Apple predicted to surprise with Oct. 19 earnings report

[AppleInsider]

New accounting rules are expected to push Apple's stock even higher, as Wall Street still underestimates the profitability of the iPhone, a new report has concluded.

Last week, the Financial Accounting Standards Board approved a change to the revenue reporting methods in the generally accepted accounting principles (GAAP). Under the old rules, Apple was required to spread its profits from the sale of each iPhone over the term of the carrier contract for the device, typically two years.

In a new note to investors, Yair Reiner of Oppenheimer said that despite all of the publicity of under-reported iPhone revenue, the market still doesn't fully realize, and that will take time. The company has reiterated its outperform rating for AAPL stock and has increased its price target to $210 per share.

"Incredibly, despite all the ink spilled over iPhone accounting, we think the Street continues to highly underestimate Apple's GAAP earnings," Reiner said. "We grant this will likely become a moot point within six months, as Apple incorporates new FASB accounting rules and recognizes more iPhone sales at time of sale. But until then, Apple's EPS will continue to surprise to the upside, even if revenue comes merely in line with Street expectations."

The report said that Apple could sell an additional 7 million to 8 million iPhones in 2010 by adding Verizon and China Mobile as carriers. While a jump from AT&T to Verizon in the U.S. has long been rumored, Apple is reportedly already in negotiations with China Mobile, the world's largest wireless carrier, to offer the iPhone.

Factoring in a potential launch of Apple's long-rumored tablet, the report also sees an additional 50 cents to $1.00 earnings per share, assuming the product could sell a half-million to one million units per quarter at $1,000 each. Sources have told AppleInsider that the 10-inch touchscreen device will debut in early 2010.



Apple is set to announce its fourth-quarter earnings in a conference call on Oct. 19, scheduled for 5 p.m. ET and 2 p.m. PT, the company announced this week. The company's fiscal year ended Saturday.

[michaelab]

Erm...if it's predicted, then it's not a surprise

[anantksundaram]

Originally Posted by AppleInsider

New accounting rules are expected to push Apple's stock even higher, as Wall Street still underestimates the profitability of the iPhone, a new report has concluded.

Aargh! How many times has it been noted that this is all probably factored into AAPL's stock price?

The only one 'underestimating' anything is AI, regarding the blockheadedness of this analyst.

[htoelle]

Before you say it Mr Ballmer, there it goes again another rounding error in Apple's favor. Someone must really have it in for Microsoft I guess. Suggest you might look in the mirror.
ht

[teckstud]

Well I'd like to remind you all again that I have been a contributing factor this quarter with my iPhone purchase along with my excellent word of mouth as I have also switched 2 other friends over when they saw how my iPhone completes me.
This quarter I hopefully will buy either a new iMac or a new MBP 13", whichever gets matte first.

[Mystigo]

Originally Posted by michaelab

Erm...if it's predicted, then it's not a surprise

Aw. You beat me to it.

[newbee]

Originally Posted by teckstud

Well I'd like to remind you all again that I have been a contributing factor this quarter with my iPhone purchase along with my excellent word of mouth as I have also switched 2 other friends over when they saw how my iPhone completes me.
This quarter I hopefully will buy either a new iMac or a new MBP 13", whichever gets matte first.

You have made my day, well, along with Apple heading up nicely. I read and reread your post and could hardly believe that it was, in most part, a POSITIVE post. Is this the new and improved teckstud? If so, I'm impressed with what a 3 day "vacation" can do for a person ... welcome back.

[Wiggin]

Originally Posted by anantksundaram

Aargh! How many times has it been noted that this is all probably factored into AAPL's stock price?

The only one 'underestimating' anything is AI, regarding the blockheadedness of this analyst.

I think what we'll soon learn is how much of an influence non-professional traders have on a stock price. Those uninformed traders who are buying and selling Apple without fully understanding the financials may very well be surprised when they see the next quarterly results. If there are enough of them who see Apple's results suddenly skyrocket, they may well drive up the price of Apple's stock a little more.

A questions: How does this affect previous iPhone sales? Does Apple update their previous quarters results? Or do they continue to account for previous sales using the old method until 2 years after the purchases and only apply the new method to new purchases?

How about they take all of the unearned earnings from previous sales and take it as a lump sum earning on their next quarterly report!

[al_bundy]

Originally Posted by htoelle

Before you say it Mr Ballmer, there it goes again another rounding error in Apple's favor. Someone must really have it in for Microsoft I guess. Suggest you might look in the mirror.
ht

i bet ballmer is crying his eyes out as he counts the cash he gets for every single iphone and ipod touch sold. in addition to every single android phone and the palm pre

and SL is going to help drive Exchange 2007 and Exchange 2010 sales

[Chris_CA]

Originally Posted by anantksundaram

The only one 'underestimating' anything is AI, regarding the blockheadedness of this analyst.

AI does an article on a report by Yair Reiner of Oppenheimer and AI is somehow 'underestimating' something?

[rtdunham]

Originally Posted by teckstud

Well I'd like to remind you all again that I have been a contributing factor this quarter with my iPhone purchase along with my excellent word of mouth as I have also switched 2 other friends over when they saw how my iPhone completes me.
This quarter I hopefully will buy either a new iMac or a new MBP 13", whichever gets matte first.

thanks teckstud. My apple holdings appreciate your efforts. I've contributed some too. And like you i'm in the market for a 13" MBP when it gets matte.

[rtdunham]

Originally Posted by Chris_CA

AI does an article on a report by Yair Reiner of Oppenheimer and AI is somehow 'underestimating' something?

I think anantksundaram meant he (anantksundaram) doesn't agree with Reiner's interpretation, therefore AI was blockheaded for reporting it. That's not a point of view i share.

[Tauron]

In other news: Ballmer is predicted to "surprise" with announcement that he is really mentally insane.

[jb510]

The most informative part of this post is the graph... It's amazing just how bad analyists have been at predicting Apple's price... And now you want to listen to them?

Personally I can't believe there is ANYONE out there that hasn't already factored this in to Apple's price and analyists that claim otherwise should be fired for incompetance.... But as we've seen over the last decade incompetance seems to be a key job skill for them.

[Dr Millmoss]

Originally Posted by Wiggin

I think what we'll soon learn is how much of an influence non-professional traders have on a stock price.

Not much. The institutional traders are the ones who really move stock prices.

[mpantone]

Originally Posted by Dr Millmoss

Not much. The institutional traders are the ones who really move stock prices.

Correct. Joe Everyday Trader counts very little.

AAPL shares held by institutions & mutual funds: 72.30%

Source: Yahoo! Finance

[jazzguru]

Originally Posted by mpantone

Correct. Joe Everyday Trader counts very little.

AAPL shares held by institutions & mutual funds: 72.30%

Source: Yahoo! Finance

Average Joes can participate in mutual funds. I do.

[caljomac]

When have apple not made money???

[parky]

How many times does it need to be said that the 24 month spread of revenue and costs is NOT related to any carrier contracts. It is all to do with giving free updates over the life of the product.

This is why the Apple TV is also included in the same rules, as it gets free updates, BUT has no carrier contract.

Please get this right and stop perpetuating the myth that it is linked to carrier contracts.

[Dr Millmoss]

Originally Posted by jazzguru

Average Joes can participate in mutual funds. I do.

But mutual fund investors don't have any control over how the mutual fund trades -- the fund managers have that control. That's the deal you make as a mutual fund investor. Institutions are the majority influence in the markets -- individual investors are along for the ride.

[jazzguru]

Originally Posted by Dr Millmoss

But mutual fund investors don't have any control over how the mutual fund trades -- the fund managers have that control. That's the deal you make as a mutual fund investor. Institutions are the majority influence in the markets -- individual investors are along for the ride.

Good point. I actually thought about that after I posted.

Mutual fund holders don't have direct control over the day-to-day buy and sell, but they can buy or sell their mutual fund shares which indirectly influence things.

But yes, institutions are pulling the strings.

[anantksundaram]

Originally Posted by rtdunham

I think anantksundaram meant he (anantksundaram) doesn't agree with Reiner's interpretation, therefore AI was blockheaded for reporting it. That's not a point of view i share.

Actually, that was poor wording on my part: what I meant to articulate - apparently unsuccessfully - was that AI was underestimating the extent to which the analyst was being dense.....

[Wiggin]

Originally Posted by Dr Millmoss

Not much. The institutional traders are the ones who really move stock prices.

Originally Posted by mpantone

Correct. Joe Everyday Trader counts very little.

AAPL shares held by institutions & mutual funds: 72.30%

Source: Yahoo! Finance

True, and I had thought about that. But then I wondered why all the fuss being made about the accounting not "fairly" reflecting Apple's financial performance?

I debated using the term "non-professional traders" in my original post when really I meant "traders who didn't take the time to review Apple's actual financial performance regardless of the accounting rules they must follow." Some non-professionals do take the time to understand a company's performance, regardless of the accounting rules they follow. And perhaps some professional traders maybe do not.

So if 72.3% is owned by instituations and mutual funds, and assuming they've done their due diligence before investing in Apple, and if the "uninformed" investors who don't do their research don't have any effect, then why did Apple or anyone else push for this accounting change? Apple must think it will have some positive effect, or that investers were somehow confused about the company's performance because of how the reporting was done, otherwise why request the change?

Edit: I'm sure there's some obsure accounting reasons that would also support changing the accounting rules, but all of the reporting here and on CNN and elsewhere has only talked about how Apple's performance was not being fairly reflected because of how they had to report and that it caused confusion and didn't reflect the true value of Apple's iPhone business (despite that Apple already provided this information in their quarterly reports alongside the required reporting method).

[Stoobs]

Bringing in Orange/T-Mobile and later Vodafone in the UK market is likely to significantly boost UK sales - O2's business contracts have been a royal pain in the bum to deal with, as soon as Orange/Vodafone start their business tarriffs I can see the telecoms managers more likely to start bringing in the iPhone to the corporate world.

Hopefully the move will force O2 to come up with slightly more reasonable tarriffs too, especially the idiotic tethering pricing!

[Dr Millmoss]

Originally Posted by Wiggin

So if 72.3% is owned by instituations and mutual funds, and assuming they've done their due diligence before investing in Apple, and if the "uninformed" investors who don't do their research don't have any effect, then why did Apple or anyone else push for this accounting change? Apple must think it will have some positive effect, or that investers were somehow confused about the company's performance because of how the reporting was done, otherwise why request the change?

Good question. Since Apple has always been rather poor at investor relations, I certainly can't imagine that they did it for us. My theory is that they did it to simplify their internal accounting.

[faxthat]

This "bad news-good news" market has been quick to respond to bad news and slow to respond to good news on individual stocks. There seems to be a much stronger response to the bigger "economy recovering-economy not recovering" type of news and there has been more of the latter lately, with manufacturing figures down and unemployment numbers rising. When there is more good news of the US economy recovering, I expect this latest prediction on Apple's upcoming earnings report to cause a jump in the stock price. In other words, I don't think it's been factored in yet.

[hypermark]

I think that there are two points on this one. One is that the market is far less efficient than people give it credit for. In other words, there is a lag between rumor becoming fact, fact shaping model and model driving by/sell activity (coupled with truly poor analysts performance).

Two is that until the impact is visible (Apple has some latitude in terms of when they will adopt the new revenue recognition, and as such it shapes real earnings projections in this quarter and moving forward), all of the charts and financial data that investors use in making buy/sell decisions reflect old data, driving price-to-earnings and price-to-sales multiples to appear higher than they will be, which again, impacts real buying and selling activity.

I wrote a primer on the impact of the change, and why it matters:

Apple Accounting Change: Why it Matters
http://bit.ly/rCWsp

Check it out, if interested.

Mark

[anantksundaram]

Originally Posted by hypermark

I think that there are two points on this one. One is that the market is far less efficient than people give it credit for. In other words, there is a lag between rumor becoming fact, fact shaping model and model driving by/sell activity (coupled with truly poor analysts performance).

Two is that until the impact is visible (Apple has some latitude in terms of when they will adopt the new revenue recognition, and as such it shapes real earnings projections in this quarter and moving forward), all of the charts and financial data that investors use in making buy/sell decisions reflect old data, driving price-to-earnings and price-to-sales multiples to appear higher than they will be, which again, impacts real buying and selling activity.

I wrote a primer on the impact of the change, and why it matters:

Apple Accounting Change: Why it Matters
http://bit.ly/rCWsp

Check it out, if interested.

Mark

If you're going to be making such sweeping assertions, care to cite any academic research at all, instead of touting some random website (probably yours)?

Many of these issues - esp. market efficiency - have been extensively researched.

[hypermark]

Originally Posted by anantksundaram

If you're going to be making such sweeping assertions, care to cite any academic research at all, instead of touting some random website (probably yours)?

Many of these issues - esp. market efficiency - have been extensively researched.

I am not sure what your point is. That you think the market IS efficient or that the point is only valid if I cite academic research? Silly.

One only has to watch Apple's stock to know how inefficient the market is. How could it be any different when the analysts themselves can't even agree on the company (the company is materially more complex to analyze than a one product company).

As to the second point, it is fundamental. Go to Yahoo Finance:

http://finance.yahoo.com/q?s=AAPL

The P/E and P/S data doesn't reflect what the new multiples will be per FASB rules, so of course the stock LOOKS like less of a deal than it magically will when the numbers change post FASB factoring (subject, of course to macro market and Apple's actual business outlook in earnings call).

Now, if you think visible pricing data doesn't impact buying behavior, can't really help you on that one.

[cameronj]

Originally Posted by faxthat

This "bad news-good news" market has been quick to respond to bad news and slow to respond to good news on individual stocks. There seems to be a much stronger response to the bigger "economy recovering-economy not recovering" type of news and there has been more of the latter lately, with manufacturing figures down and unemployment numbers rising. When there is more good news of the US economy recovering, I expect this latest prediction on Apple's upcoming earnings report to cause a jump in the stock price. In other words, I don't think it's been factored in yet.

Where have you been for the past 6 months?

All the bad news has been ignored, and good news has caused huge jumps. Why do you think the markets are up like 50% in the past 6 months?

[Dr Millmoss]

Originally Posted by hypermark

I think that there are two points on this one. One is that the market is far less efficient than people give it credit for. In other words, there is a lag between rumor becoming fact, fact shaping model and model driving by/sell activity (coupled with truly poor analysts performance).

Two is that until the impact is visible (Apple has some latitude in terms of when they will adopt the new revenue recognition, and as such it shapes real earnings projections in this quarter and moving forward), all of the charts and financial data that investors use in making buy/sell decisions reflect old data, driving price-to-earnings and price-to-sales multiples to appear higher than they will be, which again, impacts real buying and selling activity.

I wrote a primer on the impact of the change, and why it matters:

Apple Accounting Change: Why it Matters
http://bit.ly/rCWsp

Check it out, if interested.

Mark

While I can agree generally with some of the points you've made above, I believe the argument you made in your blog is problematical.

For one, you simply cannot compare the GAAP earnings as reported under the old rules to the GAAP earnings under the new rules. They are vastly different. What you need to do is compare the non-GAAP earnings previously reported to the new rules GAAP earnings, at such time as Apple begins to report that way. By comparing "apples to apples" you will find that earnings aren't exploding quite so dramatically.

Second, I think you make a serious error when you assume two things. First, that AAPL's P/E will remain the same under the new earnings rules. No reason to believe this, and it's also worth keeping in mind that P/E is a trailing indictor that predicts nothing about the future (anticipates perhaps, but does not predict). Second, I don't think you can assume that any substantial segment of the investing market will be totally blindsided by Apple's earnings under the new rules, since they've been reporting them alongside their GAAP earnings for several quarters now. Sure, you might see a flurry of "surprise" buying but in short order reality will take over (for better or worse).

Finally, in the end what really drives stocks is earnings growth. If a company can't produce earnings growth, and show the potential for more in the immediate future, the stock's P/E will decline. If analysts who understand Apple are predicting a higher stock over the coming 12 months, it's because they believe Apple has the goods to drive earnings, not because of a technical change in reporting rules. I think most of them have been quite clear about this.

[anantksundaram]

Originally Posted by hypermark

I am not sure what your point is. That you think the market IS efficient or that the point is only valid if I cite academic research? Silly.

One only has to watch Apple's stock to know how inefficient the market is. How could it be any different when the analysts themselves can't even agree on the company (the company is materially more complex to analyze than a one product company).

As to the second point, it is fundamental. Go to Yahoo Finance:

http://finance.yahoo.com/q?s=AAPL

The P/E and P/S data doesn't reflect what the new multiples will be per FASB rules, so of course the stock LOOKS like less of a deal than it magically will when the numbers change post FASB factoring (subject, of course to macro market and Apple's actual business outlook in earnings call).

Now, if you think visible pricing data doesn't impact buying behavior, can't really help you on that one.

You really should not confuse people with blowing such smoke.

Originally Posted by hypermark

That you think the market IS efficient or that the point is only valid if I cite academic research? Silly.

I think the market is generally semistrong efficient in common stocks of large, liquid companies. Your counter-argument to that assertion would be valid only if you can cite credible academic research or do some solid empirical analysis yourself, since this issue has been studied to death.

"Silly?" To jettison decades of solid peer-reviewed research is what is "silly."

Originally Posted by hypermark

I
One only has to watch Apple's stock to know how inefficient the market is. How could it be any different when the analysts themselves can't even agree on the company (the company is materially more complex to analyze than a one product company).

You don't even know the definition of what "market efficiency" is if you think analyst disagreement has something to do with it. Please define what you think it means. Moreover, what is it about "watching Apple stock" that makes you "know" how "inefficient" the market is? I have absolutely no clue what you are saying here.

Let me make it simple: Given the information you have available today, do you think that Apple is fairly priced at $182(ish)? And, if you think it's too low (high), will you buy (sell)? Incidentally, why would the person on the other side of the transaction sell (buy)? Because you are smart and they are stupid?

Originally Posted by hypermark

As to the second point, it is fundamental. Go to Yahoo Finance:

http://finance.yahoo.com/q?s=AAPL

The P/E and P/S data doesn't reflect what the new multiples will be per FASB rules, so of course the stock LOOKS like less of a deal than it magically will when the numbers change post FASB factoring (subject, of course to macro market and Apple's actual business outlook in earnings call).

Now, if you think visible pricing data doesn't impact buying behavior, can't really help you on that one.

"Visible pricing data" and "buying behavior"? You lost me there, buddy. What was "invisible" about Apple's deferred (non-GAAP) revenue or income? Do you think Apple's price-to-FCF changed one iota because of this cosmetic accounting change? (Do you think FCF has anything to do with valuing stock? Hint: It does.) Do you even bother to take a look at basic financial statements before you make buy/sell decisions (let alone start to dispense advice to others on how to make buy/sell decisions)? If you have a stellar stock-picking record based on your "visible pricing data" theory, could you show us some proof? If not, why the heck should we believe you?

Sheesh. Take your snake oil elsewhere.

[hypermark]

First off, thanks for the thoughtfully argued counter-perspective.

I am not 100% clear on your first point about comparison between GAAP under old to new. To be clear, Apple has broken out these numbers for some time, and most recently, Munster of Piper Jaffray (the best of Apple's analysts, I think) did the same, showing 2010 earnings being 48% higher.

If I read your comments correctly, they fundamentally assume that because the market has known about the Non GAAP breakout in the past, the larger market has priced them in.

All of my experience is to the contrary, and the data relativity of this on AAPL pricing seems to support same, which is the top level point of the article in the first place, and why every analyst is jumping on the bandwagon based purely on change in FASB rules. They had the data before. What changed? Did the company suddenly become better? No. They could "count" sales/earnings differently than they could before in a way that compares relative to peer companies.

Second to your reference of reality taking over in short order, you hit the nail on how the market actually works. At some point, most likely after Apple formalizes it in the earnings call, this "new" data will be priced in, no differently than RIMM got "re-priced" when their earnings call changed fundamental assumptions about their prospects. The distinction between what you are saying and I am saying is that you assume that retail investors make assessments based on all publicly available data and that institutional investors do the same.

The former clearly don't, which is one reason why Apple is such a volatile stock. It's hard to define worth relative to it being a PC company, a phone company, a media player company, etc. As such, the larger market hangs on a favorite macro story about the company. To the extent the story is iPhone, iPhone, iPhone, once everyone groks how gaudy those numbers are, the mainstream media will have something tangible to write on.

As to your comments on what P/E will be, forward outlook and macro market, I bring attention to the same in the post and bold it to underscore the point. For P/E relativity, I actually look to Google as they are the closest case of a segment gorilla that is taking/keeping market share and maximizing margins as a result.

I wouldn't pretend to know what the market will do tomorrow, let alone today, and the mechanics of this rule change are pure arbitrage, subordinate to the real forward looking performance of Apple.

Originally Posted by Dr Millmoss

While I can agree generally with some of the points you've made above, I believe the argument you made in your blog is problematical.

For one, you simply cannot compare the GAAP earnings as reported under the old rules to the GAAP earnings under the new rules. They are vastly different. What you need to do is compare the non-GAAP earnings previously reported to the new rules GAAP earnings, at such time as Apple begins to report that way. By comparing "apples to apples" you will find that earnings aren't exploding quite so dramatically.

Second, I think you make a serious error when you assume two things. First, that AAPL's P/E will remain the same under the new earnings rules. No reason to believe this, and it's also worth keeping in mind that P/E is a trailing indictor that predicts nothing about the future (anticipates perhaps, but does not predict). Second, I don't think you can assume that any substantial segment of the investing market will be totally blindsided by Apple's earnings under the new rules, since they've been reporting them alongside their GAAP earnings for several quarters now. Sure, you might see a flurry of "surprise" buying but in short order reality will take over (for better or worse).

Finally, in the end what really drives stocks is earnings growth. If a company can't produce earnings growth, and show the potential for more in the immediate future, the stock's P/E will decline. If analysts who understand Apple are predicting a higher stock over the coming 12 months, it's because they believe Apple has the goods to drive earnings, not because of a technical change in reporting rules. I think most of them have been quite clear about this.

[hypermark]

I won't debate you on market efficiency. The run of the market from last year to the present should dispel any sense of a magically efficient market. If interested, you are welcome to check out my post 'Wall Street Circle Jerk: On Feedback Loops and Efficient Markets,' which cites the analysis of many other Wall Street veterans far smarter than me on the topic.

My point wrt analyst divergence relative to efficient market is that efficient market theory assumes that all known information is priced into the market, and Apple is the prototypical example of how inefficient the market is when even the sample of professionals who are dedicated to tracking this known information have dramatically different reads on what it means.

As to Apple, I am long on the stock, and a holder of a decent chunk of it, having sold (with partners) Me.com to them last year so yes, my money is where my mouth is.

As to qualifications on stock price, I am as unqualified as everyone else, which is to say that picking what a stock is really worth is beyond most, myself included. I am merely responding to what I see as a one-time event.

My analysis on Apple the COMPANY, however, is different than Apple the STOCK since the former I know intimately well, and my analysis of THE COMPANY is there for the picking apart at my blog (40+ posts - pick away), not to mention O'Reilly and GigaOM, where I write regular guest columns at.

In other words, who I am is pretty public. Can we say the same about you?

Originally Posted by anantksundaram

You really should not confuse people with blowing such smoke.

I think the market is generally semistrong efficient in common stocks of large, liquid companies. Your counter-argument to that assertion would be valid only if you can cite credible academic research or do some solid empirical analysis yourself, since this issue has been studied to death.

"Silly?" To jettison decades of solid peer-reviewed research is what is "silly."


You don't even know the definition of what "market efficiency" is if you think analyst disagreement has something to do with it. Please define what you think it means. Moreover, what is it about "watching Apple stock" that makes you "know" how "inefficient" the market is? I have absolutely no clue what you are saying here.

Let me make it simple: Given the information you have available today, do you think that Apple is fairly priced at $182(ish)? And, if you think it's too low (high), will you buy (sell)? Incidentally, why would the person on the other side of the transaction sell (buy)? Because you are smart and they are stupid?



"Visible pricing data" and "buying behavior"? You lost me there, buddy. What was "invisible" about Apple's deferred (non-GAAP) revenue or income? Do you think Apple's price-to-FCF changed one iota because of this cosmetic accounting change? (Do you think FCF has anything to do with valuing stock? Hint: It does.) Do you even bother to take a look at basic financial statements before you make buy/sell decisions (let alone start to dispense advice to others on how to make buy/sell decisions)? If you have a stellar stock-picking record based on your "visible pricing data" theory, could you show us some proof? If not, why the heck should we believe you?

Sheesh. Take your snake oil elsewhere.

[anantksundaram]

Originally Posted by hypermark

I won't debate you on market efficiency. The run of the market from last year to the present should dispel any sense of a magically efficient market. If interested, you are welcome to check out my post 'Wall Street Circle Jerk: On Feedback Loops and Efficient Markets,' which cites the analysis of many other Wall Street veterans far smarter than me on the topic.

My point wrt analyst divergence relative to efficient market is that efficient market theory assumes that all known information is priced into the market, and Apple is the prototypical example of how inefficient the market is when even the sample of professionals who are dedicated to tracking this known information have dramatically different reads on what it means.

As to Apple, I am long on the stock, and a holder of a decent chunk of it, having sold (with partners) Me.com to them last year so yes, my money is where my mouth is.

As to qualifications on stock price, I am as unqualified as everyone else, which is to say that picking what a stock is really worth is beyond most, myself included. I am merely responding to what I see as a one-time event.

My analysis on Apple the COMPANY, however, is different than Apple the STOCK since the former I know intimately well, and my analysis of THE COMPANY is there for the picking apart at my blog (40+ posts - pick away), not to mention O'Reilly and GigaOM, who I write regular guest columns at.

In other words, who I am is pretty public. Can we say the same about you?

I have no interest in reading your blog posts. Thanks. My interest is only in responding to specific assertions you are making. And, the fact that you make yourself 'public' doesn't mean I should or want to. That is irrelevant one way or another. If there is something I am asserting with which you have trouble, I am happy to try and convince you with facts or evidence. And if I can't, shame on me. (Indeed, my question was whether you had any particular stock-picking skills to make the assertions you did, and you go on with TMI about me.com and such; I can't quite figure out the relevance).

When you make a statement such as: "efficient market theory assumes that all known information is priced into the market, and Apple is the prototypical example of how inefficient the market is when even the sample of professionals who are dedicated to tracking this known information have dramatically different reads on what it means," it reveals a problem with whether you know what it means. (i) I quite deliberately said 'semistrong' efficiency - if you go back and read what I said (which, incidentally, was in response to your specific question about whether I believed in 'efficiency') - and that has nothing to do with 'all known' information; (ii) In your one sentence above, you are conflating two completely different ideas: what the market 'knows' (data) has nothing necessarily to do with what the market thinks the data 'means' (analysis and interpretation of the data) - efficiency is merely a statement about whether and how speedily what the market 'knows' is priced. Period. It says nothing at all about what the market thinks the data means (which we have no way to figure out anyway). All that is being said here about this accounting rule change is about what the market 'knows' (i.e., the revenue recognition issue, which has always been on Apple's balance sheet as a deferred liability).

You say you are responding to a 'one-time event,' and in your post just prior (reply to Dr. Millmoss), you say the 'mechanics of this rule change are pure arbitrage.' What is the pure arbitrage opportunity here that you are suggesting we take advantage of? What should I go long, and what should I short? It seems like you have some type of trading strategy recommendation in mind, can you please articulate it?

Let me just say this one thing: "Markets are efficient" does not mean markets get prices right ex-post; it simply is a statement about whether the market fairly and speedily prices what it knows. In other words, it says the market will have taken into account the revenue recognition issue, not that the market has correctly or incorrectly put a multiple on Apple's revenue or income. Period.

Incidentally, I am still awaiting an answer to "FCF," and your claim about "visible data." I see you avoided addressing both.

[aaarrrgggh]

I'm on hypermark's side on this one. Look at each of the ~26 analysts that cover aapl over time. They can't Get too close to reality on top line, bottom line, units, margins, or even what fundamentally drives the company.

Company valuation is complicated, and while it depends on a lot more that pe ratio, that simple metric does a pretty good job of distilling information across a sector, especially if you factor out cash. Unfortunately, when you factor out cash, you also factor out the hidden growth associated with the deferred earnings.

Institutional investors have tools to help them prioritize and allocate money as much as value a company. A lower pe helps to shift allocation based on goals, outlooks, and strategies.

The decision to buy or sell at a given price has a lot to do with available capital and optimal assett allocation. You might sell at $182 to take profits and use them in a more speculative investment as an example-- that makes you no more or less smart than someone willing to expand a position at that price.

[hypermark]

Whatever. From where I sit, the fact that you are so willing to attack an articulated position with academic assertions while at the same time hiding behind anonymity (which tells whether you have actually translated knowledge into practice and/or success) speaks volumes.

As to your hanging on FCF, you clearly missed the early paragraph in my post, which reads:

To be clear, this has no impact on Apple’s cash flow, which given skepticism with perceived financial engineering by industry analysts and investment banks, has led some to say that this news is background noise, and that it should not impact your investment thinking one iota. I disagree.

In any event, done with the back/forth on this.

Originally Posted by anantksundaram

I have no interest in reading your blog posts. Thanks. My interest is only in responding to specific assertions you are making. And, the fact that you make yourself 'public' doesn't mean I should or want to. That is irrelevant one way or another. If there is something I am asserting with which you have trouble, I am happy to try and convince you with facts or evidence. And if I can't, shame on me. (Indeed, my question was whether you had any particular stock-picking skills to make the assertions you did, and you go on with TMI about me.com and such; I can't quite figure out the relevance).

When you make a statement such as: "efficient market theory assumes that all known information is priced into the market, and Apple is the prototypical example of how inefficient the market is when even the sample of professionals who are dedicated to tracking this known information have dramatically different reads on what it means," it reveals a problem with whether you know what it means. (i) I quite deliberately said 'semistrong' efficiency - if you go back and read what I said (which, incidentally, was in response to your specific question about whether I believed in 'efficiency') - and that has nothing to do with 'all known' information; (ii) In your one sentence above, you are conflating two completely different ideas: what the market 'knows' (data) has nothing necessarily to do with what the market thinks the data 'means' (analysis and interpretation of the data) - efficiency is merely a statement about whether and how speedily what the market 'knows' is priced. Period. It says nothing at all about what the market thinks the data means (which we have no way to figure out anyway). All that is being said here about this accounting rule change is about what the market 'knows' (i.e., the revenue recognition issue, which has always been on Apple's balance sheet as a deferred liability).

You say you are responding to a 'one-time event,' and in your post just prior (reply to Dr. Millmoss), you say the 'mechanics of this rule change are pure arbitrage.' What is the pure arbitrage opportunity here that you are suggesting we take advantage of? What should I go long, and what should I short? It seems like you have some type of trading strategy recommendation in mind, can you please articulate it?

Let me just say this one thing: "Markets are efficient" does not mean markets get prices right ex-post; it simply is a statement about whether the market fairly and speedily prices what it knows. In other words, it says the market will have taken into account the revenue recognition issue, not that the market has correctly or incorrectly put a multiple on Apple's revenue or income. Period.

Incidentally, I am still awaiting an answer to "FCF," and your claim about "visible data." I see you avoided addressing both.

[Dr Millmoss]

Originally Posted by hypermark

I am not 100% clear on your first point about comparison between GAAP under old to new. To be clear, Apple has broken out these numbers for some time, and most recently, Munster of Piper Jaffray (the best of Apple's analysts, I think) did the same, showing 2010 earnings being 48% higher.

If I read your comments correctly, they fundamentally assume that because the market has known about the Non GAAP breakout in the past, the larger market has priced them in.

All of my experience is to the contrary, and the data relativity of this on AAPL pricing seems to support same, which is the top level point of the article in the first place, and why every analyst is jumping on the bandwagon based purely on change in FASB rules. They had the data before. What changed? Did the company suddenly become better? No. They could "count" sales/earnings differently than they could before in a way that compares relative to peer companies.

Correct me if I'm wrong, but you seem to be charting an increase in Apple's earnings based on an upcoming change in the way they report earnings. The change will not be so dramatic when compared to a number derived in a similar way, IOW, the non-GAAP earnings they have been reporting for the last several quarters. I think it's wrong to talk about this in any other way, or as though the majority of investors have been blithely ignorant of such a fundamental issue, even though Apple reports it -- which is how I read your argument.

I think you are also misreading the analysts who are reporting on this change. If you have heard one of them say that AAPL is going to move up solely on this basis, please point out who and where. In fact, I believe they all say it's not going to make much if any difference in the end, because the markets already know about how earnings are going to look after the change in GAAP rules because they've been seeing them for many quarters quoted as non-GAAP earnings.

[anantksundaram]

Originally Posted by hypermark

As to your hanging on FCF, you clearly missed the early paragraph in my post, which reads:

To be clear, this has no impact on Apple’s cash flow, which given skepticism with perceived financial engineering by industry analysts and investment banks, has led some to say that this news is background noise, and that it should not impact your investment thinking one iota. I disagre

Please excuse me if I did: Can you show me exactly where you said this in this thread?! I cannot see it anywhere.

[hypermark]

You are absolutely right. The delta between the former non-GAAP and new-GAAP should not be so profound, and you are right that my core argument is that market hasn't processed and/or fully priced.

As to analysts noting same, I would say three things. One, the analyst cited in this AI post (Yair Reiner of Oppenheimer) said that "despite all of the publicity of under-reported iPhone revenue, the market still doesn't fully realize, and that will take time. The company has reiterated its outperform rating for AAPL stock and has increased its price target to $210 per share."

Two, Gene Munster of Piper Jaffray in upping his price target from $186 to $235 said, ""While this has been expected for the last month, we believe this will be a positive for shares of AAPL," he wrote, before raising his price target to $235 from $186."

Three, there are a whole mess of analysts that have upgraded Apple recently on no new data, save for the the change in GAAP, which I would suggest is not coincidental. Whether they all underlined and circled the change as the sole reason for the timing of the upgrade or not I don't know (I am dubious), but regardless, you have two who have called out the impact in driving up their pricing calls, and a herd that have spoken with pricing upgrades.

I agree with you that in the long run (six months +/-) this is all moot.

Originally Posted by Dr Millmoss

Correct me if I'm wrong, but you seem to be charting an increase in Apple's earnings based on an upcoming change in the way they report earnings. The change will not be so dramatic when compared to a number derived in a similar way, IOW, the non-GAAP earnings they have been reporting for the last several quarters. I think it's wrong to talk about this in any other way, or as though the majority of investors have been blithely ignorant of such a fundamental issue, even though Apple reports it -- which is how I read your argument.

I think you are also misreading the analysts who are reporting on this change. If you have heard one of them say that AAPL is going to move up solely on this basis, please point out who and where. In fact, I believe they all say it's not going to make much if any difference in the end, because the markets already know about how earnings are going to look after the change in GAAP rules because they've been seeing them for many quarters quoted as non-GAAP earnings.