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.