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Apple Once Again Surprises The Unsurprisingly Inept Analyst Estimates: When Will Investors Catch On To The Earnings Management Game?
Apple reported blowout numbers and a record quarter yesterday. Not one, that's right, not one Wall Street analyst got it right! As a matter of fact, not only did no one get it right, they were all wrong to the downside - every single one! Doesn't that sound fishy after 11 previous quarters of analysts missing the mark to the downside? In a descriptive post yesterday, I detailed how I beat the street on Google's earnings, step-by-step by "thinking more like an entrepeneur and less like a Wall Street analyst". In said missive, not only did I illustrate in relatively fine detail how the Street totally missed the massive value that Google is building, I also outlined in similar detail the voluntary game that the Street is playing with Apple and earnings guidance. Yes, it's a game, and an obvious one at that. Despite being so obvious, retail investors and institutions alike are playing along. Let me excerpt a few choice lines from said post: Since I started covering mobile technology on BoomBustBlog, things have pretty much occurred precsiely as we anticipated - with Google, Microsoft, and Research and Motion (a 6x to 7x gain on select puts) following their prescribed paths... Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!: Google’s Android Market has more than 150,000, compared with more than 25,000 in BlackBerry App World. RIM fell $6.17, or 11 percent, to $50.43 in late trading yesterday, after closing at $56.59 on the ... Friday, 29 April 2011 BoomBustBlog Research Performs a RIM Job!: ...is innovating and growing, at the same time compressing marigns. They also fail to understand the business model that Google has innovatively adopted to push Android through vendors and 3rd party distributors ... Friday, 17 June 2011 Next up is Apple, whom we predicted our analysis would reach frutition in the 4 to 6 quarters. Apple reports today, and we fully suspect a blow quarter that (again, just like the last 12 quarters) surprise the unsurprisingly inept analyst estimates that somehow could not get it right for nearly 2 years straight see above). We also expect indications of our margin compression thesis to start peeping their little eyes out of the footnotes, of course to be totally ignored by the cheerleading sell side of Wall Street and pop tech and financial media, as the Apple lovefest marches on. Hmmm! That was awfully prescient wasn't it? No! It wasn't. It was simply blatantly honest. Here is a further excerpt from a previous post describes in complete detailt the Analyst/Apple earnings game... Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document Page 16 of the aforementioned document (which was released several months ago) pegged an uncannily accurate estimate of iPhone sales at 77 million for the year. Being that Apple sold ~20.3 million for the most recent quarter and said quarter was a company record, I think it's fair to say that we have a realistic grasp on Apple. I syndicate my free content to several other sites, the vast majority of which are rife with Apple fanatics. These fanatics are literally incapable of parsing the logic of the preceding statement and the leading paragraph to this post. I have been more optimistic on Apple's nearer term accounting numbers than virtually the entire sell side, and have been proven accurate. As a matter of fact, this is actually a null feat that is absolutely nothing to brag or boast about since you simply have to look at the history of Apple's performance, guidance and analyst forecasts to see a needlessly consistent trend of error on the part of the sell side. Honestly, an elementary school student could have figured it out. I have also been correct on the underperformance and overvaluation of RIMM and the undervaluation and over performance of Google. Again, not a feat of superior intellect, but a much more mundane accomplishment of following the facts without bias and not having ulterior motives in producing analysis. In this case, an elementary school student may not have been able to do it, but I'm damn sure an astute high schooler could piece it together. In closing I will repost (for the 4th time) the earnings guidance snippet and challenge readers to possibility that we may have a very valid point. In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet. Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: 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...
Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: 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. Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.
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Strange, Gross margins have kept going up for the last year or more. I suppose having net earnings of 7.3B in a quarter and seeing 11 Billion added to cash as a broad patent is issued to Apple covering the iPad and iPhone that HTC has already been found infringing on should give us some hint that maybe , Reggie is on to something or not.
Damn, Reggie 77B in cash suggests that the company is doing something right. A 60 Billion dollar tangible net worth? A patent that will force all Android phone makers to pay a royalty stream and the knowledge that Apple has gone all out for the Enterprise including the Military which is considering a large buy of off the shelf iPads? Do you suppose that just maybe they fired the wrong guy at Apple in 1985? The royalty stream if handled correctly will probably have a "Manufacturered under a license with Apple" label on it making people wonder if just maybe they should get the real thing.
In your comparison to the huge "mistake" Apple made by not licensing the O/S which allowed Microsoft to finally come out with a usable version of windows 11 Years later, maybe you forgot about the littered corpses of all the PC Makers who signed on to make Wintel rich only to die of margin compression themselves. Do you wonder if the same thing is happening as each smart object maker designs phones and tablets around different versions of the Android, Palm, Rim O/Ss with different features that can only be used on that O/S version that maybe they are setting themselves up for a fall.
Do you worry about the security flaws inherent in the Android system and that just maybe something that is as thing as a few credit cards stacked up might be better as a closed system? Do you wonder if like I do if Moore's law will apply to not only the processing power of the Tablets and Phones but a new law of power consumption decreasing power consumption to increasing processing speed may not only enlarge the market but eventually take out the low-end laptop market? Maybe when Microsoft gets smart and writes a version of Office for the iPad that IT managers will throw up their hands and tell everyone, pick any tablet you want or phone as long as it's made by Apple.
It will take a number of years before what's happening to Microsoft will happen to Apple. Of all things, Microsoft vowed not to become like IBM and look who is closing in on Microsoft Market Cap wise; IBM. Invariably you will be proven correct in some way, but so far this has been a losing battle. Cash in the chips.
all very good points.
Additionally, the roll out of a new lower cost i-phone is expected for September as well as the recent reintroduction of the mac mini into the product line which starts at $599 and includes Thunderbolt I/O is going to be very appealing to anyone who wanted to make the move to Apple but found the cost prohibitive.
This is a very successful and well managed company that has consistently stayed one (if not two) step ahead of the competition.
While I would not be chasing the stock at this price, I can still say that the company has done a hell of a good job in every aspect you could hope for in a business.
I wouldn't expect to see this stock at $200 again unless that happens via a forward split.
The only thing that is a certainty is death taxes and QE...
Apple is CRUSHING the competition.
Took my 11 year old Daughter and her friend into Best Cry; they happened upon two iPads, picked them up, and played with them for 20 minutes - never touched one before.
I picked up an HP Tablet to tinker with - painful - took way too long to load. Then, the Motorola tablet - "Loading" (just like an old Win 98 PC) - then pain and suffering to figure it out. When the girls were done went to the iPad and "bang" - easy as pie, fast, fun.
I'm a PC person, also Linux - build and run my own systems and don't want to pay for Apple hardware and software constraints and life cylce; however, they are CRUSHING the competition and I believe will continue to do so.
RIMM and the Blackberry are dying; a losing gamble in all ways, dying I say, dying.
Google and Android are getting some market share but have the various hardware manufacturers and some implementation problems; as well as not having the cache and hip factor of Apple.
I have seen Apple lose it's magic in the past and it was when Steve Jobs wasn't there; I see him as the driving force behind the bar of excellence and would be selling Apple stock right here if I held any as he doesn not look good.
Well, this is certainly a strange post (as in the last thing I expected to read). Reggie, I thought you'd at least try to point out the "beginning of the margin compression" that you constantly talk about. Instead, you discuss beating the street???
I realize you keep your good stuff behind a paywall (NTTAWWT), but this sudden shift of focus to 'beating analysts' on the free side due to Apple's earnings announcement won't help you get more subscribers, but instead muddies the waters. Now, I haven't read all of your posts here by any means, but I don't recall reading much of anything other than margin compression and market share. Except today.
Also, you really should drop your flame-war.
Why do you do this? Are you incapable of parsing the logic the only battle won is the one avoided? Why do you insist upon acting like a child when it puts your future livelihood at stake?
Don't shit where you eat, my friend.
I call it as I see it, my friend. Apple has literal "Fanatics" as both customers and investors. I have not need to mince words. I haven't had a chance to go through the entire Apple report, and I never said I beat the Street. What I did say was I was more accurate because I don't play the earnings management game which was clearly detailed in the post referenced above last year. As you can see, that post was quite accurate.
The negative invective in these comments are proof positive of the force that an Apple miss will produce. Very few of you have bothered to parse the accuracy of my posts. All it seems some have done have read the word "Apple" and any thing not overwhelmingly positive and attacked. Let's take a look at how inaccurate my tech sector opinion has been.
Now, that looks like a pretty good track record so far. That is essentially what I said in the videos. Those who ask how my shorts are coming haven't been paying attention to the posts on my blog. It was stopped out at a slight gain. Simple as that. The full bear move on Apple is simply not ready yet. It is not time. If this were any other company, these words would be considered common sense - but this is Apple, and anything that is not a wracked with elation and a screaming endorsement is met with invective. Hey, if I'm wrong then I'm wrong - but you will not find out if I'm wrong in two or three quarters. I know the sell side has taught many to look at investments 90 days at a tiime, but that is not the way true wealth - or a successful company - is built. That short term-ism is why Google surprised everybody, why RIMM didn't fall earlier (it produced strong numbers), why all think Apple cannot fall, and why many probably will not realize a Pan-European bank run until after the money is gone.
Reggie, mea culpa?
Your insights are usually spot on, eventually this will pan out, but like in the housing market the three most important things were timing, timing and timing.
Agree w/ Popo's post.
I read that most of this "unexpected" windfall was from overseas sales. That really surprised me. Quite a few of my co-workers have the iPad and/or iPhone, and when the newest version came out, they just had to have that too. I wonder what they did with their old(er) ones? If Apple had a lick of sense they would offer trade-in for newer models, and thus absolutely kill the used iWhatever market out there.
I can only tell you what I see in Asia, the iPhone and the iPad are king. Everything else is considered second rate by consumers. It is amazing since APPL was really only in Singapore just a few short years ago.
Of course there are all kinds of hardware on the street, but there is no mistake what is considered the gold standard in mobile.
no need, they all literally fall apart after 2 years
Must have been the ghost of Irving Fisher.. I posted once.
Listening to the MSM swoon over , it sounds like Apple has "reached a permanent high plateau"
We got you the first time, hucklebuck.
Good read.
This equally applies to my read on the whole market. I am therefore firing myself.
Knowing what is not so hard, knowing when is incredibly difficult, so being early on a call that Apple is going to disappoint is understandable. This market is crazy with blind greed and manipulation. Even Soros claims it is very difficult to read. (if you can believe Soros)
Listening to the MSM swoon over , it sounds like Apple has "reached a permanent high plateau"
Apple just bitch slapped Reggie.
I thought this clown would dress up in and post of a picture of himself in a floppy pair of shoes and red wig juggling bowling pins. Claims victory on the GOOG quarter but the stock is still below where he recommended buying on CNBC, while he was bashing AAPL at 275.
Well, when Apple replaces GM and Exxon and IBM as the next US champion we will then be waiting for FAcebook to out hook Google or be droned by Android as Google retorts to Apple mayhem. Whats new, in the oligarchy game. When will the west get out of its asset bubble and its mid-east oil trouble are the big issues facing the world as the currency war brings down the Euro. Wow, what priorities does consumers have? Will they be around to tell us after the next asset crash?
looks like no matter what, reggie is going to his grave anti Apple
Moby Mac ;-)
I guess they have the system down on feeding analysts guidance to keep estimates down. If the government can use their system, we will be exceeding expectations and out of this recession on no time!
LOL
Gotta love the Chinese... they will steal anything!!!!
http://www.appleinsider.com/articles/11/07/20/chinese_counterfeiting_ext...
cheers
Who listens to analysts? I mean really does anyone these day? Taking on analysts is really scraping the bottom for escape goats.
Meanwhile, margin compression? Where?!
Next up, iCloud, Lion, MacBookAirs, and an appkicking appstore for everything.
Meanwhile, business my development business for iPads is increasing, though I will still stay small and independent. Why grow in this socialist / fascist nanny state? It just sucks the optimism and excitement from an elder like me.
Hey! Help me vote in posthumously Mussolini and Ponzi for Nobels in governance and economics. I mean, in reality they have been the most influential!
http://jimijon.blogspot.com
cheers
yeah but in the mean time the hedge funds are expected to own whats going up and short whats going down, not second guess next years news.
Nokia , RIMM ....Apple.
Just a matter of time. I'm not saying short it but all those pension and hedge funds loaded up to the gills are going to get taken to the woodshed when the penny drops. There will be no orderly decline in Apples share price when the crowded theatre see flames.
P/E is an irrelevant tool for investing with too , its completely and utterly pointless and is dwarfed in signficance by liquidity (monetary expansion)and sentiment (which is derived from growth in margins and market share)
Expensive stuff gets more expensive and cheap stuff gets cheaper. P/Es are for morons. As soon as theres a hint of margin compression or market share decline and the reaction will be shocking.
Tonites Sky...
wasnt middleton predicting a margin collapse or something for AAPL? maybe next year lol.
Reggie continuously overestimates the disaster that is Android.
Google has (as yet) utterly failed to understand the sandboxing lessons that iOS implemented to prevent Windows-style malware and spyware infestations.
From a hacking perspective, smart phones are unbelievably tempting targets. They contain spending information, identity information, location information, and are likely to be carried by people with some money to spend.
Google's security standards are nothing short of pathetic. They have goofed, and goofed in a *huge* way, but the market has yet to call them on it because the market does not yet perceive the danger.
Use Android at your own peril. It is a deeply dangerous OS and the responsibility of protecting the OS is unfortunately something that is debated between carriers, manufacturers and Google -- and all the while users info is being stolen blind.
Reggie is correct about margin collapse -- but he fails to understand the gorilla in the room: Security.
Once the Android brand is tarnished (the way "Windows" has been) -- it's smooth sailing for Apple with its cautious sandboxing of iOS devices.
The big data "heist" is coming. It is a matter of "when" not "if". And when it comes it will be a blow that rocks Google stock like nothing before.
While you make many valid points, I think you are going too far when you attribute security to being the gorilla in the room. People just don't care about it. And for proof of that, as well as established history, just look at Microsoft Windows. Hack, after hack, after hack, extensive crashes, extensive malware, ad infinitum. And people just don't care. They are used to it, and they'd rather have the devil that they know, rather than a better solution that they don't. They get comfortable with crap, and will fight to keep it. If security were important, OpenBSD would be the dominant OS. But it's not; not even close.
People want their shiny widgets. And they don't care if that "shiny" is due to radioactivity, I'm afraid.
But yes, other than that, you do make some very good points.
Fanboy much? As any reasoning individual knows, the only reason Apple computers APPEAR to be more secure than Windows based computers is because there are so relatively few of them in use that no hacker with a clue would bother to learn Apple OS hacking techniques. When Apple released their web browser for the Windows platform it was a security disaster. So much for Apples security superiority. I freely admit that I am not a fan of Apple products. I prefer to own my tech devices rather than rent them from Steve Jobs at absurd prices and then only be allowed to use them in ways Jobs finds appropriate.
Fanboy? Lifetime Windows user here.
And not once did I claim that Apple has superior security across the board. Nice straw man argument there.
I *did* claim .. (hell, it's not a claim, it's a fact) .. that iOS is more secure than Android. It is. Vastly so.
Go for it. Try to claim otherwise, Toolshed.
Many people prefer hamburgers instead of filet mignon. It's not uncommon.
It is downright amazing that Reggie has the balls to write articles saying he was right in any way regarding Apple. This douchebag has been bashing apple and claiming there will be a margin collapse for over a year. Hey dumbass the margins were almost 42%.
Yes - but you have to hand it to him for claiming victory here. I wonder if he's off to Iowa for 2012.
He sure was, and now it's analysts' fault.
Good insight though, I will take all the help I can get.
Is there any proof of decreasing margins in the latest 10q?