the comments of those who are guessing what's behind the firewall. Our base case scenario was right on target, and  during the target and after the earnings release I realized that we underestimated international (especially Asian) sell though and shifted the weight to out optimistic band which also proved fairly accurate. As all can notice, the pessimistic band is not show, and that is where the value lies here. I am now shifting my bias towards (that's towards, not to) the pessimistic band, for I feel Apple has now started to feel the competitive and margin pressures that I warned of, and has done so right at the deadline that I gave in 2010 (this is just as much a factor of luck as it is skill, alas, if it bears fruit it bears fruit). The latest valuation bands can be accessed by paying subscribers below (click here to subscribe):

Apple 4Q2012 update professional & institutional
Apple 4Q2012 update - retail
"iPhone Margin worksheet - blog download

image005 

Tuesday, 09 October 2012 Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!

To begin with, brand new Apple valuation and forensic research is now available to all subscribers. I suggest you jump on it now while it's hot...

 apple product chart growth copyapple product chart growth copy

Well, it looks as if my Apple ruminations and research have come to Fruition - and rather accurately at that. Since Apple has such a cult following, I will set the facts straight right here in a nifty little timeline as Apple tumbles in real time. This is to correct those who are comprehension challenged in saying that I've been crying to short Apple for 400 points. To begin with, I run a subscription site, I generally don't give away actionable advice for free, I charge for it. I have warned about Apple's macro and business conditions - yes, but whether to go long or short on the stock,I only opined in public once. Read below to see how that turned out. My next post will start revealing some of my actual subscription materials in order to make public the accuracy and prescience therein. Is it time for 1000s and 1000s of rose colored #iPhone sporting #iSheep and #fanbois to issue kudos to the BoomBust???

 

 Monday, 08 October 2012 Apple Weakness Now Apparent To Others Besides BoomBustBloggers

Now that the weakness in Apple is apparent to all, and not just BoomBustBlog subscribers.... AAPL priced relative to the SPY... looking for this 4 year trend to break for the aapl story to be over as a market out-performer.

AAPL relative weekly rising wedge

Wednesday, 03 October 2012 Lauren Lyster & I See The iBubble Go iPop Once Those 10 Million MBS Trader Jobs Fail To Materialize As Bernanke Promised

 I discussed this in detail with Lauren Lyster on Capital Account. The margin discussion started at 7:55. In this video I also warned that when the iBubble goes pop, so goes the NASDAQ, and as if on cue...

Monday, 01 October 2012 iBubble, iPop - Apple Is Now More Than 97% Of The Personal Computing Market Capitalization! If That's Not A Warning Sign, You Can't Read!!!!

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

Apple 2Q2012 results analysis Final - redacted Page 1Apple 2Q2012 results analysis Final - redacted Page 1

Apple 2Q2012 results analysis Final - redacted Page 3Apple 2Q2012 results analysis Final - redacted Page 3

Apple 2Q2012 results analysis Final Page 4

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Published in BoomBustBlog

 In the post After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years, I came clean with the historical performance of my Apple research. Of course, many a hater had their hearts crushed as math and common sense once again ruled the day. Still, we see herd mentality and brand loyalty effect even those who're really supposed to know what they're doing - to wit: Rochdale Trader Made Unauthorized Purchases Of As Much As $1 Billion In Apple Stock Last Month

... a trader at Rochdale Securities made unauthorized purchases of $750 million to $1 billion in Apple stock last month and now the firm is seeking a lifeline. 

It's unclear when the unauthorized stock purchases took place, but shares of Apple have dropped around 11.5% since Oct. 1.

Stamford, Connecticut-based Rochdale, which employs noted bank analyst Dick Bove, is looking for a possible deal to recapitalize such as a capital injection or a merger, Bloomberg reports citing sources familiar. 

Well, it's obvious the brokerage didn't buy that trader a subscription to BoomBustBlog. I've been following Apple for roughly two years now and have been one of the (if not the) most accurate fundamental pundits on said matter, with my valuations hugging Apple's share price rather tightly for the entire time I have followed it.

aapl research accuracy copy

Reference Apple - Competition and Cost Structure 05/16/2011, which is now available for download to all due to its dated nature - even those who do not subscribe. Please note that this report only includes base case scenarios, while the latter reports included base, optimistic and pessimistic scenarios - which is much more realistic. Although some of the later reports are also stale-dated, they contain valuable knowledge that I'm not prepared to release to the public for free at this time.

On Friday, 12 October 2012 I posted A Review Of The Accuracy Of Last Quarter's Apple Earnings Notes where in I went over the true value of my last quarterly review of Apple's performance. Please note that this was before the Q3 earnings release:

A subscriber convinced me to post the 1st quarter's valuation bands (subscribers, see Apple Margin & Valuation Note 03/15/2012) for Apple to squelch the comments of those who are guessing what's behind the firewall. Our base case scenario was right on target, and  during the target and after the earnings release I realized that we underestimated international (especially Asian) sell though and shifted the weight towards the optimistic band which also proved fairly accurate. As all can notice, the pessimistic band is not shown, and that is where the value lies here. I am now shifting my bias towards (that's towards, not to) the pessimistic band, for I feel Apple has now started to feel the competitive and margin pressures that I warned of, and has done so right at the deadline that I gave in 2010 (this is just as much a factor of luck as it is skill, alas, if it bears fruit it bears fruit). The latest valuation bands can be accessed by paying subscribers below (click here to subscribe):

Apple 4Q2012 update professional & institutional
Apple 4Q2012 update - retail
"iPhone Margin worksheet - blog download

Just to make this perfectly clear, I've been stating that Apple had margin compression stemming from extreme competition coming for two years now. That does not mean that Apple will collapse. As a matter of fact, I've included my stale Apple reports and a graph that shows I've pretty much been on target with Apple's share price the whole while. And for those who are so concerned with timing, I've highlighted in bold font where I've told subscribers to turn pessimistic on Apple's share price. This was October, roughly 12% ago in share price and many tens of billions of dollars in market value.

image005

Keep the following in mind as you peruse this post...

apple product chart growth

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

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

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

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

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

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

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

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

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

aapl research accuracy copy

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

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

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

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

Key take aways from this quarter:

iPad sales came in low

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

apple product chart growth

Apple 2Q2012 results analysis Final - redacted Page 2

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

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

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

Apple 2Q2012 results analysis Final - redacted Page 1

 

Apple 2Q2012 results analysis Final - redacted Page 3

Apple 2Q2012 results analysis Final Page 4

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

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

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

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

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Published in BoomBustBlog

Roughly 3 years ago in my "mobile computing wars" series, I foretold of The Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars! In particular, I warned of the benefits to the consumer and pitfalls to the potential losers of the battle between Apple, Microsoft and Google, reference There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. By the way, by Q1 2010, it was already evident to BoomBustBloggers that Research In Motion was a goner - ). While the bulk of my opinion and analysis was directed between the upcoming heated battle between Apple and Google (The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift and An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught) which was accurately called, I also appeared to be the lone gunman in warning that Microsoft is not even close to being out of the race just yet - . This was early 2010. Well, nearly 3 years later, we have MSFT doing what IBM, LOTUS, HP, DELL, and a wide variety of other tech companies simply didn't have the balls to do. What is that, you ask? They risked cannibalizing their cash cow revenues and kicking their lazy, unmotivated (despite declining margins and market share, via ass whoopin's from Google and Apple) OEM's in the nuts, forcing either an exponential growth via a pheonix-like rebirth style wake-up call or a collapse from atrophy. Either way, Microsoft is attempting to position itself to benefit. The previous world tech rulers simply got too comfortable in their make money by doing nothing, cash cow, monopolistic business lines and sat around while more innovative and nimble competitors literally ate their lunch then came bombarding in demanding dinner as well (say Apple).

Well, this is a good time (albeit a risky one) for MSFT. With revenues and margins declining on a structural basis for the first time (in its history) it is actually attempting to reposition itself to lead in the fastest growing segment in technology, not to mention the segment that is currently eating its lunch. That is the ultra mobile computing segment. Windows phone is a work in progress, and while capable from a software perspective, still lacks the downright killer hardware and flexibility of Android high end devices an also lacks the cult-like following and brand loyalty of Apple's devices. It's a shame since MSFT was actually in this space early, nearly first. Actually, it was early in smart phones, right behind Nokia and Psion (both European companies) and was first in actual usable (arguably) tablets - both in the early 1990's. It that monopolistic apathy that allowed Apple to come from behind with relatively dumbed down tech and outgrow Microsoft. The Surface Tablet is MSFT's revenge though. CNet calls it the best productivity app yet...

Like the Galaxy Note 2 clearly makes the iPhone appear to be a toy rather than a useful device, the Surface does the same to the iPad.

 I noticed that many pundits pan the Surface for its lack of available apps. The Surface is a 1st gen product, and it does lack a wealth (or even a moderate amount) of 3rd party apps. What seems to be overlooked is that MSFT has built the Surface around the most in demand, the most profitable, and the least likely to be accurately replicated apps in the industry - the ubiquitous Microsoft Office Suite of apps. To assert that the Surface doesn't have any apps when it ships with the latest and the only touch-centric version of this app suite is to totally miss the point of the product. Let's be serious here- the iPad, and most Android tablets (save the Asus Transformer series) is/are useless for true productivity where content creation (sans drawing on a screen) and productivity are concerned. They come nowhere near PC replacements. Even those products that can come near (such as the Transformer Prime) lack a truly accurate reproduction of the office suite that is used in 90% of the workplaces world wide. As this Bloomberg article states: Microsoft’s Surface Tablet Lacks Apps to Rival IPad

Microsoft Corp. (MSFT) will be constrained in a contest against Apple Inc. (AAPL) in the market for handheld computers by unveiling a tablet that doesn't work with some of the most widely used downloadable applications. The Surface RT, a tablet that runs the latest version of Microsoft’s flagship operating system and goes on sale tomorrow, won’t feature applications for Facebook Inc. (FB)’s social-networking service or Apple’s iTunes music store.

One can combine the profits (and daily users) from Facebook and iTunes, double the sum, and you probably wouldn't get to half the profits of the Office franchise. True Office compatibility is what is holding back those who spend the truly big bucks in both the consumer and the enterprise side from adapting tablets en masse and truly dropping the desktop or notebook form factor PC for good. Comparing Facebook and iTunes to Office is like comparing a go kart to a minivan. Anyway you look at it, factoring superior build quality, pleasing aesthetics, and most importantly, something you can actually use to get work done, Microsoft has released a truly credible threat to the Android/Apple franchise in the tablet space - I still remain unconvinced in the phone space (where Android is killing them), but the jury is still out and the curtains don't' close till the calorically challenge chick sings...book

The Surface is being touted as a full PC (Ballmer: Microsoft Surface 'Literally a Full PC), and it appears as if there's some credibility to that. It will be very interesting to see what Google's response is (they have purchased a popular mobile phone/tablet office suite to bolser their current Google Apps/Drive cloud storage offering. Bundling this into both high end tablets and thier upcoming $99 offerings with ultra thin keyboard covers would be just what the doctor offered for both the enterprise and the student markets. Unfortunately, I feel Apple's hubris may be their shortcoming, for the iPad-mini is a disappointment, and appears to be simply an answer to the Nexus 7 and Amazon tablet, overpriced to avoid the margin compression inevitably coming down the pike (). The same appears to go for the iPhone 5, for I feel they should have packed much more tech into that device. It is so far behind the Samsung Galaxy Note 2 and S3 (roughly two years behind) that the only real sales they will get will come from extreme brand loyalty or from those who have never tried the Samsung and other competing Android products. While this may permit Apple to grow at impressive rates, basically they will start to simply cannibalize their existing user base and many new users will opt for the best and the newest tech. Apple may feel "Blackberried" or "RIMM"ed sooner than expected.

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Published in BoomBustBlog

FB Sep 21 12 18 puts

Facebook's price bounced 20%+ between earnings announcement yesterday and the posting of this article.  Curiously enough, the stock bounced to within a mere SEVENTY CENTS of our mutliple's based valuation target the day after earnings. I feel some love is in order here, for that was  damn good call! Subscribers, please reference the FB IPO Analysis & Valuation Note - update with per share valuation released exactly 5 months ago on 05/21/2012 (click here to subscribe). Just to remember where we came from (I'm just using the time period where it was possible to short or buy puts on the stock, to keep things real)....

As for keeping it real:

MOBILE GROWTH: Roughly 14 percent of its ad revenue came from mobile advertising, up from somewhere around zero. This is to be expected, but since we don't have any real baselines or history to compare this to, it truly means nothing other than Facebook has and can make SOME money from mobile. The query du jour is how much, and when, no?

THE NUMBERS: Facebook Inc. posted a loss of $59 million, or 2 cents per share, in the July-September period. Adjusted earnings of 12 cents per share were a penny better than expected. Revenue rose 32 percent to $1.26 billion. That's also higher than the $1.23 billion Wall Street was looking for.

All should still be aware of the primary factor in this "growth company" stock's story....

image002

These facts should not have been a surprise, and blog subscribers were made aware nearly a year ago, as excerpted from our 2nd most recent forensic analysis.

FB IPO Analysis  Valuation Note Page 03

As excerpted from Facebook's earnings press release: Payments and other fees revenue for the third quarter was $176 million, a 13% increase over the same quarter in the prior year and a 9% decline sequentially from the second quarter of 2012. So, where did that drop likely come from? Well reference the part about Zynga below, warned roughly 7 months before the fact!

FB IPO Analysis  Valuation Note Page 04

 

As excerpted from BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO:

I made it clear that those who lost roughly half of their capital at or near the IPO price simply forfeited those funds from not readign BoomBustBlog, and this sitaution was virtually guaranteed. I felt so strongly about it that I made much of my opinion available for free this time.

Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Double your money by shorting the Street's advice! Once Again!

Here is a full year of free blog posts and paid research material warning that ANYBODY following the lead of Goldman, Morgan Stanely and JP Morgan on the Facebook offereing would get their Face(book)s RIPPED!!! Could you imagine me on a reality TV show based on this stuff??? Well, it's coming...

  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
  8. On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available...
  9. Is Time For Facebook Investors To Literally Face the Book (Value)?
  10. Facebook Bubble Blowing Justification Exercises Commence Today
  11. Facebook Options Are Now Trading, Or At Least The PUTS Are!
  12. Reggie Middleton breaks down "Muppetology," Face Ripping IPO's, and the Chinese Wall!
  13. Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs
  14. Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?
  15. Shorting Federal Facebook Notes Are Not Allowed Today ?
  16. As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analysis. 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. I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update, and the latest iteration can be found here FB IPO Analysis & Valuation Note - update with per share valuation 05/21/2012. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

Published in BoomBustBlog

Below are my thoughts, but before I get into them I will like to reiterate that many pundits, investors, analysts and traders still have no clue as to the type of company that Google is. Imagine a private equity firm that has consistently put out the leaders (as in the number one company) in several industries, every 3rd year or so for 10 years straight. Now, take that private equity fund and give it it's own operations with some of the smartest engineers and strategists in the world, and have them spend 1.5 Billion (that's Billion with a "B"") in R&D annually to discover new things. Now fund that private equity fund and R&D camp with cashflow from the world's largest automated web advertising firm, whose closest competition is so far away as to barely even be known for its wares by the average person. Now, add to it the worlds fastest growing, largesta and most technically advanced mobile operating system. Then add to it the largest patent portfolio and 4th largest handset maker in the world (remember the mobile industry is where its at now). Then add to it the largest and by far the most prominent digital media destination AND publsihing property in the world. Then add to that the largest consumer and enterprise cloud operations in the world. 

Finally, add to the mix the largest, most oft use and most entrenched search engine which (when combined with the cloud properties) basically makes this company the defacto gatekeeper for digital data for the world.

What would you have with this new world conglomerate? You'd have Google, that's what you'd have. Now, on to my anecdotal quips on Google's dramatic Q3.

  • Enterprise wide margins have dropped. I suspect the Motorola acquisition and the influx of mobile revenues, which alter the supply-demand landscape dramatically, thus dropping pricing power for the near to medium term. 
  • Core site revenues are growing along trend line
  • International growth is healthy, though hampered by FX hedging losses
  • Paid clicks increased 33% YOY while costs per click decreased 15% over same period - core margin expansion!
  • Traffic acquisition costs are up 8% YOY - paying more for traffic, but less than margin expanding...
  • Motorola revenues are material, and their margins are weak which pulls down overall margins. This is a foreseen negative but management obviously feels it is worth it, likely due to the largest patent portfolio in the business, the 2nd largest set top box position in the industry and the 4th (roughly) best handset manufacturer in the industry. I'll side with management on this one.
  • "Other costs of revenues" more than doubled YOY, which should be a major cause for concern. As a matter of fact it is such a large increase as to be akin to one-time events. These need to be investigated in detail.
  • The key determinant of the value of this quarter's numbers is whether these increased expenses are (in increasing value from very bad to potentially very good):
    1. 1. - Recurring expenses signaling a structural change in the business
    2. 2. ~ Onetime expenses
    3. 3. + Investments in future revenues inaccurately characterized as cost and expense.
  • My bets are that those algo traders and armchair pundits masquerading as investors and analysts are overlooking strategic investment and calling it expense. A glimpse into the EDGAR filing’s cash flow quip reveals some clues: “Cash Flow and Capital Expenditures – Net cash provided by operating activities in the third quarter of 2012 totaled $4.0 billion, compared to $3.95 billion in the third quarter of 2011. In the third quarter of 2012, capital expenditures were $872 million, the majority of which was for production equipment and facilities-related purchases. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the third quarter of 2012, free cash flow was $3.13 billion. We expect to continue to make significant capital expenditures.

You heard it direct from the horse’s mouth! Despite heavy infrastructure and development expenditures, plus the biggest acquisition ever, Google increased free cash flow. Google will make a significant push into original digital media and content. Expect YouTube to compete directly with NBC, FOX, HBO, etc.

Risky? Yes!

Potentially profitable and disruptive? Ask the classified and newspaper industries (or at least what’s left of them) if Google knows what it’s doing!!!!

As excerpted from our nearly 70 page forensic Google report (Subscribers, see Google Final Report 10/08/2010), I attempt to educate on the investment prowess of Google (that is both internal investment and external acquisition). Remember, many of Google's investments have become the largest instances of their type in the indsutry. The largest web video presence: YouTube! The largest mobile OS? Android! The largest mobile ad presence? Admob! the largest online productivity suite? Docs/Drive! I can go on with Gmail, Voice, etc., but if I haven't driven the message home yet then I probably never will. Google management has made it clear that YouTube will compete with major networks and Google Docs will compete and is actually pulling some business from Microsoft Office in the Enterprise. These are mere anecdotal examples. We all know the Android story already...

Google Final Report Sep 29 Page 49

Google Final Report Sep 29 Page 50

Google Final Report Sep 29 Page 51 

Google Final Report Sep 29 Page 52

Google Final Report Sep 29 Page 53

Google Final Report Sep 29 Page 54

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Finally, let's look at Google today compare to the broad market over the last 6 months...

goog stock price vs sP

'Nuff said!

Published in BoomBustBlog

 A subscriber convinced me to post the 1st quarter's valuation bands (subscribers, see Apple Margin & Valuation Note 03/15/2012) for Apple to squelch the comments of those who are guessing what's behind the firewall. Our base case scenario was right on target, and  during the target and after the earnings release I realized that we underestimated international (especially Asian) sell though and shifted the weight to out optimistic band which also proved fairly accurate. As all can notice, the pessimistic band is not show, and that is where the value lies here. I am now shifting my bias towards (that's towards, not to) the pessimistic band, for I feel Apple has now started to feel the competitive and margin pressures that I warned of, and has done so right at the deadline that I gave in 2010 (this is just as much a factor of luck as it is skill, alas, if it bears fruit it bears fruit). The latest valuation bands can be accessed by paying subscribers below (click here to subscribe):

Apple 4Q2012 update professional & institutional
Apple 4Q2012 update - retail
"iPhone Margin worksheet - blog download

image005

Keep the following in mind as you peruse this post...

apple product chart growth

 

Apple 2Q2012 results analysis Final - redacted Page 1

Apple 2Q2012 results analysis Final - redacted Page 2

Apple 2Q2012 results analysis Final - redacted Page 3

Apple 2Q2012 results analysis Final Page 4

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

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

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

Published in BoomBustBlog

To begin with, brand new Apple valuation and forensic research is now available to all subscribers. I suggest you jump on it now while it's hot...

 apple product chart growth copy

Well, it looks as if my Apple ruminations and research have come to Fruition - and rather accurately at that. Since Apple has such a cult following, I will set the facts straight right here in a nifty little timeline as Apple tumbles in real time. This is to correct those who are comprehension challenged in saying that I've been crying to short Apple for 400 points. To begin with, I run a subscription site, I generally don't give away actionable advice for free, I charge for it. I have warned about Apple's macro and business conditions - yes, but whether to go long or short on the stock,I only opined in public once. Read below to see how that turned out. My next post will start revealing some of my actual subscription materials in order to make public the accuracy and prescience therein. Is it time for 1000s and 1000s of rose colored #iPhone sporting #iSheep and #fanbois to issue kudos to the BoomBust???

Spring 2010 - I declare the mobile computing wars are on and Google looks to be the front runner (light years ahead of the sell side)...

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

In October of 2010, I warned that Apple would face margin compression and make a short candidate. I DIDN'T say it should be short at that time, but I did say within 4 to 8 quarters competitive realities would catch up with it...

October 2011

So, what happened exactly 4 quarters later? Oh yeah, Apple misses on margins, the stock drops -  Reggie Middleton Wasn't the ONLY Openly Apple Bear in the .. This was the only time where I publicly stated I would short Apple. Announce contrarian short candidate - company misses and the stock dropped, right on the 4 to 8 quarter schedule! Sounds pretty good to me. Go to 2:20 in the video for a clear description of the margin compression illustrated below...

{youtube}Q3g__vy6Pmw{/youtube}

In the mean time, here are some updated margin charts to support what was said in the video and the extant Apple research for subscribers to review.

iBubbleiBubble

Yes, Apple is the vast majority of the desktop computer equity market capitalization!

Apple revenues as a smartphone companyApple revenues as a smartphone company

Apple has, in just a few short years, morphed from a computer computer to a smartphone and tablet company, which essentially are just new age computers anyway. It's just that no one sees Motorola, RIMM or Nokia that way!

ipad marginsipad margins

iphone marginsiphone margins

As the key revenue drivers see there margins compress (and I told you so two years ago), entity level margins will drop as well:

Which Is The More Sustainable Business Model - Selling The World's Information or Selling Shiny New Things???

Apple Margin chart

Google is a true threat to Apple that simply cannot be ignored. Here I explained that threat im explicit, easy to follow detail...
 
Of course, I put my money where my mouth was and publicly declared Google to be a superior investment to Apple on CNBC's stock draft. To date, I'm currently in the lead as Google drastically outdistances Apple...  Reggie Middleton currently leading the CNBC Stock Draft Pick ...
Now, exactly 8 quarters after my 4 to 8 quarter premonition, does everybody want to get short Apple and long Google??????

October 2012: Everyone jumps on the BoomBustBlog bandwagon...

 goog vs aapl

Below is my latest on Apple, showing whether I believe this is the time to short and what I think Apple is really worth. I feel I have been on the forefront of the Apple issue AND have been rather accurate as well.

Click here to subscribe. After subscribing, I wish all newcomers to download the very simply and quick Apple margin model below to put your most optimistic assumptions in to see how they may look in terms of product sales.

 

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Published in BoomBustBlog