A Couple Of Apple Facts That Mainstream Media & Most Analysts Fail To Harp On
As is usual, I'm receiving inordinate amounts of Apple Fanboi mails
and comments asking me to admit how wrong I was on Apple. Of course,
these emails fail to articulate exactly what I was wrong about, or
relate to what I was/am right about. Apple is a company with a
heretofore unheard of cult following. If its Apple, it can do no wrong,
and anyone who disagrees is wrong. Well for investors, that is a
dangerous perspective. Apple's share price has been on a tear, but its
tearing in an equity market that is devoid of true fundamental market
pricing. This, alone, should be enough to give the prudent man (or
woman) pause. If that's not enough, there's always the commons sense
Apple is minting money, that's for sure, but it's minting money based
off of a single product. That product has been been totally eclipsed in
functionality by its competitors. Those competitors also happen to be
Apple's primary vendors and suppliers for that very same product that
Apple relies on for ~70% of its profits!!! If that's not a recipe for
disappointment, I don't know what it is? This was explained fully in my
post The Mobile Computing Wars Are Progressing Exactly As Anticipated - Google Is Killin' Them!!!
In 2010, I said it will probably take up to 8 quarters for the Apple competition to cause earnings
misses. I believe that I was the only one to say so, and Apple has
missed expectations twice in less than a year. Reporters and armchair
analysts (this includes much of the sell side) have blindly swallowed
Apple's mesmerizing marketing BS in chanting with the chorus "these
misses stem from the unwashed masses waiting with bated breath
anticipation for the next, greatest (and already obsolesced by the
Android competition) iPhone model to be released). I find this bullshit
to be virtually intolerable when reiterated by would be professionals.
If you do a Google (or Bing) search for Apple Misses Earnings, you get
something like the following:
Apple misses earnings targets, Street reacts • The Register Apple released its earnings
report for the third quarter of its 2012 fiscal year, and its numbers
came in well below most Wall Street moneymen's projections ...
SHOCK: Apple Misses Earnings After iPhone Sales Come In …The Business Insider Oct 18, 2011 · Apple's just missed earnings estimates for the first time in a really long time. The reason? Lighter than expected iPhone sales dragged the whole sucker ...
Apple Misses on Earnings, Revenue, iPhone Sales, Stock Tanks ...Wall Street Journal Oct 18, 2011 · The mixed-bag earnings season continues. Apple reported third-quarter earnings of $7.05 a share, on revenue of $28.3 billion. Analysts, on average ...
Apple Misses Q4 Earnings Estimates, Blames Excessive Rumors ...Wired News Oct 18, 2011 · For the first time in six years, Apple’s quarterly earnings missed analyst estimates. Apple’s explanation? iPhone sales slowed down as consumers ...
Apple misses earnings. Stock punished in after-hours trading ...Fortune Tech Oct 18, 2011 · Mac and iPad sales set new records, but iPhone sales disappoint Apple (AAPL) reported disappointing results for its fourth fiscal quarter on Tuesday ...
What did all of these esteemed news outlets have to say? They all towed the Apple damage control investor relations line, "iPhone sales fell short of expectations due to customers waiting for the next generation of the iPhone!" Did any analyst or reporter or even blogger bother to sit down and ponder the veracity of said statement?
Just for the record, this is what BoomBustBlog headlines looked like: Apple
Once Again Surprises The Unsurprisingly Inept Analyst Estimates: When
Will Investors Catch On To The Earnings Management Game? Those
interested in learning more about Apple's earnings management practices
should click said link. In regards to the misses, the headline
(predictive) went like this Reggie Middleton Wasn't the ONLY Openly Apple Bear in the ...
Apple has been pushing the iPhone out since early 2007. It became a
hit by 2008, and started dominating the smart phone market by 2009. It
had mucho demand and became the sole product pushing Apple's out-sized
earnings. Since 2007, Apple has released a new iteration every year, and
this annual release was no surprise. By 2010, Android functionality
caught up to and surpassed that of the iPhone - even as Android's market
share eclipsed that of the iPhone (today Android stands at ~62% global
market share and its still growing like a weed). Despite all of this,
there were no earnings misses due to this so-called "iPhone release
expectation effect" (IREE) in the years 2007, 2008, 2009 nor 2010! Why
is that? It's because there is no IREE! Apple missed expectations
because observers seem to be totally oblivious to the fact that Android
has not captured WAY over half the market, and is growing like
gangbusters against a macro backdrop that sees LESS disposable income
for shiny toys like the iPhone - not more! Notice how the IREE effect
only occurred after Android captured majority market share???
Again. No miss due to IREE in 2008, 2009 or 2010 despite telegraphed
and obvious upgrade cycles, yet there were TWO BIG misses in the year
spanning 2011 to 2012, the same time period that Google took more than
half the pie. Why has noone bothered to espouse such? Because if Apple
says it so, it simply must be so!
The following is a comment from a fellow BoomBustBlogger:
A lot of people consider your articles
panning apple to be hot air. I think you are right... its just the
stock market has not yet figured out what is going on. My understanding
is that the markets believe this entire missing earnings is about apple
customers waiting for the new release so everyone expects that apple
will have a stellar quarter after the new product launches. What if
thats not the case and the revenue misses are actually prospective
customers switching to the android ecosystem??? Thats what the stats are
So where is apples growth going to come from...
overseas.. really?? Lets analyze. A smartphone like iphone is not a
necessity, its either a comfort or a luxury. To buy one, you have to be
able to afford it. Check out wikipedia for the per capita income across
countries. I state that iphone at the current prices can compete with
android only in Canada, US, Mainland Europe, Scandinavia, Aus and the
oil rich states in the middle east. ROW will simply not see large scale
adoption of iphone / ipad as the vast majority lack sufficient
You have stated that apple is losing
ground in the western markets too. I see a wildcard that might
accelerate this - a crash in europe. A monetary union without a fiscal
union is unsustainable. Its a question of when rather that if one of the
PIIGS defaults. Mostly financial institutions buy sovereign debt so US /
EU banks should be exposed and there should be contagion. So there just
might be less disposable income in the US to fill up apples coffers in
the coming quarters.
Let me state I am not a fanboy for
either side. I think competition is good and will give consumers better
products at even better prices. I dont own a smart phone. I work for a
fortune 500 company who has provided me with a regular corporate cell (
sprint) and a laptop. I recently bought a Nexus 7 to server as a pda +
journal. And yes, you were right about the add on effect for google.
After getting the nexus 7, ive cancelled vonage and use google voice,
Ive started using google drive and google docs, gmail( had yahoo since
2002), google finance and blogger. I'm also impressed with offline maps
in google maps and the navigation options it has. All these services
just seem to work seamlessly on my nexus. I just might switch over
completely to gmail!
Let's go over some additional marketing mantra turned unassailable dogma from the marketing muscle machine known as Apple...
Then there's the group who say, but you said Apple's tablet margins will slip (which they have) and their market share in tablets and phones will slip (which both have),
but you are wrong because.... Well, look at their share price! In this
market, do you really believe that share price is truly indicative of
likely future fundamental performance? I have engaged in this price
spike argument for the followiing situations as well (keep in mind that
securities prices in the short run don't mean everything and all of
these situations had price spikes, some lasting years, ex. housing
- 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?
- 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!
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?
- 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
- The fall of commercial real estate
in general (September of 2007) and the collapse of General Growth
Properties [nation's 2nd largest mall owner filed bankruptcy] in
particular (November 2007):
- The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
- 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
- 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
- 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)
- 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
- 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
Despte all of this, Apple's share price has actually performed about
where my research has anticipated. This is an excerpt from a post made
For all of those near fanatics who do not subscribe, I
suggest you ask a friend who does subscribe to share with you the
difference between last month's valuation note target price (page 10 of Apple Margin & Valuation Note) and the price of Apple today (click here to subscribe). I also urge the same for Google using our latest Google Q1-2012 Valuation Summary.
It is worth noting that the key assumptions that underline the
above valuations – (1) iPhone continuing to witness stupendous growth
******* in 2012 and ****** 2013 over a larger base and (2) iPhone
margins continue to remain healthy off stable prices and despite
increase in material cost – should be keenly watched over the next
couple of quarters.
Then ask them bout the logical argument behind the concern with
Apple and the extremely volatile price action of the last few weeks. As
stated many times in the past, The BoomBustBlog argument and analysis is solid.
What else is there to the earnings announcement? Well we were
absolutely correct in terms of the oncoming margin compression of the
the product lines, something that was actually easy to see coming but
many refused to admit. Of course, there will be those select few that
say, "But wait, the company reported an INCREASE in margins while you
said there will be a decrease!". Yes, that's true and both can exist
Comments are always welcome. Follow me: