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Apple now sitting on $10B in deferred revenue, more than Samsung or Google earned last quarter - Page 2

post #41 of 84
Quote:
Originally Posted by Corrections View Post

There's a picture of the deferred revenue, there's over $10billion

Also, there was no suggestion that Apple deferred $10B in one quarter. Don't complain about being deceived by your own comprehension issues.

The article talks about last quarter and how analysts missed the news about the 10B deferred revenue. Admittedly he does waffle on in his typical labouring style and I only have so much time. Maybe he pointed out somewhere on page 902 what this actually means - how much more revenue per quarter we can anticipate even if sales were flat y-o-y but I didn't read past page 900 so I didn't get to it.

My point is simple: if Apple had not previously deferred income the last quarters revenue would have been lower so it's all a wash if revenue isn't growing that much. The analysts would have reacted the same, which was fairly neutral despite the hysteria here.
Edited by asdasd - 11/1/13 at 3:14pm
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post #42 of 84
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Originally Posted by mvigod View Post

Apple does a poor job of marketing itself and its financials. It is its own worst enemy.  Icahn is actually trying to help apple with this and if the street is willing to offer shares so low he rightfully feels apple should be buying them hand over fist.

Borrow money at 3%.  After tax write off on interest effective rate at 2% or less.  Apple has a 15% plus earnings yield.  What part of no brainer does the apple board not understand?  When you can buy dollars for dimes you do it all day long because it won't last forever.  This is a once in a lifetime opportunity for Apple to take back 1/3 to 1/2 the company shares at a too low to believe price.

The only rationale for NOT doing this is if the board is very uncertain and nervous about apple's near term future.

I disagree. Crazy Carl may be in it for the long term, but how long is long. Why would 10s of billions of dollars in debt be a good thing? Once Carl gets his target share price, he will sell and Apple will still be in debt for a long term.
post #43 of 84
Now can any of you geniuses explain to a mere physics post grad like myself why "buying back stock" would lead to a price increase. The $150B should be adding to the value of the stock anyway. A company with no revenue, $150B in the bank and 1 B stock outstanding should have shares valued at $150. Otherwise you could buy $150 B for $100B were the stock at $100.

This means any company with $150B in cash should see that much value added to the stock. In Apples case that's about $150 per share as apple does have about 1 billion stock outstanding. Spending the money to buy back the stock should keep the price neutral because the lower number of shares is offset by the reduction in cash per share which should have been priced in. It balances. Besides that they have to borrow so it's a loss, and a loss of fire power for major acquisitions.
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post #44 of 84
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Originally Posted by konqerror View Post
 

 

Not exactly true. If they now defer $100 for software, and they didn't raise the price of Macs $100, the total revenue is the same. They just lost $7.4 billion of revenue in the current quarter, to be made up over the next year.

Ahem, nothing is so straight forward as you claimed.

 

While you are at it how about giving us a breakdown of the component cost so see can see whether Apple is lying as you claimed.

post #45 of 84
Quote:
Originally Posted by sog35 View Post
 

 

I agree with you 100%.  If you are confident the stock will rise mid/long term there is ZERO reason to not borrow and do a buyback.

 

With one exception: They are planning a $75-$100B acquistion.  Beyond that there is no reason to have over $150B in cash doing nothing.

 

I think Tim knows this.  My guess is they will announce another buyback one the current one is winding down.  Though I doubt it will be $150B and it will be spread over several years.

 

It was also bad timing to change the deferred revenue method.  Without the method the current quarter would have been close to 39% and guidance for Q1 would be 40%+.  That would have easily moved the stock to $575-$600.  I just don't understand why such a move was neccessary.  Now all YoY quarter comparisions for GM are off.

No one borrows money to buy back their own shares, they borrow money to expand their business.

 

With better products they have a better chance of improving the price of their shares.

 

It is a stupid idea anyway and serve only to fatten icahn's purse.

post #46 of 84
Quote:
Originally Posted by sog35 View Post
 

So basically if Apple didn't change their accounting method they would have $10B more in profits the last year........

 

I really don't see why they need to defer revenue for hardware for 2 years.  This a really conservative method.

There was an article back a ways that explained why they deferred the revenue and it was due to a law put in place because of enron and there accounting practices.

post #47 of 84
Quote:
Originally Posted by asdasd View Post


Ah good point. So we are seeing some deferred revenue from 1-2 years ago now. Which means net not-yet-declared revenue isn't anything like 10B. ( which isn't one quarter either as DED seems to suggest).

More info below the line than above as is common enough these days.

DED said there deferring $900 million in this next quarter which was reported by Peter Oppenheimer in the Q4 conference call.  So there Q1 2014 will not report all of there earnings.  Because of the minus $900 million.

post #48 of 84
Quote:
Originally Posted by AdamC View Post
It is a stupid idea anyway and serve only to fatten icahn's purse.

All what's to be said in one little sentence...

post #49 of 84
Quote:
Originally Posted by asdasd View Post

Now can any of you geniuses explain to a mere physics post grad like myself why "buying back stock" would lead to a price increase. The $150B should be adding to the value of the stock anyway. A company with no revenue, $150B in the bank and 1 B stock outstanding should have shares valued at $150. Otherwise you could buy $150 B for $100B were the stock at $100.

This means any company with $150B in cash should see that much value added to the stock. In Apples case that's about $150 per share as apple does have about 1 billion stock outstanding. Spending the money to buy back the stock should keep the price neutral because the lower number of shares is offset by the reduction in cash per share which should have been priced in. It balances. Besides that they have to borrow so it's a loss, and a loss of fire power for major acquisitions.
Stock prices are a function of earnings per share. If revenue goes up and the number of outstanding shares is unchanged, the stock price will rise. If earnings remain the same and the number of shares goes down, then the price per share will increase.

At least, that is the simplified view for many investors. Not all. The formula also involves a multiplier applied to earnings per share. That multiplier reflects market and economic expectations as well as investor expectations for the company in question.
post #50 of 84
Quote:
Originally Posted by macaholic_1948 View Post

Stock prices are a function of earnings per share. If revenue goes up and the number of outstanding shares is unchanged, the stock price will rise. If earnings remain the same and the number of shares goes down, then the price per share will increase.

At least, that is the simplified view for many investors. Not all. The formula also involves a multiplier applied to earnings per share. That multiplier reflects market and economic expectations as well as investor expectations for the company in question.

So basically you are saying that the cash has no bearing on share price. Only earnings? So a company with no earnings and $150B cash is actually worth zero.
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post #51 of 84
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Originally Posted by asdasd View Post

So basically you are saying that the cash has no bearing on share price. Only earnings? So a company with no earnings and $150B cash is actually worth zero.

And then you have Amazon...
post #52 of 84

Okay, fine, Apple!  Defer all the revenue you want!

 

But please explain to the immature and negative media about this deferred revenue.

 

Apple, please market your success not just your products!

 

Do it for us shareholders.

post #53 of 84
Quote:
Originally Posted by jungmark View Post

And then you have Amazon...

Seriously. I mean what does the market think that amazon is going to do? If they ever start earning real profit the stock will tank. People will demand dividends. A buy back scheme will be proposed. A buy back scheme will be implemented. The stock will tank some more.
A bigger buy back scheme will be proposed...

Moral. Don't earn outside profits.
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post #54 of 84
Quote:
Originally Posted by asdasd View Post

The article talks about last quarter and how analysts missed the news about the 10B deferred revenue. Admittedly he does waffle on in his typical labouring style and I only have so much time. Maybe he pointed out somewhere on page 902 what this actually means - how much more revenue per quarter we can anticipate even if sales were flat y-o-y but I didn't read past page 900 so I didn't get to it.

My point is simple: if Apple had not previously deferred income the last quarters revenue would have been lower so it's all a wash if revenue isn't growing that much. The analysts would have reacted the same, which was fairly neutral despite the hysteria here.

Really it's evident you read headlines and a bit of the first paragraph and then race to the comments to express whatever thought jumps to your mind. That's why you always complain about irrelevant things without having the full picture.
post #55 of 84
And exactly what has any of this done for Apple shareholders? Nada! Apple still seems to be limping along at a snail's pace with the cries of doom still being tossed at it. I just don't get it at all. How can things like this mean absolutely nothing to potential investors. Apple's P/E is still very conservative compared to rivals. However, that may be due to Apple's large market cap. I really don't know what to think anymore when it comes to Apple's income and how it's related to shareholder value. If that $10 billion is more than Google earned last quarter than why is Google sitting at well over $1000 a share and Apple stays capped at around $530 a share. That's insane.
post #56 of 84
Quote:
Originally Posted by Constable Odo View Post

And exactly what has any of this done for Apple shareholders? Nada! Apple still seems to be limping along at a snail's pace with the cries of doom still being tossed at it. I just don't get it at all. How can things like this mean absolutely nothing to potential investors. Apple's P/E is still very conservative compared to rivals. However, that may be due to Apple's large market cap. I really don't know what to think anymore when it comes to Apple's income and how it's related to shareholder value. If that $10 billion is more than Google earned last quarter than why is Google sitting at well over $1000 a share and Apple stays capped at around $530 a share. That's insane.

 

Stock valuations, and in the aggregate market capitalization, are only indicative of what the investing market thinks holding a stock may be worth. It is not a 'true' valuation of the company. If today’s stock price is $500, and there are 900M shares, that only means an investor is more likely to find a buyer or seller for stock in close proximity to $500. 

 

You can maybe find a desperate seller willing to take less, or a desperate buyer who will pay more. And that’s constantly happening, resulting in wildly changing prices. This is not necessarily rational, just as the lane changing behaviors of individual drivers is often apparently insane to other drivers who happen to have different motivations for the decisions they make (ie. how much of a hurry they are in vs. how much they are willing to risk causing a collision). 

 

When you look at things from that perspective, it explains why a solid company like Apple, which faces some risks and challenges but has a strong history of outperforming the market and successfully entering new ones, can have an insanely low valuation for a period of time due to false information and simply wrong headed investors. 

 

Apple is currently set up with the ability to survive major global shifts and a significant economic downturn. A company driving insanely fast and having zero safety zone for maneuvering, like the wildly profitless Amazon, could easily crash and burn in the next bubble. A one trick pony like Google could run into a major problem if, say, there was a major lawsuit targeting its primary successful business.

 

Recall that in 2008, Apple’s stock ran up and fell down repeatedly, doubling and collapsing in half throughout the year back and forth. That’s insane. But two years later it was up about 2x each year, and in 2012 it exploded. This year it flattened out, giving back all the progress from 2012. But that was based purely on false information and threats that failed to materialize. 

 

Apple now has the only tablet that matters, has increasing phone strength as Samsung and Google become enemies and are unable to report continued high end growth, and Microsoft Windows is imploding. Apple is building the world’s largest tech R&D center and financing global shifts in Application Processor fabrication. 

 

If Android couldn’t sell demonstrably better 4G LTE handsets vs iPhone 4/4S while it had the exclusive through the end of 2012, imagine how bad its going to get next year, as Android demonstrably falls behind and looks increasingly stale and slow moving as Google doubles down on very low end devices with 512MB of RAM as Apple continues to sell 64-bit machines with better battery life and advanced exclusive features like Touch ID.

 

Now as an investor, you’re only cranky about how much money you have. But that in itself helps to illustrate how irrational and misguided investors are. You can fume at "the market" for being "insane" in their valuations, but really its just a bunch of people like you who are making decisions based on faulty or incorrect thinking.

 

It’s rather like being on a freeway with heavy traffic and complaining about other people’s decisions to drive on your route. You’re really just part of the problem. If you can’t take the traffic, stay off the highway. If you like driving without stop signs deal with the freeway having traffic, because a lot of people are doing the same as you for the same reasons. 

post #57 of 84
Quote:
Originally Posted by lkrupp View Post

Okay all you genius-steins arguing over Apple’s financials... is Apple doomed or not? That’s all I want to know. Because Wall Street certainly acts like Apple is on its last leg.

Is that a good thing or a bad thing?

http://www.thedailyshow.com/watch/tue-october-29-2013/last-gay-standing
post #58 of 84
Quote:
Originally Posted by Corrections View Post

 

Stock valuations, and in the aggregate market capitalization, are only indicative of what the investing market thinks holding a stock may be worth. It is not a 'true' valuation of the company. If today’s stock price is $500, and there are 900M shares, that only means an investor is more likely to find a buyer or seller for stock in close proximity to $500. 

You write a lot of great stuff. But on this one, you're out to lunch, especially when you make sweeping statements like the one I've underlined above.

 

Please learn the difference between value (what Constable Odo is implicitly referring to), and price (which is what you're referring to). In a market that is efficient, the two should, indeed, be equal. 

 

Odo is simply -- and correctly -- pointing out the fact that Apple's intrinsic value is greater than its market price, and wondering aloud about why the market is so seemingly inefficient (i.e., why the price does not adjust to reflect value). Your response to him -- that somehow, markets do not necessarily measure 'true' value -- is a sweeping, and incorrect overgeneralization.

 

There are a lot of factors that can help close that gap. Good shareholder communication is one, for starters. Managing market expectations well is another. I am not suggesting either is easy to do, but the largest company in the world by market cap could, no, should clearly be doing a better job of it.

 

Incidentally, if you'd really like to understand the distinction between value and price -- which very few people do -- here's is an excellent primer: http://aswathdamodaran.blogspot.com/2013/02/apple-redux-thoughts-on-value-price-and.html

post #59 of 84
Quote:
Originally Posted by asdasd View Post


So basically you are saying that the cash has no bearing on share price. Only earnings? So a company with no earnings and $150B cash is actually worth zero.

If a company had $150B in cash and no earning would be a very weird beast.

 

Also, it's not about past earnings it's about expected future earnings (and obviously everyone is entitled to their own "expectations").  So if there were a company with a boatload of money in the bank but zero expected earnings, there would be something seriously wrong.  That would mean that the core business had an on-going loss that exactly offset the massive investment earning from that cash.  That would be a sick company and it's stock would fair poorly.  Would it be worth "zero?"  Of course not.  If nothing else, someone could buy up the company, sell everything off, and keep the cash.  So the share price would reflect that worst-case scenario.

post #60 of 84
Quote:
Originally Posted by konqerror View Post

It's incorrect to say that the deferred revenue is pure profit. The deferred revenue has to offset the development costs which are amortized over the life of the products.

If you assume Apple's software margins are 50%, then only 50% of the deferred OS X revenue, for example, will become profit. The most of the rest will go to capitalized costs, mainly programmer's salaries.

I'm curious about this statement but not disagreeing with it.

In Horace's podcast, he says that Apple doesn't have traditional Profit and Losses in each division, like Microsoft.

What does that mean? I'm not sure for accounting purposes?

Can Apple use current development costs for the current year and have the deferred income be pure profit?

Any professional accountant know that?
post #61 of 84
Quote:
Originally Posted by mvigod View Post

Apple does a poor job of marketing itself and its financials. It is its own worst enemy.  Icahn is actually trying to help apple with this and if the street is willing to offer shares so low he rightfully feels apple should be buying them hand over fist.

Borrow money at 3%.  After tax write off on interest effective rate at 2% or less.  Apple has a 15% plus earnings yield.  What part of no brainer does the apple board not understand?  When you can buy dollars for dimes you do it all day long because it won't last forever.  This is a once in a lifetime opportunity for Apple to take back 1/3 to 1/2 the company shares at a too low to believe price.

The only rationale for NOT doing this is if the board is very uncertain and nervous about apple's near term future.

Actually, that's Double-Dutch. There is every reason not to do so given that Apple has arrived at this point by ignoring such expert opinion and proving that the rest of the market are the ones out of step...not Apple. I always wonder about these so-called solutions to problems that are pure inventions of folks who have zero clue about Apple's operating philosophy - essentially, they are criticising Apple for their own failures.
So no, I do not wish Apple to be 'just like everyone else'. I want them to continually throw up surprises, blind-side the opposition and to produce grokless confusion amongst mere mortals and leaden-footed analysts.
post #62 of 84
Wouldn't Apple's current realized earnings include realized deferred earnings from previous years?

The first year (and 2nd and 3rd year, depending on realization period) that they switched to subscription in 2007 would have been a year with under-appreciated earnings.

Year over year increases in deferred earnings would yes, be under-appreciated, but only the increases. The previous deferred earnings that get realized this quarter are part of current reported earnings. This gets complicated doesn't it?

Current realized earnings that are a result of previously deferred earnings, could be said to not reflect currently produced value, but rather carried over until now. The $10B is never-the-less a good chunk of moola to be taken into consideration.
post #63 of 84
Quote:
Originally Posted by malax View Post

Quote:
Originally Posted by asdasd View Post

So basically you are saying that the cash has no bearing on share price. Only earnings? So a company with no earnings and $150B cash is actually worth zero.
If a company had $150B in cash and no earning would be a very weird beast.

Also, it's not about past earnings it's about expected future earnings (and obviously everyone is entitled to their own "expectations").  So if there were a company with a boatload of money in the bank but zero expected earnings, there would be something seriously wrong.  That would mean that the core business had an on-going loss that exactly offset the massive investment earning from that cash.  That would be a sick company and it's stock would fair poorly.  Would it be worth "zero?"  Of course not.  If nothing else, someone could buy up the company, sell everything off, and keep the cash.  So the share price would reflect that worst-case scenario.

Yes, typically, cash is worth cash.

But that need not always be the case. In some companies, it can be worth less, if we think that it is only temporarily there before it's burnt through with already committed expenses or likely to be thrown at wasteful spending, e.g., value-destroying acquisitions. (But Apple is surely not that).
post #64 of 84
While Apple is deferring $10B over two years, it is also receiving the money that had been deferred from 2011 and 2012. If Apple sales were to remain absolutely flat, in two years a steady state would be reached in which income deferred to the future would be exactly offset by income now recognized from earlier deferments. The "pipeline" would be full and stable.

Of course, Apple sales are increasing, so the amount of deferred income DED should be concerned with is only the increase in sales. Maybe he could recalculate that.
post #65 of 84
Quote:
Originally Posted by Corrections View Post

Stock valuations, and in the aggregate market capitalization, are only indicative of what the investing market thinks holding a stock may be worth. It is not a 'true' valuation of the company. If today’s stock price is $500, and there are 900M shares, that only means an investor is more likely to find a buyer or seller for stock in close proximity to $500. 

You can maybe find a desperate seller willing to take less, or a desperate buyer who will pay more. And that’s constantly happening, resulting in wildly changing prices. This is not necessarily rational, just as the lane changing behaviors of individual drivers is often apparently insane to other drivers who happen to have different motivations for the decisions they make (ie. how much of a hurry they are in vs. how much they are willing to risk causing a collision). 

When you look at things from that perspective, it explains why a solid company like Apple, which faces some risks and challenges but has a strong history of outperforming the market and successfully entering new ones, can have an insanely low valuation for a period of time due to false information and simply wrong headed investors. 

Apple is currently set up with the ability to survive major global shifts and a significant economic downturn. A company driving insanely fast and having zero safety zone for maneuvering, like the wildly profitless Amazon, could easily crash and burn in the next bubble. A one trick pony like Google could run into a major problem if, say, there was a major lawsuit targeting its primary successful business.

Recall that in 2008, Apple’s stock ran up and fell down repeatedly, doubling and collapsing in half throughout the year back and forth. That’s insane. But two years later it was up about 2x each year, and in 2012 it exploded. This year it flattened out, giving back all the progress from 2012. But that was based purely on false information and threats that failed to materialize. 

Apple now has the only tablet that matters, has increasing phone strength as Samsung and Google become enemies and are unable to report continued high end growth, and Microsoft Windows is imploding. Apple is building the world’s largest tech R&D center and financing global shifts in Application Processor fabrication. 

If Android couldn’t sell demonstrably better 4G LTE handsets vs iPhone 4/4S while it had the exclusive through the end of 2012, imagine how bad its going to get next year, as Android demonstrably falls behind and looks increasingly stale and slow moving as Google doubles down on very low end devices with 512MB of RAM as Apple continues to sell 64-bit machines with better battery life and advanced exclusive features like Touch ID.

Now as an investor, you’re only cranky about how much money you have. But that in itself helps to illustrate how irrational and misguided investors are. You can fume at "the market" for being "insane" in their valuations, but really its just a bunch of people like you who are making decisions based on faulty or incorrect thinking.

It’s rather like being on a freeway with heavy traffic and complaining about other people’s decisions to drive on your route. You’re really just part of the problem. If you can’t take the traffic, stay off the highway. If you like driving without stop signs deal with the freeway having traffic, because a lot of people are doing the same as you for the same reasons. 
Great post. Nice to have some clarity and perspective here.
post #66 of 84
Quote:
Originally Posted by asdasd View Post

So basically you are saying that the cash has no bearing on share price. Only earnings? So a company with no earnings and $150B cash is actually worth zero.
Not exactly. If you were liquidating Apple, then it would most certainly have value.

The fact that cash is on Apple's balance sheet is a big factor in judging its viability as an investment asset. But, it is of no more value as an asset than a desk or building or any other asset of equal value.

What Apple is expected to do with the cash has greater value than the cash itself.

But, as stated elsewhere, future earnings are an indicator of future value. Present earnings are an indicator of current health and value of the company. Investor expectations based on both plus such esoteric things belief in company strategy, stock but backs, new products, market analyst opinion and phase of the moon help to set stock price.

Actual cash balances are just a consideration.
post #67 of 84
Quote:
Originally Posted by konqerror View Post

It's incorrect to say that the deferred revenue is pure profit. The deferred revenue has to offset the development costs which are amortized over the life of the products.

If you assume Apple's software margins are 50%, then only 50% of the deferred OS X revenue, for example, will become profit. The most of the rest will go to capitalized costs, mainly programmer's salaries.

You generally cannot capitalize salaries.    You can capitalize freelancers and outside contractors.  

post #68 of 84
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Originally Posted by zoetmb View Post

You generally cannot capitalize salaries.    You can capitalize freelancers and outside contractors.  
Yes. You can under appropriate circumstances. But, generally speaking GAAP does not require capitalization of such costs.
post #69 of 84
Apple needs better PR to combat a hostile, ignorant media
post #70 of 84
Quote:
Originally Posted by Corrections View Post

Really it's evident you read headlines and a bit of the first paragraph and then race to the comments to express whatever thought jumps to your mind. That's why you always complain about irrelevant things without having the full picture.

No I read the article and my point still stands. The deferral is largely irrelevant as previous revenue has been deferred to this quarter. In any case the market is looking for future growth.

Also. Don't get so defensive DED, and at least post as yourself.
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post #71 of 84

It´s the money that´s Apples biggest problem. Apples Business is worth much more than a PE of 13. But the PE is calculated against the whole of Apple, which means $150 of that is dead cash. And dead cash is punished in terms of PE. Had Apple done followed Icahn example, not only would AAPL increase its share price to 750 - that is just based on EPS model. But Apples business would also be priced at a much higher PE as well. 

 

Make no mistake about it, excess cash is penalised by Wall Street. The current $150b is barely making 1% appreciation currently, that gives you a *terrible* PE sole based on the cash. 

 

I´m sure Tim Cook and Apples board knows this, and will make adjustments come january 2014. They love sitting on cash, but they hate the fact that it´s starting to drag the PE/Business valuation down so much more. Time to take action.

post #72 of 84
Quote:
Originally Posted by malax View Post

If a company had $150B in cash and no earning would be a very weird beast.

Also, it's not about past earnings it's about expected future earnings (and obviously everyone is entitled to their own "expectations").  So if there were a company with a boatload of money in the bank but zero expected earnings, there would be something seriously wrong.  That would mean that the core business had an on-going loss that exactly offset the massive investment earning from that cash.  That would be a sick company and it's stock would fair poorly.  Would it be worth "zero?"  Of course not.  If nothing else, someone could buy up the company, sell everything off, and keep the cash.  So the share price would reflect that worst-case scenario.

I fully understand that company is "sick". It was a simplified thought experiment. Were that company trading at $140 with a billion stock outstanding you could buy $150B for $140B. If that's too out there imagine a company making no profit and zero margins - the market cares about profit more than revenue. There are other factors (brand etc) but in this, also simplified analysis, the $150B is priced in. Again, if it weren't, you could buy a loss making company for pennies even if it had $150B in cash. ( or securities etc).

And this price should not vary. It can't be based on sentiment - like brand or goodwill. Or estimations of future growth. It has to be always priced in. This isn't about DEDs article but the commentators encouraging a buy back. That's a loss of "firepower" to buy acquisitions, join patent consortiums and all for money which will effectively "disappear" into a stock price which won't even increase, only to appear as cash again if Apple issues new stock, which is a stupid way to acquire company's etc.

Keep the money.
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post #73 of 84
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Originally Posted by hydr View Post

It´s the money that´s Apples biggest problem. Apples Business is worth much more than a PE of 13. But the PE is calculated against the whole of Apple, which means $150 of that is dead cash. And dead cash is punished in terms of PE. Had Apple done followed Icahn example, not only would AAPL increase its share price to 750 - that is just based on EPS model. But Apples business would also be priced at a much higher PE as well. 

Make no mistake about it, excess cash is penalised by Wall Street. The current $150b is barely making 1% appreciation currently, that gives you a *terrible* PE sole based on the cash. 

I´m sure Tim Cook and Apples board knows this, and will make adjustments come january 2014. They love sitting on cash, but they hate the fact that it´s starting to drag the PE/Business valuation down so much more. Time to take action.

Thanks. That's the first explanation which explains why cash may be worth less than stock. Cash doesn't earn that much cash and has negligible p/e.

So I have now changed my opinion. Apple should buy back with half it's reserves keeping the rest for firepower.
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post #74 of 84
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Originally Posted by asdasd View Post


So I have now changed my opinion. Apple should buy back with half it's reserves keeping the rest for firepower.

Not so fast. Most of Apple's cash is abroad, and it would incur a massive (up to 35%) tax bill if brought back. That would be silly to do.

People are misrepresenting or misunderstanding the p/e argument. First, in any valuation, Step 0 is, you set the cash aside, and value only the operating asset; the cash, which is assumed to be worth no more than cash, is simply added back at the end to get the aggregate market cap. Any half-way decent analyst would take a that into account in his/her valuation.

Second, Apple's ex-cash p/e actually looks worse that the p/e including cash; i.e., the market is undervaluing Apple's operating assets even MORE than we think. Here's a simple example. Suppose a company has no debt (i.e., it's all equity financed), and it has a market cap of $150 that includes $50 in cash. In other words, its operating assets are valued by the market at $100. Assume the company has $10 in earnings, all of it from the operating assets (i.e., cash produces zero returns).

What is the company's p/e including cash? 150/10 = 15x.

What is its p/e if we exclude the cash? (150 - 50)/10 = 10x.

This is Apple's situation currently. Bottom line is, the market is placing a huge discount on Apple's ability to create value from future growth from its operating assets and innovation. In this context, a big cash pile can be a bad thing because it can exacerbate this perception: it can signal to the market that the company has no plans, ambition, or opportunities to invest to create value from future growth. (This latter point is the one important reason to give away the cash. However, I do not believe it applies to Apple.)

What we have here is a simple case of Apple being undervalued relative to its intrinsic value. It happens all the time. If you believe that to be the case, as I do (and as many value investors, such as Bill Miller at Legg Mason, do) just buy and hold, and forget about it for a few years. The rest is noise.
post #75 of 84
To add to the above, at the end of the day, there is no getting around the fact that Apple has to do a far better job of communicating to, and managing the the expectations of, the market. To keep saying 'incredible' gazillions of times or just referring to 'some incredible products we are working on and have in the pipeline' is just trite. Every company says that.

Someone at Apple -- at a minimum, the CFO -- has to communicate grander sense of its vision. Say what you will about Amazon (I happen to think its valuation is nuts), but Bezos is a master at that.
post #76 of 84
Quote:
Originally Posted by anantksundaram View Post
 

You write a lot of great stuff. But on this one, you're out to lunch, especially when you make sweeping statements like the one I've underlined above.

 

Please learn the difference between value (what Constable Odo is implicitly referring to), and price (which is what you're referring to). In a market that is efficient, the two should, indeed, be equal.

 

I said the current stock price is "not a 'true' valuation of the company" in the context of changing stock prices. If AAPL is $500, you can calculate a market cap, but if you started buying up those shares with a $500B war chest, that would dynamically change the valuation of the company. So it’s not a true, fixed value, but rather just an extrapolation of market valuation based on the latest stock price multiplied by outstanding shares. Apple’s market valuation jumped back and forth between ~$380B and $700B over the past year. That’s a pretty shifty "truth." Reality is that value and price are different, and the whole game is trying to outthink others on either a short term of day trading, a medium term of shifting around stock, or as a long term investment, each of which is played very differently. And all the games are going on at once, making things look pretty irrational at any given moment. 

post #77 of 84
Quote:
Originally Posted by Corrections View Post
 

I said the current stock price is "not a 'true' valuation of the company" in the context of changing stock prices. If AAPL is $500, you can calculate a market cap, but if you started buying up those shares with a $500B war chest, that would dynamically change the valuation of the company. So it’s not a true, fixed value, but rather just an extrapolation of market valuation based on the latest stock price multiplied by outstanding shares. Apple’s market valuation jumped back and forth between ~$380B and $700B over the past year. That’s a pretty shifty "truth." Reality is that value and price are different, and the whole game is trying to outthink others on either a short term of day trading, a medium term of shifting around stock, or as a long term investment, each of which is played very differently. And all the games are going on at once, making things look pretty irrational at any given moment. 

You appear to be conflating 'true' with 'fixed.' Value changes all the time, as new information comes in, new realities emerge.

 

The fact that Apple's stock price fell was predictable. It is quite consistent with Apple's fundamentals: Apple's earnings fell approximately 10% during 2012-13, along with the market's sense (rightly or wrongly -- rightly, in my view) that increasing competition from Samsung was lowering margins and that (again, rightly or wrongly -- wrongly in my view) Apple had stopped 'innovating.' Put everything together, and add to it the fact that the 'wins' needed to sustain stock price growth at Apple's market cap are dramatically higher (i.e., the fact that a $40B gain in revenue when you're a $80B company is a 100% gain, while a $40B gain when you're $480B company is an 8.3% gain), and we can understand why the stock price fell.

 

Granted, the $700/share (not 'B') on the upside and $380/share on the downside might both have been over-reactions, but the 'market' got Apple's fundamentals directionally right. That is simply a fact.

 

Your conspiracy theories about things being a 'game' are just that: conspiracy theories. People bandy that around all the time, with zero evidence. You, of all people, who excoriate others for forming judgments without facts should not throw opinions around without evidence.

 

As an aside, day trading in Apple's stock amounts to a hill of beans in terms of either price or value. Moreover, Apple is far from the only stock to get day-traded. So that point is not at all relevant.

post #78 of 84
Quote:
Originally Posted by anantksundaram View Post
 

You appear to be conflating 'true' with 'fixed.' Value changes all the time, as new information comes in, new realities emerge.

 

The fact that Apple's stock price fell was predictable. It is quite consistent with Apple's fundamentals: Apple's earnings fell approximately 10% during 2012-13, along with the market's sense (rightly or wrongly -- rightly, in my view) that increasing competition from Samsung was lowering margins and that (again, rightly or wrongly -- wrongly in my view) Apple had stopped 'innovating.' Put everything together, and add to it the fact that the 'wins' needed to sustain stock price growth at Apple's market cap are dramatically higher (i.e., the fact that a $40B gain in revenue when you're a $80B company is a 100% gain, while a $40B gain when you're $480B company is an 8.3% gain), and we can understand why the stock price fell.

 

Granted, the $700/share (not 'B') on the upside and $380/share on the downside might both have been over-reactions, but the 'market' got Apple's fundamentals directionally right. That is simply a fact.

 

Your conspiracy theories about things being a 'game' are just that: conspiracy theories. People bandy that around all the time, with zero evidence. You, of all people, who excoriate others for forming judgments without facts should not throw opinions around without evidence.

 

As an aside, day trading in Apple's stock amounts to a hill of beans in terms of either price or value. Moreover, Apple is far from the only stock to get day-traded. So that point is not at all relevant.

 

You keep using phrases that have never been used in the way you are inventing. Saying the various ways to play the stock market are overlapping games is not in any imaginable way a "conspiracy theory." Consult a dictionary.  But your other facts are all wrong too.

 

Apple’s margins are far higher than Samsung, 2x or more. The idea that Apple had shifting margins (certainly not plunging) as it introduced new products and earned "only" $37B in FY 2013 compared to $41.6B in FY 2012 does not support a nearly halving of its market capitalization. 

 

"Might have been over-reaction" might be a huge understatement. Look at 2008 and tell us if the market "got Apple's fundamentals directionally right," given they they were all over the place, and had absolutely nothing to do with Apple’s fundamentals.

 

Additionally, Apple’s big drop since Sept 2012 didn’t occur after lower results came in, but occured BEFORE (-31% over the blockbuster winter Q1 13 quarter) Apple released HIGHER Q1 results and continued trending downward after it released the highest Q1 results ever. The stock has since recovered as Apple released LOWER Q2/Q3/Q4 earnings.

 

So you can’t even say the market got anything "directionally right." It was simply always "directionally wrong."

 

Instead of accusing me of "throwing opinions around without evidence" you should be apologizing. 

post #79 of 84
Quote:
Originally Posted by Corrections View Post

You keep using phrases that have never been used in the way you are inventing. Saying the various ways to play the stock market are overlapping games is not in any imaginable way a "conspiracy theory." Consult a dictionary.  But your other facts are all wrong too.

Apple’s margins are far higher than Samsung, 2x or more. The idea that Apple had shifting margins (certainly not plunging) as it introduced new products and earned "only" $37B in FY 2013 compared to $41.6B in FY 2012 does not support a nearly halving of its market capitalization. 

"Might have been over-reaction" might be a huge understatement. Look at 2008 and tell us if the market "got Apple's fundamentals directionally right," given they they were all over the place, and had absolutely nothing to do with Apple’s fundamentals.

Additionally, Apple’s big drop since Sept 2012 didn’t occur after lower results came in, but occured BEFORE (-31% over the blockbuster winter Q1 13 quarter) Apple released HIGHER Q1 results and continued trending downward after it released the highest Q1 results ever. The stock has since recovered as Apple released LOWER Q2/Q3/Q4 earnings.

So you can’t even say the market got anything "directionally right." It was simply always "directionally wrong."

Instead of accusing me of "throwing opinions around without evidence" you should be apologizing. 

If I knew what I had to apologize for, I'd gladly do so. As it stands, your post above is a stream-of-consciousness rant that I am unable to deconstruct. I have no clue what you're saying here, in other words.

Maybe you can take a deep breath, gather your thoughts better, and post when you feel you are actually likely to make sense. I can help, if you're interested:

1) You brought up the notion that the market is a 'game', I didn't. Why don't you tell us, based on your having looked up a dictionary, what the word means?

2) Who said anything about -- or cares about -- Samsung's margins!? What does that have to do with Apple's lower margins, which is what I was addressing? Btw, was that the only factor affecting Apple's stock price that I referred to, or were there a couple of others?

3) The price today (~$520) is exactly directionally right vis-a-vis where AAPL was a year ago. If you can't see that, I don't know what to say.

4) Your reference to Apple's various quarters leads me to conclude that perhaps you're not exactly on top of how markets value assets. They give a hoot about happened on the past quarter or year. They focus on expectations relating to margins, risks, and growth from today to forever.
PS: While you're at it, you may also need to learn a bit about deferred revenues versus accrued expenses, and the notion that it is not the levels of those that matter, but the changes from one period to the next.

Edited by anantksundaram - 11/3/13 at 6:40pm
post #80 of 84
Yes, they're sitting on deferred revenue and Apple's share price will be the first to drop. Apple needs to cut out these twisted accounting methods and run their finances like every other company. Wall Street already has problems with understanding Apple's value. Why does Apple have to make it worse. Every financial trick Apple attempts backfires on them and shareholders always end up taking the brunt of share price decreases. Meanwhile, companies like Google and Amazon just play it straight and investors pour money into those companies. Apple's devious revenue tricks don't interest big investors at all. In fact, it probably scares them away because they think Apple is trying to pull a fast one on them to cover up some other losses. Big investors obviously have no interest in GAAP or Apple.
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