Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
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reggie@veritaseum.com
I was going to name this piece "Why Sell Side Wall Street and the Mainstream Media Can't Touch Me", but I decided to go the humble route :-) Do you guys remember those highly paid Wall Street analysts and popular MSM guys who had $1,000+ price targets on Apple just a few months ago? Let's reminisce, shall we...
- Gene Munster [Piper Jaffrey] Says Apple Is Going to $1,000 - Businessweek Apr 2012
- Apple's Quarter Was Lousy, But Stock Still Headed To $1,000 - Forbes Oct 26, 2012
- Andy Zaky: Apple will cross $1,000 within 15 months - Apple 2.0 ...Sep 18, 2012 – And hit $1500 before the end of 2014, predicts the manager of an Apple-only hedge fund Zaky called that bottom in mid May.
- Cramer's 'Mad Money' Recap: Apple $1,000 Not Half-Baked...Apr 3, 2012
Let's contrast this to what I have espoused over a similar time frame...
- 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 - This pretty much says it all, right Mr. Munster of Piper Jaffrey??? Yeah, I called you out on this one! Here is an excerpt for good measure, but before you read it remember that Apple's thrashing at the exchange has forced it to renounce its earnigns manipulating ways - just as I anticipated!!!
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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? ... 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... The analytical community and the (sheeple) investors which they serve... Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: 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.
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- A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!
- A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple - This reviews the history of the commoditization of the PC at the hands of Microsoft (2010)
- Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression
- Apple on the Margin - This is an illustration of margin compression, before the fact. Yes. Tomorrow's financial news,,, yesterday!
Now, on to the title of the article and why these guys just don't understand Apple...
Apple is not the leader of the post PC world!
Post PC World! That was part of the marketing mantra created by Steve Jobs and his RDF (Reality Distortion Field). PCs are personal computers. Personal computers are small (relative to mini computers and mainframes) computing devices. Apple made/makes nearly ALL of its revenues from PCs, particularly once they became imbued with always on telecommunication capabilities (ex. the Internet). These PCs include iMacs. Macbooks, iPods, iPads or iPhones - any way you look at it they are just PCs or ultra-portable PCs.- So point one, PCs are still alive and well (thus far)...
- Point two, Apple makes nearly all of its money from PCs...
- Point three, Apple is not the leader of the PC world right now. It's not Dell nor HP, either. An Asian company is the PC leader - Samsung!
Samsung has out innovated, out distributed, outran and outsold Apple using the leverage of a free OS/ecosystem that is currently best of breed and improving at what is at least 3x the speed of the competition. Here's a tidbit to chew on..
Worldwide (traditional) PC shipments totaled 89.8 million units in the fourth quarter of 2012 (down 6.4% from Q4 2011) and is on rapid and continuous downward decline in terms of growth (4Q12) - IDC
In the worldwide smartphone market, vendors shipped 219.4 million units in 4Q12. The year-over-year growth was 36.4%, as compared to what most people consider the PC's growth of negative 6.4% Althought the high-growth smartphone market was dominated by Samsung and Apple, prices are being driven down substantially by challengers. As excerpted from IDC's mobile press release:
Kevin Restivo, senior research analyst with IDC's Worldwide Quarterly Mobile Phone Tracker. "Vendors with unique market advantages, such as lower-cost devices, can rapidly gain market share, especially in emerging markets. A good example is Huawei, which overtook LG as a Top 5 vendor in the overall mobile phone market and passed HTC to become a Top 5 smartphone vendor."
"The fact that Huawei and ZTE now find themselves among the Top 5 smartphone vendors marks a significant shift for the global market," noted Ramon Llamas, research manager with IDC's Mobile Phone team. "Both companies have grown volumes by focusing on the mass market, but in recent quarters they have turned their attention toward higher-end devices. In addition, both companies have pushed the envelope in terms of industrial design with larger displays and smaller form factors, as well as innovative applications and experiences."
What do ALL of these Asian companies have in common? What do ALL of these companies, except Apple, have in common? Well, for one, they're all growing a hell of a lot faster than Apple. In addition, Samsung has already overtaken Apple. But there's more. Here's a hint... Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression.
So, what else is the sell side missing? Hardware is Dead!
Or at least the fat margined hardware model. Reference Smartphone Hardware Manufacturers Are Dead and Computer Hardware Vendors Are Dead, Part Deux! Yeah, you're not going to hear this from many investors or analysts, but then again how many can really see the forest for the trees? So, you ask, "How is it that hardware is dead?" Well....
- For one: The open source OS paradigm calls for rapidly improving hardware specs at ever lower prices. I have pointed to evidence of this above, as these Asian OEMs produce ever better product at ever lower prices - just like the old school PC industry. This drives Google's info-centric business model which is why Google pushes free Android.
- Two: after years of outsourcing manufacturing tech and UP to low cost labor Asian countries, those countries have found a way to produce trinkets of their own. Of limited quality and value so you say? Well, remember the iPhone is a Chinese phone, through and through -at least Chinese built. So now you argue, it's American designed, just Chinese made! Please peruse the Oppo Finder 5, a phone that's drastically superior to the iPhone 5 in practically every single way, retailing for $100 less than the cheapest iPhone 5 made. Low cost, low margin products combined with Google's free OS will drive the price of hardware down to near zero, if not negative. Google even has its own hardware arm now (Motorola) to facilitate this downward march in margins and prices. Suppose Google decides to create best of breed Nexus devices and give them away just below cost? Imagine the best smartphone available in the world, unlocked, without a contract, for the cost of a single monthly wireless phone payment??? Google's Nexus program is acting as a training ground to teach Google's Motorola division to build best of breed! Google's biggest and most successful partner - Samsung, is an Asian company. Samsung Electronics of South Korea reported today that its quarterly profit jumped 76%, as its Galaxy smartphones beat rival Apple's iPhone in each quarter of 2012. What many seem to have missed is that EBITDA, Operating and Gross margins all slipped QonQ though. A sign of things to come??? Remember, Google benefits most when the barriers to access information are least. Reference "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!" as well as my videos below...
Samsung is also currently Google's biggest threat. This (soon to be combative) symbiotic relationship is akin to the relationship that Samsung had with Apple. Competitors, yet symbiotic partner/clients. Samsung and Google are poised to have a slugfest. Their relationship is similar to that of Samsung and Apple, with Samsung being the Apple in this case. Apple is highly reliant upon Samsung for memory and processor chips, and screens. Although Apple is a the biggest Samsung client, it's by far not the only one and the Chinese manufacturers are up and coming.
Since Samsung is highly reliant on Google's Android but Google has significant diversification when it comes to its reliance on Samsung, Samsung's role is reversed here. You do see who's winning the Samsung/Apple battle, don't you? Expect the same conflict with similar results when Samsung butts heads with Google, unless some significant changes come into play - Which is quite possible in this rapidly morphing landscape.
Despite this, I'm sticking with Google on this for now. You see, despite Samsung's meteoric growth and triumphs over Apple, even its margins are sliding Q on Q, but most miss this because of the massive jump in earnings. Yes! Margin compression! Remember, RIMM and AAPL (and Nokia too) both exhibited this massive jump in earnings before commoditization born from the Android less than free model struck home. Many were caught with their pants down who didn't read BoomBustBlog.
I warned in plenty of time to both avoid loss and profit on the short side for each company:
- Research in Motion in early 2010: Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
- Apple from 2010 till the ultimate short call in October just past: Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All
- I also laid clear the path to Google's prominence as far back as 2010, when there was not a peep from the sell side, see Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm .
Now, Samsung seems to be the most innovative of the handset vendors to date, but if I'm right, they will end up having to innovate in a commodity space just like the traditional PC manufacturers (Dell, HP, etc.) have to do now. Why? Because of point number Three...
The new PC is not even a PC anymore, its a multi-tiered, multi-function, distributed cluster of interactive, location aware, multimedia applications sharing your social activities and data through a network of servers - in short, it's the cloud!
For right now, GOOGLE IS THE CLOUD! See my video descriptions of Google's business models above.
Apple can't do cloud!
Simply ask those iMap (our whatever it's called) users who were Bamboozled into switching from Google Maps.... and Apple will not learn the Cloud until it has been a "has been" in the likes of Sony and the Walkman or the PlayStation. That's the base case scenario. The optimistic case is that Apple learns to do the cloud enough to compete with and possibly beat Google, and burns deep into its cash horde, reducing margins along the way. Yes, that's the best case scenario. You see, it's not about who has the best products services at this point. I believe that's Google and its partners, but again that belief is beside the points. In order for Apple to be competitive in a truly post PC world (I can't even say remain competitive) it simply HAS TO DROP MARGINS!!!
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