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After My Contrarian Calling OF Apple's 3rd Miss, I Come Clean On My Apple Research Track Record For 2 1/2 Years

Submitted by Reggie Middleton on 10/26/2012 11:03 -0400

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

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

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

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

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

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

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

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

Key take aways from this quarter:

iPad sales came in low

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

apple product chart growth

Apple 2Q2012 results analysis Final - redacted Page 2

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

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

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

Apple 2Q2012 results analysis Final - redacted Page 1

Apple 2Q2012 results analysis Final - redacted Page 3

Apple 2Q2012 results analysis Final Page 4

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

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

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

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

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Fri, 10/26/2012 - 22:44 | 2923330 notadouche

Point taken. Really though, it's one thing to dialogue with someone that disagree's but why waste your time with anyone that degenerates into name calling. Not only is it not worth your time but it's not worth anyone's time. On that I believe there would be 100% agreement.

Fri, 10/26/2012 - 14:19 | 2922262 kito

reggie, what do your computers tell you about hurricane sandy??????????.....do i short new jersey, or perhaps go long long island???? pleeease reggie, what do your predictive powers tell you?????????????....................

Fri, 10/26/2012 - 18:30 | 2922233 Zero Govt

".. Apple is such an asshole topic for many.."

GOOn is yours... what are the losses on Android?

"..only subject that elicited 5 asshole comments for every 3 lucid ones.."

It may be the asshole writing the 2 year long Apple-hater series at the root of the problem.

I wouldn't expact a total asshole to ever figure that out though.

You've clearly demostrated your bias with this hilarious 2 year Apple-hater series.. replete with I Love Android & hate anything Apple.

You're not exactly qualified to do surveys and judging by your biased writings (subjective/stupid opinion from a biased stance) it may be your asshole articles coming back to smack you in the nose you can't see past

Dust off your fiery sword of truth Reg, throw away those blinkers, how's GOOns Android losses mounting up year-on-year?

When can we expect your report on GOOfball's declingin Ad Revenue model and pitiful attempt to prop it up with sub-prime credit' everyone missed you predicting it through your big trumpet, haven't seen the retrospective report yet either! When, when, when, when????

Somewhat hilarious you talking about RiM and Apple "riding out profits" when you completely ignore GOOfbabble swimming underwater in losses. GOO only dreams they had Apple and RiM's profits to ride on.

Please don't do anymore surveys, smacks of Hitler doing a survey on Jews, you make even Moodys look highly professional and unbiased by comparison, they must be laughing at your survey (like the rest of us)

Fri, 10/26/2012 - 13:38 | 2922124 alien-IQ

Reggie, your posts have become so predictably and laughably biased that it should come as no surprise to learn that very few people read your posts any more.

Let's reexamine this little thing:

GOOG misses on their earnings: Your computer is broken and can't provide much on the topic and the headline of that article was some pathetic whitewash for what really took place. They "missed by a country mile" (ZH's words, not mine)...but fortunately, your computer was "broken" and you could only put out what has been to date your shortest post. How fuckin convenient was that huh?

AAPL misses on their earnings: All your systems are in full swing and top form and you provide video links, past articles, access to your "paid" (gag, choke, gag) analysis so that everyone can see that "you were right"...because we haven't heard you spew that often enough.

Is it any wonder why we laugh at you? You've become a joke. The only person I have ever seen refer to themselves in third person more often than you was Jeff Bridges in The Big Lebowski.

Fri, 10/26/2012 - 15:12 | 2922388 LouisDega

Alien, Are you forgetting Bob Dole? Hes the third person king

Fri, 10/26/2012 - 13:49 | 2922164 Reggie Middleton

The entire opinion was available through the link that I provided. You didn't read it, that was the problem. That's probably your problem here as well. I provided you with 2.5 years of historical valuations so you can see how tight it stuck to the share price. Compare it to your muppet masters, Goldman, et. al. I dare 'ya!

Fri, 10/26/2012 - 14:09 | 2922227 alien-IQ

Are you really so densely idiotic that you actually think people come to ZH because they follow the advice of Goldman? Seriously? Or is that the only thing you could find in your ever diminishing grab bag of snappy retorts?

Of all the people that post on ZH, you are hands down the most thin skinned and defensive I have ever seen here. Most authors let their writing do their talking...you feel yours needs further explanation because why? Because your work is so intellectually complex that very few can grasp the profundity of it? Well, here's my "contrarian" volley to that notion: Have you considered the possibility that you're just a shitty writer whose ideas get lost in a morass of obtuse repetitiveness and self-congratulatory delusions of grandeur?

You are utterly tiresome and a complete bore. I'm done with you.

Fri, 10/26/2012 - 14:17 | 2922252 Reggie Middleton

I'm done with you.

Well Good RIddance! I hope to never see you around these parts again. Adios, mi amigo.

Fri, 10/26/2012 - 14:30 | 2922288 Zero Govt

Can you give us GOOns Android red-ink losses in Mexican please Reggie?

Fri, 10/26/2012 - 13:56 | 2922187 notadouche

Favorably comparing yourself to Goldman would be tantamount to saying I'm good because I'm less evil than Satan. I don't know if that's exactly the ringing endorsement that your looking for is it?

Fri, 10/26/2012 - 13:42 | 2922141 MillionDollarBogus_

Well, I read Reggie's stuff, and I like Reggie...

Nuff said...

Fri, 10/26/2012 - 17:35 | 2922757 SilverSavant

IMHO Reggie does excellent work, which no one else covers as well. Thank him for the nice outfits and lifestyle points, too. As far as talking his book, he might be a bit biased, or not.

Fri, 10/26/2012 - 15:31 | 2922451 dracos_ghost