Displaying items by tag: technology

In continuing with the "Hardware is Dead" mantra, I bring you a company that I introduced last year as the maker of some of the most beautiful, durable and innovative handsets available. Below is an introductory overview of their latest flagship handset, the N1 from Oppo - a Chinese company that I featured on my blog about a year and a half ago with thier then flagship - the Finder 5. It was the first five inch full HD phone that I was aware of. It was the first phone sporting a 13 MP camera that I knew of. It was sexy, a sandwich of metal and hardened glass. It was also the thinnest smartphone that I knew of at the time. Although a year old, it is still competitive in terms of performance and specs. Unlike the iPhone, it was durable as well. How durable? Check out this demo...

So, if you're a true nerd such as I, you must wonder what the follow-up flagship from this little known company that makes reference quality high end Blu-Ray players is like. Well, rotating 13 MP camera, 3600 mAH  battery, BLE remote control, rear mounted touch pad - it's different and an obvious attempt at innovation beyond the simple rectangular slabs that we've grown used to. Of course, not everthing is herbs and roses here, but one thing is for sure - priced below $600 US, it can easily put margin pressure on the big boys if it catches on. I should know, because I pioneered the hypothesis of Southeast Asian companies armed with Android ripping through profit margins of the big boys three years ago when the mere thought of such was blasphemous and I was thought to be inept. Now, if you Google "Apple Samsung margin compression" you get...

  1. Samsung Follows Footsteps Of Apple, HTC, Nokia - Wasn't That ... Sep 6, 2013 - I've written several articles on this topic, with Samsung, Apple, RIMM, NOK and ...  Apple Gears Up To Combat The Margin Compression That...

  1. Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry ...Mar 7, 2013 - Two and a half years ago I declared in my mobile computing wars series that Google would commoditize the mobi...

Here's a quick video of the unboxing and a comparison to the market leader as well as my personal favorite. There are two technical errors in the video, One, the camera does NOT have OIS (optical image stabilization) which is apparent in low light situations, and two the camera assembly has a 6 element lens array, not 7. This may be minor to most, but the technical geeks among you will notice the snafu.

About the camera...

There's a lot to write about the camera on this phone. Let's start with... 

The Good

Let's face it, the iPhone is still probably the most popular phone among the cosmopolitan, metropolitan cutie crowd. They buy it because it's cute, and these girls use the cute iPhone to make a lot of cute "selfies". From grade school, to high school, to undergrad, to college and grad school, to the young adult dating scene, to married with kids, to taking self portrait flics with the grand kids - the front camera on smartphones get worn out by the female cosmo crowd. This is where the N1 stands out.  It uses one very high quality camera on a swivel instead of a big/little combination back and front. The results, combined with innovative software, are quite impressive.

The self photography (or selfie) market is bigger than even I thought. I took the N1 to various spots around NYC city and let cute girls esconced in make-up try it out. They loved it. Check this out...

You swivel the camera a full 270 degrees to the from to take a hi-res selfie...

CAM00303

You then invoke the "Make-up" app and choose the desired effect (sexy, elegant, sping freshness, blah, blah, blahhh...). The phone then applies its processing wizardy around your face, eyes, head and mouth. If you click the "fine tuning" option, you can drill down to specific facial parts to custom sculpt your face...

CAM00304

CAM00305

 CAM00300

 CAM00308

You custom sculpt your facial parts by grabbing and dragging the dots to where you'd like to expand or contract your eyes, mouth and lips...

 CAM00309

This is the finished product...

CAM00312 

For those non-make up type guys (I profess that I may be one of them) who may not be able to see the difference, this is a split screen comparison...

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I believe Oppo may be on to something here... 

Then there's the Bad...

I consider the N1 to be a photography-centric phone, and as such I must admit that I was rather dissappointed with the performance of the camera in low light settings and even in broad daylight, particularly when compared to competing high performing shooters such as the LG G2 and the new Nokia phablet (I believe it's the 1520) & the 1020. There was a material amount of noise, graininess and trouble locking on focus. From a company that has put out such high quality product in the recent past, I was really taken aback. So much so that I decided to look into the problem further. In defense of the company, I believe I got one of the very first  - if not the first - production models and it may have shipped a tad bit incomplete. 

The camera on the Oppo N1 is a 13 Megapixel Sony EXMOR RS Stacked CMOS Sensor unit. This is the exact same sensor found on the Find 5 (above), the Lenovo K900, the Samsung Galaxy S4 and the Galaxy Note 3. It is a 1/3.06″ sensor. Oppo attempts to set it apart from the competition by complementing it with a six element f2.0 aperture lens. According to the marketing material the lens is coated with IR and Blue filters for reduced chromatic aberrations and purple fringing. The innovative part is that whole unit sits on a swivel-type arrangement that can rotate 206 degrees for using the same camera for front-facing as well as rear-facing shots.

Remember investors, it is the higher end cameras on phones that have all but destroyed the point and shoot industry (ie. Minolta>Sony, Samsung, Nikon, Canon, etc.) and is clearly threatening to move up the food chain to higher end prosumer and mirrorless devices. Many may poo - poo this statement and sentiment, but then again so did those consumer point and shoot manufactuers from a few years ago - you know those very same guys whose market is just about subsumed, and it is clear that the smart money will look for photographic innovation from companies who are trying to outrun margin compression. The problem is you will probably not be able to do so unless you have low labor cost structure - as in SE Asia, and even then, the laws of economics will catch up to you - right Samsung? From the Oppo web site...

 
 

Cutting Edge Optics

N1 is the first Android smartphone to use six physical lenses, giving you a clearer image while eliminating any distortion. The latest generation stacked CMOS sensor, upgraded type 1/3.06 imaging module and f/2.0 wide aperture lets more light in, so you can take great photos even in dark environments.

Not satisfied with what was available, we partnered with the leading optics companies to tailor make our own image-processing solution for improved white balance, exposure and focus. No matter the lighting condition, the N1 camera captures astonishing clarity and detail.

Reinvented Flash Technology

Like any camera, the N1 is equipped with a flash to light up dark environments. The dual flash design consists of a normal flash for back facing shots and a diffused softer light for when you flip the camera forward. With its brightness tunable via the OPPO N1 camera software, the front facing flash will provide perfect lighting conditions for any front facing shots.
 
 

Capture the Essence of Time

With unprecedented hardware support, the N1 supports long exposure photography of up to 8 seconds. Capture more than pictures; capture the pulse of the moment.

Camera Design

Designing a rotating camera was a challenging engineering problem. More than a year of work and over 20 different camera designs ultimately led to the simple brilliance of the OPPO N1. The small camera housing includes more than 10 modules, 50 cables, and 67 components. Every part is structurally reinforced and undergoes anti-static treatment.

 

So, you must be asking the same question that I asked myself. With all of this fancy schmancy camera tech, how is it that the N1 produced pictures that I wasn't happy with? For one, I believe it's a low level firmware and/or driver issue. That means that the N1 could still quite possible be the best thing since sliced bread, but was shipped (to me, at least) with half-baked software that crippled what looks like excellent hardware. This is a guess, mind you. This is the evidence.

This is the LG G2 pic taken at full resolution with all automatic settings on, the picture has been cropped to fit comfortably on this page.

G2 sample cropped 

This is the Oppo N1 pic taken under the same conditions and settings...

N1 sample cropped

There is much more noise in the N1s version, and the more you zoom in and the closer you look the more apparent it is. The N1 underperformed the Note 3's camera and LG G2 (although most cameras do, even the Note 3). The N1 was litereally blown out of the water by the Nokia phablet. I presumed such poor performance from such apparently premium hardware stemmed from over compression and misprocessing of raw data from the sensor. To remedy such I downloaded Camere FV5, an app that allows DSLR level flexibility in configuring your Android smartphone's camera. It allows you to adjust the compression of the JPG file upon saving and to save in a near lossless PNG format. To all of the non-geeks who actually have a life and have no idea of what I'm talking about, this app allows you to take pictures without being tampered with by the OEM enginneers forethoughts on how the picture should be processed once taken. The logis is, if the pics were being overprocessed or compressed too much, this would solve the problem. Alas, even with the lack of compression, subpar results ensued. 

I'm going to give Oppo the benefit of the doubt on this one and request they clarify the issue with the camera. If I'm right and the drivers need to be tweaked and/or rewritten, the N1 may very well still be one of the best photographic phones on the market. 

 My next post on this topic will cover the N1s other features in comparison to its competition, how it pans out in day to day use (there's plenty of other sites who do benchmarks and other tech stuff) and most importantly whether this device or a device like this can make a dent in the US markets and consequently in Apple and Samung's profit margins.

Who Is Reggie Middleton?

Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analyst reports.

Reggie Middleton Wins CNBC's First Ever Stock Draft Investment Contest, and Does So By A Wide Margin!

Reggie Middleton's The Only Investor/Analyst To Publicly & Timely Call To Short Apple At It's All Time High and Go Long Google On CNBC!

The Financial Nostradamus!

Who Is Reggie Middleton & What Is BoomBustBlog?

Since the inception of his BoomBustBlog, he has established an outstanding track record, including but not limited to, the call of....

  1. The housing market crash in the spring of 2006 and publicly in September of 2007: Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? | After the collapse, a prudent bullish call as well... Joe Lewis on the Bear Stearns buyout Monday, March 17th, 2008: "The problem with the deal is that it is too low, and too favorable for Morgan. It is literally guaranteed to drive angst from the other side. Whenever you do a deal, you always make sure the other side gets to walk away with something.  If you don’t you always risk the deal falling though unnecessarily. $2 is a slap in the face to employees who have lost a life savings and have the power to block the deal. At the very least, by the building at market price and get the company for free!" | BSC calls are almost free and the JP Morgan Deal is not signed in stone Monday, March 17th, 2008 | This is going to be an exciting, and scary morning Monday, March 17th, 2008 | As I anticipated, Bear Stearns is not a done deal Tuesday, March 18th, 2008 [Bear Stearns stock goes from $1 and change to $10, front month calls literally explode from pennies to several dollars]

  4. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 |  May 2008
  5. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): 
    1. Will the commercial real estate market fall? Of course it will.
    2. Do you remember when I said Commercial Real Estate was sure to fall?
    3. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
    4. Generally Negative Growth in General Growth Properties - GGP Part II
    5. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
    6. BoomBustBlog.com’s answer to GGP’s latest press release and Another GGP update coming… (among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).
  6. The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
  7. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
  8. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
  9. The overvaluation of Goldman Sachs from June 2008 to present): “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look”, “When the Patina Fades… The Rise and Fall of Goldman Sachs???“andReggie Middleton vs Goldman Sachs, Round 2)
  10. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis
  11. Ireland austerity and the disguised sink hole of debt and non-performing assets that is the Irish banking system: I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!
  12. The mobile computing paradigm shift, May 2010:  »

Reggie Middleton Singularly Moves The Irish Banking System, Apparently Motivates Top Banking Regulator To Resign

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

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smartphones-picsay

Last week I aggressively chided rock star sells side analysts for daring to say that Apple's reported slide in gross margins weren't real reduced margins. Those who know the industry well know that Apple is being sucked into matching the efforts of the market king Microsft and the uber aggressive challenger Google in the offering of free office productivity software. Of course, this brings about #MarginCompression for all but Google since the other two companies actually sell this software while Google always gave it away for free.

Well, last week we say Apple write down nearly a billion dollars on this event, and today we can expect the same from Microsoft, again potentially couched in the effect of its weakening but still apparent reality distortion field. To wit, ZDnet publishes: Microsoft improves its free online Office

Where's Office for the iPad? Maybe you're looking in the wrong place. Today, Microsoft released its latest batch of Office Web App updates, pushing its free offering well past the feature set offered by its rivals.

Office is Microsoft's fattest cash cow. It's even more profitable than the ubiquitous Windows franchise. Pray tell, what happens when you materially increase functionality while simultaneously drop and/or maintain pricing at ZERO?

Once again, why is this happening?

For paying subscribers:

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deadbeat2 

Bloomberg reports: T-Mobile Sales Beat Analysts’ Estimates as Subscribers Surge. So, how did BoomBustBloggers know this would occur? Well, It started last year with the article "Deadbeat Carrier Creative Destruction In The Ongoing Mobile Computing Wars". You see, US wireless carriers are running one of the biggest Ponzi schemes around. The buy overpriced hardware from manufacturers on contract (see Have We Reached "Peak Premium Smartphone"?) mark up said hardware and then offer it at heavily and usurious financing rate otherwise called a subsidy. The US consumer buys these overpriced devices for a relatively small downpayment and then proceeds to pay through the nose to the carrier a very, very margin rich wireless fee for what amounts to a commodity service of dumb virtual pipes through the airwaves.  Not only does the carrier recoup its outlay for the device purchased en masse from the OEM, the carrier also tacks on and collects a very large premium for its post paid wireless services as well.

There are 4 major national carriers in the US, basically two big ones two smaller ones. The smallest of the 4, T-Mobile, consistently go beat up - losing out on the right to subsidize the iPhone at a loss (like AT&T used to and Sprint still does) and basically losing subscribers. Then they decided to do something about it. They said, "Hey, let's stop being deadbeats!". By changing their pricing plans and eliminating subsidies and instead selling pure access to their virtual pipes (like a carrier is supposed to) combined with actual "real" financing of the hardware (at competitive rates, nonetheless) they essentially committed DeadBeat Carrier Blashphemy. The only issue was, it worked, to the chagrin of the competition - reference:

 Reggie Middleotns Carrier Cost ComparisonReggie Middleotns Carrier Subsidy Cost Comparison

Now, back to the Bloomberg article whose substance we predicted this time last year: T-Mobile Sales Beat Analysts’ Estimates as Subscribers Surge

T-Mobile US Inc. (TMUS), the fourth-largest U.S. wireless carrier, reported third-quarter sales that exceeded analysts’ estimates as its cheaper service plans and phone-upgrade strategy attracted customers.

Sales rose to $6.69 billion, an increase of 8.7 percent when adjusted to account for T-Mobile’s merger with MetroPCS Communications Inc., according to a statement today from the Bellevue, Washington-based company. Analysts projected $6.58 billion, the average of estimates compiled by Bloomberg.

T-Mobile, which combined with MetroPCS in May, added 648,000 new monthly subscribers, topping the 401,000 average estimate and gaining for a second straight quarter. 

T-Mobile, which merged with MetroPCS six months ago, added 648,000 new monthly subscribers, topping the 401,000 average estimate and gaining for a second straight quarter. T-Mobile has benefited from offers such as zero-down financing on phones and a $10-a-month service that lets customers upgrade their devices more often -- a program that rivals such as Verizon Wireless, AT&T Inc. (T)and Sprint Corp. (S) have now adopted. 

Umm... Margin Compression!!!??? Remember we called this in the telecomm space a few months ago... Deadbeat Carriers Compete, aka #MarginCompression!!!

The net loss was $36 million, following a second-quarter net loss of $16 million. The average phone bill for monthly subscribers shrank about 3 percent to $52.20 from the second quarter as more customers opted for cheaper plans. Analysts had projected $52.86, according to a survey of seven estimates by Bloomberg.

... T-Mobile rose 1.7 percent to $28.83 at 9:42 a.m. in New York. As of yesterday, the shares had climbed 72 percent since May 1, following the MetroPCS merger. Deutsche Telekom rose 0.6 percent to 11.82 euros in Frankfurt.

Who in the hell is behind this rampany wave of #MarginCompression? Oh yeah! Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics. Google has created an atmosphere and environment that is primed to drive down the cost of computing and Internet access even further. I will discuss that in detail in my next article on this topic. In the meantime and in between time, read: 

Subscribers, this is directly relevant to both the Apple and the Google valuations. 

Recent Apple Valuation Reports

Subscribers, download the Q3 and Q4 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

Recent Google Valuation Reports

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Note: The next three annual subscriptions (professional or higher) will get the opportunity to purchase their own pair of Google Glass Explorer Edition, through the Glass referral program. Click here to subscribe, and if you want to be referred to purchase your own pair of Glass then email me after payment.  

smartphones-picsay

Last week in Reggie Middleton's Apple Q4 2013 Analysis: RDF In Full Effect As Analysts & Press Go GaGa Over Garbage! I wrote:

Apple Still Has The Business and Financial Press Mesmerized With It’s RDF (Reality Distortion Field)

For some reason when I read management comments and financial statements I seem to see something totally different from Sell Side Analysts and the financial and business press. This is an excerpt from “Business Insider” on Apple’s Q4 earnings results:

The stock initially tanked after the numbers were out thanks to weaker than expected margin guidance. Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

On the company's earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

Apple's margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 

Apple's margins have been and will be hit harder as I've predicted.  This non-sense about the deferred revenue from giving away software and Gene Munster's "real margin" comments are utter nonsense. Apple's reported margin IS ITS "REAL MARGIN"! The reason it is giving away its core software products for free is to compete with the entry and the threat of Microsoft's Surface 2 tablet that comes bundled with a real, the real, office suite - Microsoft Office. This makes it real deal contender in the enterprise, where Office is not on the de facto standard - it is the standard. It also has to compete with Google's Android who bought Quick Office and is now giving that office suite for free. For those who don't think that makes a difference, what OS do you think took the iPad from 92% market share in 2010 to 32% market share last quarter?

Let me add to this since both Gene Munster and I are both frequent CNBC guests:

gene munster aapl forecast

On the same network, I recommended an Apple short:

If you did this investment thing to actually make money, who do you think CNBC should have on more regularly???

Well, my analysis has been vindicated once again, as per the NextWeb

KitKat ships with Google’s Quickoffice, bringing Microsoft Office editing out of the box to all new Android users

With Android 4.4 KitKat, Google’s biggest blow to Microsoft isn’t against Windows Phone. It’s against Microsoft Office. You see, KitKat ships with Quickoffice, letting you edit Microsoft Office documents, spreadsheets, and presentations on the go, without paying a dime, straight out of the box.

This tidbit was largely lost in the news yesterday, given the large number of improvements and new features that KitKat offers. Yet it’s a very big deal: every Android user that upgrades to KitKat will get Google’s Quickoffice, and every new Android device (starting with the Nexus 5) that ships with KitKat or higher will get access to Quickoffice.

office anywhere 730x457 KitKat ships with Googles Quickoffice, bringing Microsoft Office editing out of the box to all new Android users

Google acquired Quickoffice back in June 2012. In December 2012, the company released Quickoffice for iPad, making it exclusively available for free to its Apps customers. In April 2013, it followed up with free Android and iPhone versionsfor Apps customers as well. Last month, Google released Quickoffice for free, making it available to all Android and iOS users.

Here’s what we wrote at the time:

Microsoft shot itself in the foot here. Sure it finally released Office Mobile for iOS in June and Office Mobile for Android in July, but there was one small problem: an Office 365 subscription was and still is required.

In other words, Microsoft matched Google’s deal. Now Google has hit back and undercut Microsoft once again, and this blow might be the biggest yet.

image078

Click here to subscribe or purchase this update. Paid subscribers click here: File Icon Apple 4Q2013 preliminary update. As we wait for my elfin magicians and presdigitation analysts to finsih up on the updated valuation numbers, I'm quite comfortable in recommending subscribers adhere to the latest set of valuation numbers proffered in the last Apple update. 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

See also:

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 The short call - October 2012, the month of Apple's all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

Published in BoomBustBlog

The 20 page preliminary report is ready for download to all paying subscribers. It tells the "truth" about Apple. This report does not contain an updated valuation section just yet. I'm still working on that for it is a bit more involved and complicated than I originally anticipated. Considering how quickly all of the sell side came up with thier updated valuations and marking their historical accuracy to market as compared to mine, one would think the prudent investor would be given pause. 

image078

Click here to subscribe or purchase this update. Paid subscribers click here: File Icon Apple 4Q2013 preliminary update. As we wait for my elfin magicians and presdigitation analysts to finsih up on the updated valuation numbers, I'm quite comfortable in recommending subscribers adhere to the latest set of valuation numbers proffered in the last Apple update. 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

See also:

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 The short call - October 2012, the month of Apple's all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

Published in BoomBustBlog

I’d like to start this report off with an excerpt from the last report, which ironically excerpted the one before that – to wit:

Possibly the biggest indicator of past research being of high quality is the ability to regurgitate it in the future as new research and have said research be considered of value, or better yet of extreme value and high quality. With that being said, I’d like all to realize that Our Q1 Report Said It All – Let’s Revisit How We Started That Report…

“Apple Is In Trouble – Plain & Simple!”

Apple has successfully transformed itself from a portable and desktop computer company to a mobile device company, and managed to do so right at the crux of the mobile computing boom. As such, it has benefitted mightily, briefly becoming the largest and most respected company in the world. Alas, what goes up must eventually come down. The largesse revenues and margins gleaned by Apple brought massive competition, and in the case of Google’s Android, business models specialized in gutting the fat margins which caused Apple to prosper. As a result, margin compression ensued, but very few actually saw a sign of it until it was too late (reference Deconstructing The Most Accurate Apple Analysis Ever).”

This quick traipse down memory lane is quite useful for Apple is now paying for the perceived above average margin displays of its recent past by reaping the extreme margin compression to be seen as it has now full transformed itself into a mobile device company. Again, as quoted from our Q1 report,

“Apple is now paying the piper for its shift into mobile by having its pipeline effectively saturated with mobile products, thus nullifying the margin expansion that the move into mobile products has brought on. Mobile products had higher margins than their desktop/laptop counterparts...

 The entire Apple story can be encapsulated in just two relatively simple charts. The first, found directly below, is profitability. Thus far, only the iPhone has been able to hold some ground but it has slowly been stripped of margin. The iPad business’s profitably is being gouged.

For those who haven’t done so, I strongly recommend that you read the last three Apple research reports. They have been absolutely on the money. Now, on to Apple’s most recent quarter…

Apple Still Has The Business and Financial Press Mesmerized With It’s RDF (Reality Distortion Field)

For some reason when I read management comments and financial statements I seem to see something totally different from Sell Side Analysts and the financial and business press. This is an excerpt from “Business Insider” on Apple’s Q4 earnings results:

Apple's numbers are out, and they're good. 

Revenue, EPS, and iPhone sales are ahead of expectations. iPad sales were a little worse than expected, but not too bad. 

The stock initially tanked after the numbers were out thanks to weaker than expected margin guidance. Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

On the company's earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

Apple's margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 
Read more: http://www.businessinsider.com/apple-q4-earnings-2013-10#ixzz2jDN1vWa4

Let’s parse this piece by piece.

“Revenue, EPS, and iPhone sales are ahead of expectations.”

Three and a half years ago I released analysis that puts this myth to rest. Apple is one of the most accomplished of sandbagging management. Paying subscribers, reference Apple Earnings Guidance Analysis 08/12/2010

apple sandbaging1apple sandbaging3

 

iPad sales were a little worse than expected, but not too bad. “

I wonder how one defines “not too bad”…

ipad sales miserable and getting worse

 

“Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. “

I've warned, and warned, and warned....

Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

 

Apple hardware costs spiking

 

On the company's earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

 

Apple's margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 

Apple's margins have been and will be hit harder as I've predicted.  This non-sense about the deferred revenue from giving away software and Gene Munster's "real margin" comments are utter nonsense. Apple's reported margin IS ITS "REAL MARGIN"! The reason it is giving away its core software products for free is to compete with the entry and the threat of Microsoft's Surface 2 tablet that comes bundled with a real, the real, office suite - Microsoft Office. This makes it real deal contender in the enterprise, where Office is not on the de facto standard - it is the standard. It also has to compete with Google's Android who bought Quick Office and is now giving that office suite for free. For those who don't think that makes a difference, what OS do you think took the iPad from 92% market share in 2010 to 32% market share last quarter?

There is a lot more contained in the upcoming (as in a few hours) Apple analysis for subscribers. Apple will have a very active year next year. The reason(s) is contained in the subscriber only report, in explicit detail, to be released in a few hours. I will update this post with links when it is ready for download. Yes, the truth is now for sale, and in Apple's case you can get a month of it for $275.

 

I refer my subscribers to the research documents below for the answers... 

 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

 

 

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

 

 

See also:

 

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 

 The short call - October 2012, the month of Apple's all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

 

Published in BoomBustBlog

Apple announces after the market close today. For my subscribers, I believe true valuation hovers around my base case scenario from the last Apple update. Of course, after we have crunched the numbers from this quarterly update we will have considerably more empirical data to munch on. As a quick review...  

Apple's major problem is that the vast majority of its profits come from 2 products, both of which are rapidly losing market share and are outclassed by the competition in many different ways. On top of that, the competition is both undercutting on prices and outperforming on tech. That's a bad combination for a company that relies on fat margins to sustain their share price.

iPhone-5-vs-Galaxy-S4-Xperia-Z-Ultra

The mere diversity of the Android universe is a significant threat to Apple's margins. Check this out...

2 40

A water-proof phone must be corny, right?

I know, many will say.. "But, But this is tablet, not a phone!!!" Well, if that's the case, it competes mightily against both the iPad and the iPad mini (the mini hurts Apple's historical margins and the iPad is dropping in both ASP and market share like a rock). We all know what follows rapid market share loss, right?

In early 2010 I warned on Blackberry (then RIMM), with market share loss to Android being the prime determinant... . I put significant data out in the public domain to illustrate my point and put explicit price points out for subscribers, ie. RIM Smart Phone Market Share, RIP? Was I right?

Blackberry market share vs margin correlation analysisBlackberry market share vs margin correlation analysisBlackberry market share vs margin correlation analysis

Sony Xperia Z Ultra Apple Compare

The iPhone and the iPad business franchises are still making money hand over fist, but they are also losing market share and margin - and doing so quickly...

image038image039image048

 The addition of (margin) mini products and iPhone 5Cs simply evidence what is obvious, the existence of products like those below are pressuing Apple and continue to eat at its hegemony...

11 xperia z ultra 271315438590382730

On top of the fact that Apple faces extreme compeition on all fronts, common business sense begs the question, Have We Reached "Peak Premium Smartphone"?

See also:

Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

 

  1. Here I go again – Hardware is Dead & Samsung Agrees
  2. When Berries Go Bad: BlackBerry to Slash Workforce by Up to 40% (As Predicted)
  3. Samsung Follows Footsteps Of Apple, HTC, Nokia - Wasn't That Quick?
  4. Looking Through Windows To See The Big Data On Fruit - Or Android Gets 'em Again
  5. iPad Shipments Decline As BoomBustBlog Time Machine Disrupts The Apple Reality Distortion Field Once Again
  6. Apple Bonds Proven To Have A Nasty Taste
  7. Angels, ArchAngels and Data Demons: The Smartphone Battle Is Officially Taken To The Cloud!
  8. Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics
  9. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!!
  10. Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In
Published in BoomBustBlog

carrierIQ homepageAbout a month and a half ago, I penned the piece NSA's Greatest Weapon In Surveillance? Outright Ignorance In Tech Consumers. The goal was to attempt to wake up the less than conscious in regards to where and with whom the true threats to privacy and security stem from. Those harping on innovative designs such as Glass as security threats are failing to see the forest due to the massive amount of tree bark in the way. This piece is another attempt at education from my perspective. 

I have been hard on the large US carriers, and for good reason. Barring the smallest (and not by coincidence, the most innovative) of the 4, these guys exemplify the monopolistic behavior that has caused America to fall behind the world on many levels. Basically, from an innovation and financial performance perspective, they're basically deadbeats! Hence, 

One other reason many should be down on the deadbeat carriers is also a very fundamental given, that really shouldn't be given - Privacy! Nearly all of the major carriers use the device that they sold you to snoop on you. US cellular carriers use an app that is basically one of the most widely dispersed spyware apps in this country. It can systematically syphon out location data, keystrokes and other aspects of e-mail and SMS conversations. Don't belive me, this is a quote directly from the vendor of the spyware itself:

Network Operators and device manufacturers determine whether and how they deploy the iQ Agent and what metrics will be gathered and forwarded to the Network Operators.  The iQ Agent receives instructions in the form of a profile, which activates the iQ Agent and defines what available metrics are to be collected and provides instructions on how to pre-process the data prior to uploading. The Embedded iQ Agent is not visible or discoverable by consumers.  Since it is deeply embedded inside the device software, it cannot be deleted by consumers.

In non-nerd, anti-dork English, this says carriers decide what the spyware app and Trojan Horse rips from your device and sends back to the carrier. This spyware/Trojan Horse is purposely hidden and concealed from the owner of the device. As per Wikipedia:

  • Spyware is software that aids in gathering information about a person or organization without their knowledge and that may send such information to another entity without the consumer's consent, or that asserts control over a computer without the consumer's knowledge.
  • Trojan horse, or Trojan, is a hacking program that is a non-self-replicating type of malware which gains privileged access to the operating system while appearing to perform a desirable function but instead drops a malicious payload, often including a backdoor allowing unauthorized access to the target's computer.[1] These backdoors tend to be invisible to average users, but may cause the computer to run slowly.  

 Here's a YouTube video showing the carrier spyware capturing keystrokes, SMS messages, emails, direct browsing activity, user names and passwords (in clear text, unencrypted) and other types of personal information. It also shows how aggressively the spyware is hidden from the enduser, and if found it is virtually impossible to stop or remove without rooting the phone. First a little Wikipedia background on the video's author:

On November 12, 2011, researcher Trevor Eckhart stated in a post on androidsecuritytest.com[23] that Carrier IQ was logging information such as location without notifying users or allowing them to opt-out,[24] and that the information tracked included detailed keystroke logs,[25] potentially violating US federal law.[26] 

On November 16, 2011, Carrier IQ sent Eckhart a cease and desist letter claiming that he was in copyright infringement by posting Carrier IQ training documents on his website and also making "false allegations."[27][28]Eckhart sought and received the backing of user rights advocacy group Electronic Frontier Foundation (EFF).

On November 23, 2011, Carrier IQ backed down and apologized.[29] In the statement of apology, Carrier IQ denied allegations of keystroke logging and other forms of tracking, and offered to work with the EFF.[30]

On November 28, 2011, Eckhart published a YouTube video that demonstrates Carrier IQ software in the act of logging, as plain text, a variety of keystrokes. Included in the demonstration were clear-text captures of passwords to otherwise secure websites, and activities performed when the cellular network was disabled.[31] The video of the demonstration showed Carrier IQ's software processing keystrokes, browser data, and text messages' contents, but there was no indication that the information processed was recorded or transmitted. Carrier IQ responded with the statement, "The metrics and tools we derive are not designed to deliver such information, nor do we have any intention of developing such tools."[32][33] A datasheet for a product called Experience Manager on Carrier IQ's public website clearly states carriers can "Capture a vast array of experience data including screen transitions, button presses, service interactions and anomalies".[34]

If the claims by Eckhart are true, the process of sending usage data is in conflict with Carrier IQ's own privacy policy which states: "When Carrier IQ's products are deployed, data gathering is done in a way where the end user is informed or involved."[35]

According to Wikipedia, IQ Agent (the spyware in question) was first shipped in 2006 on embedded feature phones and has since been implemented on numerous devices and operating systems, including smartphones (Android, RIM,[8] iPhone), USB modems and tablets. It is currently running on over 150 million devices, making it one of the most ubiquitous of spyware packages known to this author.

Here's some more interesting excerpts from said article:

 On December 1, 2011, Carrier IQ issued a "clarification" (reference 1 December 2011: Important Clarification About the Data Received from Mobile Devices) to its November 23 statements: "While a few individuals have identified that there is a great deal of information available to the Carrier IQ software inside the handset, our software does not record, store or transmit the contents of SMS messages, email, photographs, audio or video. For example, we understand whether an SMS was sent accurately, but do not record or transmit the content of the SMS. We know which applications are draining your battery, but do not capture the screen... As a condition of its contracts with operators, Carrier IQ operates exclusively within that framework and under the laws of the applicable jurisdiction. The data we gather is transmitted over an encrypted channel and secured within our customers’ networks or in our audited and customer-approved facilities... Carrier IQ acts as an agent for the operators. Each implementation is different and the diagnostic information actually gathered is determined by our customers – the mobile operators. Carrier IQ does not gather any other data from devices. Carrier IQ is the consumer advocate to the mobile operator, explaining what works and what does not work. Three of the main complaints we hear from mobile device users are (1) dropped calls, (2) poor customer service, and (3) having to constantly recharge the device. Our software allows operators to figure out why problems are occurring, why calls are dropped, and how to extend the life of the battery. When a user calls to complain about a problem, our software helps operators’ customer service to more quickly identify the specific issue with the phone."[39]

There has been debate whether Carrier IQ software actually sends the collected data in real time or if it is stored on the phone and only gets read out later. The company clearly states on its web page that its software is able to provide real-time data: "Carrier IQ’s Mobile Service Intelligence solution eliminates guesswork by automatically providing accurate, real-timedata direct from the source – your customers' handsets." (emphasis added).[40]

 

Of course, on the same page I got there clarification (1 December 2011: Important Clarification About the Data Received from Mobile Devicesfrom, you can also find this press release: 19 October 2011: Nielsen and Carrier IQ Form Global Alliance to Measure Mobile Service Quality. The authors at Wikipedia picked this up as well, to wit:

Although the phone manufacturers and carriers by and large say the software is strictly used to monitor its phone systems and not to be used by third parties, a press release on October 19, 2011 touted a partnership with Nielsen Company. The press release said, "Together, they will deliver critical insights into the consumer experience of mobile phone and tablet users worldwide, which adhere to Nielsen’s measurement science and privacy standards. This alliance will leverage Carrier IQ's technology platform to gather actionable intelligence on the performance of mobile devices and networks."[48]

Long story, short (as if it isn't already too late for that), instead of worrying about new Glasses taking a picture of you walking down the street (after 40 other cameras just did the same thing), you should be more focused on all of the info stored (against your will) and ripped from your cellular handset. Even if you were to give ALL of the carriers, and ALL of these spyware companies the benefit of the doubt, the way THIS Trojan horse is put together (client server relationship with complete push/pull capabilities), all the NSA has to do is flip a switch and the'll know what flavor 'snuff great grandma likes to chew! 

Consider yourself warned! I doubt very seriously if this revolution will be televised (or even streamed from Netflix!).

It took me nearly an hour to get this stuff off of my device, and even more time to lock it down. Those who are interested in having this institutional spyware removed from their phones for a fee should contact support [at] boombustblog [dot] com. My son is starting a service that will do it for you, but you will void your warranty as a result of seeking said privacy. Of course, anyone who purchased insurance should be covered anyway, but always read the fine print.

Despite all of this I still believe Tech Is Far And Large The Biggest Thing This Millennium - Lehman, EU Crisis Included. I am actively looking to servce on the boards of tech companies.  Security companies in the mobile space currently have my eye, but I'm looking to advise and serve on the boards of any company in the mobile computing space. For those who don't know me, reference "Who is Reggie Middleton?".

Published in BoomBustBlog

I'm going to take this time to demonstrate what I consider excellence in forensic and fundamental analysis. As most know by now, Google blew out the sell side analysts forecasts last Thursday to surge 18%+ to $1,011 per share. They beat on both the top and bottom line even as a major shift to mobile with its lower cost per clicks scared most analysts into forgoing the power of the Google engine. Well, my subscribers knew better. Reference Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?:

Google has almost consistently outgrown the adoption rate of web advertising. What does this mean? Well, it means that although Web advertising is getting bigger and more popular as a slice of the total advertising pie, Google is getting even bigger and more dominant in the space – not less. Google is beating competition back even as the market grows! 

Google ad growthGoogle ad growth


That's right! I easily informed all that Google is growing its ad business faster the market is growing, hence Google can outrun margin compression, and it has - reference Google Shares Jump To All-Time High On Q3 Earnings Forbes‎: 


Despite concerns over declining ad prices, Google GOOG +0.49% beat expectations in thethird quarter in both profits and revenues.

The search giant earned a profit before certain costs such as stock compensation of $10.74 a share on a 12% rise in revenues, to $14.89 billion. Net income was nearly $3 billion, or $8.75 a share.

Google’s shares were rising fast, by more than 6%, in extended trading immediately after the earnings announcement. The stock had fallen about 1%, to $889, in today’s trading.

Analysts had expected earnings before certain costs such as stock compensation to rise 15% from a year ago, to $10.35 a share. Net revenues were expected to rise 5%, to $11.9 billion (gross revenues of $14.8 billion), a big slowdown from even a quarter ago.

Ad prices, measured by cost per click, fell 8% from a year ago and 4% from the last quarter. In the second quarter, prices had fallen 6%, so if anything, the price declines are rising. Paid clicks rose 26% from a year ago and 8% from the second quarter.

The bottom line is that while ad prices continue to decline, that decline is offset considerably by more people clicking on the ads. “Clicks were up much more significantly than we expected,” Roger Barnette, president of search marketing firm IgnitionOne, said in an interview. However, 12% revenue growth is down yet again, the fourth straight quarter of declining sales, which were up 31% as recently as the first quarter.

There is much, much more to this story, though. My valuation numbers from last quarter have not changed much, but my foresight into the future has grown demonstrably, and I will be putting opinion out and investment opportunities accordingly over the next week - for both public and private equity investors. In the meantime, my paying subscribers should review the following valuation notes - as appropriate.

To demonstrate the level of foresight of BoomBustblog research, I present below is a 5 page excerpt of the 69 page Google forensic analysis that I released to professional and institutional subscribers three years ago. 

Google Final Report Sep 29 Page 01

Google Final Report Sep 29 Page 02Google Final Report Sep 29 Page 03Google Final Report Sep 29 Page 04Google Final Report Sep 29 Page 05Google Final Report Sep 29 Page 06Google Final Report Sep 29 Page 07

hese commands take even more precedent when viewed in context of Google's biggest launch of the year, Glass....

Google is in the final phases of launching a product, a product that is to personal productivity as the smart phone was to computing. The company is up about 10% since that video about a month and change ago...

From the latest quarterly valuation update for BoomBustBlog subscribers (click here to subscribe): 

BoomBustBlog releases its updated valuation on Google Inc. in the 2nd quarter of this year. The stock has registered a +47% return since our last valuation update in March 2012.

Google continues to play a dominant-leader role in the online advertisement and search market. Its market share in online advertisement has been consistently growing not only in the US, but also in the other geographies. Besides being a leader in the online advertisement market, the company has been continuously taking initiatives to broaden its product and service offering. The last year has seen a number of (now) well-known products.

The continuous endeavor to diversify product and services through sustained efforts in research & development forms an important component of our valuation. While we expect that the company will continue to grow its revenue off its leading space in the advertisement and search market, its ability to diversify its future revenue in different streams is a key to the current valuation. We therefore expect its revenue to grow along a more diversified route. This statement requires some explanation, for most still don’t seem to understand the Google business model. Google monetizes the vast majority of its initiatives through ad revenue. This causes many to label Google’s various ventures as a failure, due to being misled by cost shifting. Google cost shifts through a myriad of products, disrupting entire industries, then monetizes the results through “Ad Revenue”. Thus, looking for direct revenue streams from Android is fruitless in comparison to searching for strength in ad revenue bolstered by Android.

So how do I know if my thesis on this revenue diversification is on point. I instruct all to simply look at...

Google’s ‘other’ revenue

The nondescript "Other" revenue line... 

•“Other” revenue in 2009: $762 million, or 3.2% of $23.65 billion in total revenue

•“Other” revenue in 2010: $1.09 billion, or 3.7% of $29.32 billion in total revenue

•“Other” revenue in 2011: $1.37 billion, or 3.6% of $37.9 billion in total revenue

•“Other” revenue in 2012: $2.35 billion, or 4.7% of $50.18 billion in total revenue

The 2012 numbers are not inclusive of the Motorola Mobility operations. The Motorola revenue was approximately $4.14 billion on top of the other “other” revenue. For those who are not paying attention, Google's non-advertising revenue was $6.49 billion last year — or 12.9% of total revenue and growing like a weed!!!

How fast is the growth acceleration in the "Other" category? Q3 “other” revenue grew 85% compared with the year-ago period to $1.23 billion. That means that Google nearly doubled this revenue from last year, or put another way it's half of the entire total in calendar 2012 - made in just one quarter. If one were to look at the growth from a longer historical perspective, 2 years ago the “other” revenue total for third quarter 2011 was $385 million. That means that Google has produce MORE than 3x the revenue it did two years ago! Wait until Glass is released!

Expect the sell side to finally catch on to this, and when they do, expect valuation models to change accordingly.

Published in BoomBustBlog

Apple's flagship device, the iPhone 5S is facing tremendous competition from Android powered handsets. We now have devices that cost more then 15% less than the premier iPhone, yet run circles around the Apple flagship in nearly every single worthwhile category.Unlike the Android beasts of the recent past (sans the Samsung Galaxy series) these newer Android devices aren't only geek and engineer's toys - they are coming to market backed by centimillion dollar marketing budgets. If you remember, this is how Apple caught the crown.

Now, it's not as if Apple can't do better from an R&D, engineering and production perpective - it can. It's just that the company is trapped, hamstrung, by its need to incessantly safeguard its above industry average margins. Of course, whatever goes up, must come down, and we'll be seeing more of that in Apple in the coming quarters.

The "S" products are Apple's method of stuffing margins by selling what is essentially a commodity product at a premium price. Essentially, they recycle last year's model with a new chip and camera and relaunch it as essentially a new device. They have gotten away with this for some time now, but over the last year, the Android onslaught has been so aggressive that as Apple stuffs margin in lieu of innovating, the Androids pull ahead in capability and innovation while at the same time effecively dropping prices. The result is now very obvious as the video below, put together in the NYC Grand Central Station Apple store, attests to...

Following up on Deconstructing The Most Accurate Apple Analysis Ever, I am offering subscribers an updated valuation of Apple now that it has fallen to EXACTLY where I warned subscribers in October (the week of its all-time high of about $707 it would fall) to. After playing with the iPhone 5 for about a week, I told subscribers to expect the stock to bounce up against the pessimistic band of our valuation analysis. Apple last traded at $420, this is how I put it 5 months ago...

image124

This report is still available for download to paying subscribers:

With this report and Apple's subsequent ~40% or so drop, we have profited from Apple on both the long and short sides (After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years)

Now it's time to discuss where the stock will go from here. Valuation and specifics are the purview of paying subscribers only. All subscribers may email me for my valuation numbers (a quick summary only) and professional/institutional subscribers may contact me for a 5 minute discussion on this topic. I will have an updated valuation report out with 48 hours, likely by tomorrow midday. In the meantime I'll share a smattering of metrics, facts and trends that the sell side is still refusing to face. Let's dance, shall we?

Apple Is In Trouble – Plain & Simple!

Apple has successfully transformed itself from a portable and desktop computer company to a mobile device company, and managed to do so right at the crux of the mobile computing boom. As such, it has benefited mightily, briefly becoming the largest and most respected company in the world. Alas, what goes up must eventually come down. The largess revenues and margins gleaned by Apple brought massive competition, and in the case of Google’s Android, business models specialized in gutting the fat margins which caused Apple to prosper. As a result, margin compression ensued, but very few actually saw signs of it until it was too late (reference Deconstructing The Most Accurate Apple Analysis Ever).

Take note of the chart below which show Apple’s expenses at the corporate level spike.

image109

The spiking of expenses is corroborated by nearly all fundamental profitability metrics. Before delving into these metrics, let’s review how they margin compression is actually being leveraged. You see, Apple’s margin problem is not emanating from just aggressive competition with smart business models, ubiquitous cloud services (Google) and low cost means of production (Samsung). Apple is now paying the piper for its shift into mobile by having its pipeline effectively saturated with mobile products, thus nullifying the margin expansion that the move into mobile products have brought on. Mobile products had higher margins than their desktop/laptop counterparts. The chart below shows Apple as a nearly completely mobile products company.

 image107

Now, one may say, “but even if they have turned completely into a mobile products company, margins should stabilize, not compress!”. How true, young grasshopper, except for the fact that as Apple has nearly completed its transformation, Google has started compressing margins in the mobile space, which has in turn started to put pressure on the margins of this nearly completely transformed company. Look at the progression of the revenue/product mix over time.

As can be seen from the chart below, Apple is not a phone/tablet company…

image111

From margin perspective, one may see an extra hit to margins as Apple has actually had a relative increase in Mac sales, whose margins are materially lower than iPad and iPhones. This will be compounded by iPhone 5 and iPad mini sales, both of which have lower margins than the products they replaced or are cannibalizing.

Now, follow the trend in entity level margin compression (below) while cross referencing the (the product mix revenue above) and you will see that there is a near saturation of mobile products, with lesser margin tablets and even lower margin notebooks creeping in over the last three quarters…

As a matter of fact, this has been the largest drop in margin (in terms of %) since I’ve followed the company.

image106

Oh, and BTW, you can have shrinking margins AND shrinking market share, re: 4:58 in this CNBC video below (watch the whole clip if you haven't seen it before).


So, exactly how did this all come to be?

google-campus-android-statue

 Stay tuned. Tradable numbers will be forthcoming to subscribers (click here to subscribe) within 48 hours. To all retail investors (pros should know better) who do not subscribe, please do not attempt to read into what's in the subscription material by guessing from my public posts. All of the opinion and analysis that I make public has been of extremely high quality and quite accurate in aggregate, but it was not intended to be used as investment advice. That is what you pay for.

Published in BoomBustBlog
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