My conclusion is that the analysts' share price targets are ridiculously low.
Even $250 within 12 months is too low? That is a 50% increase from the current share price -- which I'd call quite optimistic for any company (not to mention, in the midst of a recession). You would not?
As for the deferred revenue wave, we're enjoying that now, and it will only continue. This method of accounting doesn't make new revenue, it just spreads it out over time. Correct me if I misunderstand your point, but your analysis seems to assume that investors will suddenly start paying much closer attention to non-GAAP earnings and price AAPL accordingly. It could happen I suppose, but why?
I don't get it. I thought the rose was off the bloom, the iPhone killers will win, and Apple is facing a consumer revolt. Surely these analysts have heard about Apple's approaching doom? What's up with all these positive projections?
Even $250 within 12 months is too low? That is a 50% increase from the current share price -- which I'd call quite optimistic for any company (not to mention, in the midst of a recession). You would not?
Actually, Good Dr, I agree that $250 within 12 months is optimistic. And I agree with you that that is typically what is represented by an analysts' price target. As a matter of fact, I originally had a sentence to that effect in my response, but I removed it because I believe that even if the original poster was correct in his inherent assumption (i.e. that there should be agreement between the 2012 prediction and the near-term PPS targets) then his logic is completely flawed. In other words, even working within his own set of (questionable) premises, he STILL came up with a bogus conclusion.
Quote:
Originally Posted by Dr Millmoss
As for the deferred revenue wave, we're enjoying that now, and it will only continue.
]
Correction: we're enjoying it now, but it will grow massively as we get more quarters of insanely great sales behind us.
Quote:
Originally Posted by Dr Millmoss
This method of accounting doesn't make new revenue, it just spreads it out over time. Correct me if I misunderstand your point, but your analysis seems to assume that investors will suddenly start paying much closer attention to non-GAAP earnings and price AAPL accordingly. It could happen I suppose, but why?
Indeed, Dr, you misunderstand my point. I am asserting that in spite of the data before them, a great percentage of analysts and investors will continue to ignore the non-GAAP earnings in favor of the most readily available EPS figures (which are GAAP). A significant fraction of Wall Street will continue to use GAAP earnings and its derivatives (such as P/E) indefinitely.
What will change is the following: after we get 5-6 quarters of insanely great iPhone sales behind us, which we actually do not have yet, even the GAAP earnings are going to start shooting up. This is the tsunami to which I refer, and I think that THAT will be the turning point. There is an inherent delay built into the GAAP earnings for Apple, and all of the people that are turning a blind eye to it are going to be surprised when the GAAP tsunami hits. Truthfully, calling it a "tsunami" implies a sudden "here and gone" event. In actuality, the GAAP earnings growth will be like an impressive swell with a long wavelength. Different investors will realize the import at different points on the rise, but eventually there will be critical mass.
So this is my assertion in a nutshell:
1) Even GAAP earnings are going to begin impressive growth over the next few years, and
2) Those investors that are focused only on GAAP will jump in and drive the P/E higher.
Correction: we're enjoying it now, but it will grow massively as we get more quarters of insanely great sales behind us.
Well of course, it's just a delay effect, so GAAP will always lag behind non-GAAP earnings.
Quote:
Indeed, Dr, you misunderstand my point. I am asserting that in spite of the data before them, a great percentage of analysts and investors will continue to ignore the non-GAAP earnings in favor of the most readily available EPS figures (which are GAAP). A significant fraction of Wall Street will continue to use GAAP earnings and its derivatives (such as P/E) indefinitely.
What will change is the following: after we get 5-6 quarters of insanely great iPhone sales behind us, which we actually do not have yet, even the GAAP earnings are going to start shooting up. This is the tsunami to which I refer, and I think that THAT will be the turning point. There is an inherent delay built into the GAAP earnings for Apple, and all of the people that are turning a blind eye to it are going to be surprised when the GAAP tsunami hits. Truthfully, calling it a "tsunami" implies a sudden "here and gone" event. In actuality, the GAAP earnings growth will be like an impressive swell with a long wavelength. Different investors will realize the import at different points on the rise, but eventually there will be critical mass.
So this is my assertion in a nutshell:
1) Even GAAP earnings are going to begin impressive growth over the next few years, and
2) Those investors that are focused only on GAAP will jump in and drive the P/E higher.
Thompson
This is essentially the point made by Andy Zaky at Bullish Cross a few months back, and I do understand it. My skeptical side says that if this was going to set off a real buying frenzy, it probably would have already. Forecasting GAAP earnings for future quarters is easy enough, using Apple's non-GAAP earnings reporting, which they provide every quarter now. I mean, it's not a mystery -- anyone can accurately estimate how much iPhone revenue is already baked into future quarters. I'd like to think you are right, but...
Well of course, it's just a delay effect, so GAAP will always lag behind non-GAAP earnings.
OK, so we've been in violent agreement about this fact from the get-go. The only question is whether this will come as a surprise to anybody...
Quote:
Originally Posted by Dr Millmoss
This is essentially the point made by Andy Zaky at Bullish Cross a few months back, and I do understand it. My skeptical side says that if this was going to set off a real buying frenzy, it probably would have already. Forecasting GAAP earnings for future quarters is easy enough, using Apple's non-GAAP earnings reporting, which they provide every quarter now. I mean, it's not a mystery -- anyone can accurately estimate how much iPhone revenue is already baked into future quarters. I'd like to think you are right, but...
Yes, this point has been put out there for well over a year now. So you may reasonably question my assertion that there are still a large number of investors that are routinely missing the significance of this, but it isn't very hard to find examples. Over the past year or so, I have always stopped to take notice of published AAPL targets and supporting arguments, and I have been shocked to see that greater than half of them completely ignore the deferred revenue. They grab the GAAP numbers, arbitrarily assign a range of possible growth values based on little more than historical trends, select a range of forward P/E's to use (again based on historical trends) and compute a range of share prices. In each case, it is clear that their "high end" GAAP growth predictions are completely missing out on the contributions that are "already in the bag". Shocking, I tell you, that "smart" people such as these make so many choices based on incomplete information and shallow thinking. But then again, after the examples we have seen of market behavior over the past year, can you really support the notion that the majority is thinking rationally and using complete data to support their decisions? No, there is far far too much evidence to the contrary. There is so much near-term, knee-jerk reaction built into the system that investors still express concern over Apple's low-ball guidance each quarter. This, in spite of the fact that the tendency to do so is known and blathered about incessantly in the weeks leading up to the conference call. The AAPL market is extremely reactionary and driven by short-term thinking, which means it is definitely ripe for a "surprise" that they should have seen coming.
Based on the arguments and "analyses" I have seen, I am certain that there will still be significant surprise out there when the GAAP numbers hit their true growth.
Based on the arguments and "analyses" I have seen, I am certain that there will still be significant surprise out there when the GAAP numbers hit their true growth.
Ah, I see -- you expect some semblance of investor rationality to return. I didn't know it ever existed. I've seen little more than fleeting glimpses of rationality in my 12 years as an AAPL investor.
Well, we'll see I suppose. If you're right, maybe I can retire.
But recent quarters have not been kind to Andy Zaky --- he missed basically everything on unit sales numbers and then got it right on the profit column, which meant that he pulled a number out of nowhere.
There were several wall street analysts hitting quite a few columns of unit sales right --- then got it wrong on the profit margin (and thus got in wrong on the quarterly earnings). Well, you can forgive them for getting the profit margin wrong --- they are human after all.
It is a lot different from Andy Zaky which basically missed everything but got the final number correct --- that basically meant he was guessing the whole way.
But recent quarters have not been kind to Andy Zaky --- he missed basically everything on unit sales numbers and then got it right on the profit column, which meant that he pulled a number out of nowhere.
There were several wall street analysts hitting quite a few columns of unit sales right --- then got it wrong on the profit margin (and thus got in wrong on the quarterly earnings). Well, you can forgive them for getting the profit margin wrong --- they are human after all.
It is a lot different from Andy Zaky which basically missed everything but got the final number correct --- that basically meant he was guessing the whole way.
Everybody is guessing to some extent. Zaky got closer to the important number than anyone else. I notice he's done that for the last several quarters, which is how long I've been reading him.
Everybody is guessing to some extent. Zaky got closer to the important number than anyone else. I notice he's done that for the last several quarters, which is how long I've been reading him.
I disagree --- it is the "process" that is important.
To paraphrase Warren Buffett --- any idiot can get it right in the good times, but when the bad times come then we will know that they are swimming without any clothes.
If you read Andy's more recent stuff, he no longer has that everybody is wrong bravado. He was rightfully criticized by many people in recent quarters for getting every unit sales wrong and then getting the final profit number correct ---- it only means ONE thing, he was pulling a number out of a hat.
Ah, I see -- you expect some semblance of investor rationality to return. I didn't know it ever existed. I've seen little more than fleeting glimpses of rationality in my 12 years as an AAPL investor.
Look back at the charts for those 12 years. Notice that many of the extreme peaks and troughs have no associated fundamental driver? That's the irrationality you speak of, and you are right to expect it to remain. (OK, one big trough WAS fundamental: iMac sales fell off a cliff during the dot-com bust.) Now notice the incredible multi-bagger trend that is underlying all the noise and which generally tracks the growth of Apple's earnings? That's the rationality that is hard to discern on shorter time scales, and I expect it to remain as well.
So...
? I expect that fear, uncertainty, and doubt from numerous sources will remain and will heavily influence investor sentiment (e.g. economy, health of Steve, crisis du jour, etc). I expect irrational behavior to "modulate" the signal so that there are significant peaks and troughs of euphoria and fear, respectively. I expect that the irrationality will always be present and cause volatility.
? But I also expect many investors to continue to rely on the same shallow indicators that consistently get the lion's share of the media attention (e.g. the EPS and P/E that are based on GAAP numbers). And no, I don't think that the majority of potential AAPL investors even realize that the Apple GAAP EPS is about to skyrocket, in spite of the fact that it is easy to compute that fact, if they only knew to try. I expect that the realities of sharply increasing GAAP EPS and P/E will be rewarded by an underlying uptrend.
? I expect that a small fraction of bold investors (that would be us) understands AAPL fundamentals at a deeper level than the majority and so isn't feeling like the current valuation (always based on GAAP) is in any way near the danger zone. Eventually, even the GAAP earnings numbers will bring valuation down to a safer level for the fence-sitters, and the share price will rise accordingly.
You know, I find that Wall Street is an uber-efficient handicapper of short term information. Every scrap of rumor or news that could influence this year's earnings is instantly "baked in". This is in accord with your message of the past few posts.
So you may wonder how the not-so-hidden news of the effects of deferred revenue isn't already "baked in" too. Well, as efficient as I think Wall Street may be, it is almost completely lost in the "long term" department. It seems like the majority of traders and fair-weather investors don't carefully consider fundamental details that are years away from significant import. I believe that if you have patience, vision, and a plan, you can really trounce Wall Street. Otherwise, they kill you.
Quote:
Originally Posted by Dr Millmoss
Well, we'll see I suppose. If you're right, maybe I can retire.
Why do I get the impression you are disagreeing without even actually disagreeing? If you really have a strong opinion that I am wrong, just go ahead and post it with reasoning. (It won't hurt my feelings... debate is just exercise for the mind when it is kept professional and respectful.)
? I expect that a small fraction of bold investors (that would be us) understands AAPL fundamentals at a deeper level than the majority and so isn't feeling like the current valuation (always based on GAAP) is in any way near the danger zone. Eventually, even the GAAP earnings numbers will bring valuation down to a safer level for the fence-sitters, and the share price will rise accordingly.
So you may wonder how the not-so-hidden news of the effects of deferred revenue isn't already "baked in" too. Well, as efficient as I think Wall Street may be, it is almost completely lost in the "long term" department. It seems like the majority of traders and fair-weather investors don't carefully consider fundamental details that are years away from significant import. I believe that if you have patience, vision, and a plan, you can really trounce Wall Street. Otherwise, they kill you.
The problem is that everybody CLAIMS that they know more or understand more than everybody else.
Not so long after Andy Zaky's now famous article on non-GAAP effects from revenue deferring --- he was shown to miss mac computers sales unit by a mile, ipod sales unit by a mile and iphone sales unit by a mile. But the funny thing was that Andy Zaky hit the jackpot on EPS.
It's like math exams in school --- the teacher is going to give you a lot of partial points when you get all the math equation proofs correct and then got the final answer wrong. Andy Zaky was basically the exact opposite --- getting all his proofs wrong and then got the final answer correct. It means what exactly --- he didn't understand a single thing about Apple at all.
The problem is that everybody CLAIMS that they know more or understand more than everybody else.
Not so long after Andy Zaky's now famous article on non-GAAP effects from revenue deferring --- he was shown to miss mac computers sales unit by a mile, ipod sales unit by a mile and iphone sales unit by a mile. But the funny thing was that Andy Zaky hit the jackpot on EPS.
It's like math exams in school --- the teacher is going to give you a lot of partial points when you get all the math equation proofs correct and then got the final answer wrong. Andy Zaky was basically the exact opposite --- getting all his proofs wrong and then got the final answer correct. It means what exactly --- he didn't understand a single thing about Apple at all.
Trying to predict near term unit sales, margins, and EPS, etc, is a not game I would even attempt. It didn't take a rocket scientist to know that Apple was going to announce strong numbers at the last conference call along with disappointing guidance. The final numbers were not easy to predict, but it was fairly clear that expectations would be handily exceeded. I am not surprised that Andy Zaky's unit sales numbers were bogus and that his profit was luckily correct. And I don't care one way or the other.
All I need to know is this:
? iPhone has HUGE margins which have yet to make themselves apparent in the GAAP numbers,
? many people are still using GAAP numbers to calculate valuation and determine entry points,
? iPhone is growing market share in a market that will experience extreme growth. (If someone can't see the endgame of the cell phone industry, which has traditional cell phones almost completely annihilated within 5-10 years, then I guess they didn't foresee the mass market demise of the typewriter and film camera either.)
If those three things are true (and I wonder if anyone can challenge them) then the conclusions are simple:
? iPhone profits will grow because of unit sales increase and exponential revenue recognition,
? people focused only on GAAP numbers will be surprised at the profit growth, and
? Apple's share price will benefit greatly.
Given a long term view, one doesn't get all caught up in the tedium of guessing what the details will be each and every quarter. I watch the results to help determine my future exit strategy, but I don't generally prognosticate about short-term numbers. So if anything, your Andy Zaky example only serves to further amplify my point.
This is the biggest no-brainer in tech that I can ever recall, and I am even more giddy from the fact that some folks still don't realize it yet. (I can buy more when I find some spare capital.) So much for Wall Street vision.
Trying to predict near term unit sales, margins, and EPS, etc, is a not game I would even attempt. It didn't take a rocket scientist to know that Apple was going to announce strong numbers at the last conference call along with disappointing guidance. The final numbers were not easy to predict, but it was fairly clear that expectations would be handily exceeded. I am not surprised that Andy Zaky's unit sales numbers were bogus and that his profit was luckily correct. And I don't care one way or the other.
All I need to know is this:
? iPhone has HUGE margins which have yet to make themselves apparent in the GAAP numbers,
? many people are still using GAAP numbers to calculate valuation and determine entry points,
? iPhone is growing market share in a market that will experience extreme growth. (If someone can't see the endgame of the cell phone industry, which has traditional cell phones almost completely annihilated within 5-10 years, then I guess they didn't foresee the mass market demise of the typewriter and film camera either.)
If those three things are true (and I wonder if anyone can challenge them) then the conclusions are simple:
? iPhone profits will grow because of unit sales increase and exponential revenue recognition,
? people focused only on GAAP numbers will be surprised at the profit growth, and
? Apple's share price will benefit greatly.
Given a long term view, one doesn't get all caught up in the tedium of guessing what the details will be each and every quarter. I watch the results to help determine my future exit strategy, but I don't generally prognosticate about short-term numbers. So if anything, your Andy Zaky example only serves to further amplify my point.
This is the biggest no-brainer in tech that I can ever recall, and I am even more giddy from the fact that some folks still don't realize it yet. (I can buy more when I find some spare capital.) So much for Wall Street vision.
Cheers,
Thompson
The iphone carries such high media profile that the carriers selling them have a big bulleye on their back. Sooner or later, the carriers have to justify their iphone business model --- in the light of the recent analyst report that not a single carrier makes money off the iphone.
Why do I get the impression you are disagreeing without even actually disagreeing? If you really have a strong opinion that I am wrong, just go ahead and post it with reasoning. (It won't hurt my feelings... debate is just exercise for the mind when it is kept professional and respectful.)
Because we're discussing not arguing? It happens sometimes, even on the net.
True, the markets are rarely very sensible in the short-run, but my feeling is that the general rationality level when it comes to AAPL has always been sub-normative. My hunch about this (from years of investing in the company, and generally being a fan of their products) is that the conventional wisdom about Apple is they are bound to fail. If not now, probably soon. Even when they succeed, it tends to be regarded as a provisional success. Unlike other companies which become accepted as successful, Apple never seems to get a pass when they don't whack the ball out of the park.
As evidence of this, witness the number of journalist who persist in writing about Apple as a cult, and their customers as true believers. This nonsense survives the selling of hundreds of millions of products. So something cultural is going on here, and I believe it translates into investor behavior. How could it not? I think this is at least one reason why investors have such a hair-trigger when it comes to selling. This story could be over any minute, right?
Recall the 2000 debacle, when AAPL shares fell 50% in one after-hours session. That was bad enough, but then during the three years following, AAPL's market cap was frequently at or near cash on hand. Investors were valuing everything else the company owned, including its business, as completely worthless. Less than worthless, actually. How normal is that, even in times when fear overwhelms greed?
And did we not just see AAPL fall 60% from its high? Granted, in the midst of a general market panic, but still. I've been through too many of these gut-wrenching falls into the bottomless pit to have much faith that logic or good sense wills out in the end. Well okay, maybe in the end -- but you know what they say about the end.
App Store is stuffed with limited simplistic applications.
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
Is that really your definition of "limited simplistic applications?"
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store
I use actively - on daily basis - about 30 apps downloaded from AppStore. This is where the difference of our views comes from.
Quote:
Originally Posted by inkswamp
to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
What's so special about that? Your application is limited to one single version of operating system, isn't it? We, for instance, connect to our Domino servers from our iPhones. No big deal.
Quote:
Originally Posted by inkswamp
Is that really your definition of "limited simplistic applications?"
No. Look, I'm gonna tell you, what it really is.
I download social network app from AppStore and it appears not to support the network's internal mailing service. I download car navigation app and discover instantly, that traffic jam notifications and speed camera database updates are not implemented; and all that -on the platform, which is seen by everyone as being the richest in wireless options one on the market. I download mobile TV app and it is said to work over WiFi, but it does not. I download date calculator (because gas expenses app doesn't have the ability to calculate dates) and it calculates business days and can't calculate calendar days...
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
Is that really your definition of "limited simplistic applications?"
Comments
My conclusion is that the analysts' share price targets are ridiculously low.
Even $250 within 12 months is too low? That is a 50% increase from the current share price -- which I'd call quite optimistic for any company (not to mention, in the midst of a recession). You would not?
As for the deferred revenue wave, we're enjoying that now, and it will only continue. This method of accounting doesn't make new revenue, it just spreads it out over time. Correct me if I misunderstand your point, but your analysis seems to assume that investors will suddenly start paying much closer attention to non-GAAP earnings and price AAPL accordingly. It could happen I suppose, but why?
Even $250 within 12 months is too low? That is a 50% increase from the current share price -- which I'd call quite optimistic for any company (not to mention, in the midst of a recession). You would not?
Actually, Good Dr, I agree that $250 within 12 months is optimistic. And I agree with you that that is typically what is represented by an analysts' price target. As a matter of fact, I originally had a sentence to that effect in my response, but I removed it because I believe that even if the original poster was correct in his inherent assumption (i.e. that there should be agreement between the 2012 prediction and the near-term PPS targets) then his logic is completely flawed. In other words, even working within his own set of (questionable) premises, he STILL came up with a bogus conclusion.
As for the deferred revenue wave, we're enjoying that now, and it will only continue.
]
Correction: we're enjoying it now, but it will grow massively as we get more quarters of insanely great sales behind us.
This method of accounting doesn't make new revenue, it just spreads it out over time. Correct me if I misunderstand your point, but your analysis seems to assume that investors will suddenly start paying much closer attention to non-GAAP earnings and price AAPL accordingly. It could happen I suppose, but why?
Indeed, Dr, you misunderstand my point. I am asserting that in spite of the data before them, a great percentage of analysts and investors will continue to ignore the non-GAAP earnings in favor of the most readily available EPS figures (which are GAAP). A significant fraction of Wall Street will continue to use GAAP earnings and its derivatives (such as P/E) indefinitely.
What will change is the following: after we get 5-6 quarters of insanely great iPhone sales behind us, which we actually do not have yet, even the GAAP earnings are going to start shooting up. This is the tsunami to which I refer, and I think that THAT will be the turning point. There is an inherent delay built into the GAAP earnings for Apple, and all of the people that are turning a blind eye to it are going to be surprised when the GAAP tsunami hits. Truthfully, calling it a "tsunami" implies a sudden "here and gone" event. In actuality, the GAAP earnings growth will be like an impressive swell with a long wavelength. Different investors will realize the import at different points on the rise, but eventually there will be critical mass.
So this is my assertion in a nutshell:
1) Even GAAP earnings are going to begin impressive growth over the next few years, and
2) Those investors that are focused only on GAAP will jump in and drive the P/E higher.
Thompson
Correction: we're enjoying it now, but it will grow massively as we get more quarters of insanely great sales behind us.
Well of course, it's just a delay effect, so GAAP will always lag behind non-GAAP earnings.
Indeed, Dr, you misunderstand my point. I am asserting that in spite of the data before them, a great percentage of analysts and investors will continue to ignore the non-GAAP earnings in favor of the most readily available EPS figures (which are GAAP). A significant fraction of Wall Street will continue to use GAAP earnings and its derivatives (such as P/E) indefinitely.
What will change is the following: after we get 5-6 quarters of insanely great iPhone sales behind us, which we actually do not have yet, even the GAAP earnings are going to start shooting up. This is the tsunami to which I refer, and I think that THAT will be the turning point. There is an inherent delay built into the GAAP earnings for Apple, and all of the people that are turning a blind eye to it are going to be surprised when the GAAP tsunami hits. Truthfully, calling it a "tsunami" implies a sudden "here and gone" event. In actuality, the GAAP earnings growth will be like an impressive swell with a long wavelength. Different investors will realize the import at different points on the rise, but eventually there will be critical mass.
So this is my assertion in a nutshell:
1) Even GAAP earnings are going to begin impressive growth over the next few years, and
2) Those investors that are focused only on GAAP will jump in and drive the P/E higher.
Thompson
This is essentially the point made by Andy Zaky at Bullish Cross a few months back, and I do understand it. My skeptical side says that if this was going to set off a real buying frenzy, it probably would have already. Forecasting GAAP earnings for future quarters is easy enough, using Apple's non-GAAP earnings reporting, which they provide every quarter now. I mean, it's not a mystery -- anyone can accurately estimate how much iPhone revenue is already baked into future quarters. I'd like to think you are right, but...
Well of course, it's just a delay effect, so GAAP will always lag behind non-GAAP earnings.
OK, so we've been in violent agreement about this fact from the get-go. The only question is whether this will come as a surprise to anybody...
This is essentially the point made by Andy Zaky at Bullish Cross a few months back, and I do understand it. My skeptical side says that if this was going to set off a real buying frenzy, it probably would have already. Forecasting GAAP earnings for future quarters is easy enough, using Apple's non-GAAP earnings reporting, which they provide every quarter now. I mean, it's not a mystery -- anyone can accurately estimate how much iPhone revenue is already baked into future quarters. I'd like to think you are right, but...
Yes, this point has been put out there for well over a year now. So you may reasonably question my assertion that there are still a large number of investors that are routinely missing the significance of this, but it isn't very hard to find examples. Over the past year or so, I have always stopped to take notice of published AAPL targets and supporting arguments, and I have been shocked to see that greater than half of them completely ignore the deferred revenue. They grab the GAAP numbers, arbitrarily assign a range of possible growth values based on little more than historical trends, select a range of forward P/E's to use (again based on historical trends) and compute a range of share prices. In each case, it is clear that their "high end" GAAP growth predictions are completely missing out on the contributions that are "already in the bag". Shocking, I tell you, that "smart" people such as these make so many choices based on incomplete information and shallow thinking. But then again, after the examples we have seen of market behavior over the past year, can you really support the notion that the majority is thinking rationally and using complete data to support their decisions? No, there is far far too much evidence to the contrary. There is so much near-term, knee-jerk reaction built into the system that investors still express concern over Apple's low-ball guidance each quarter. This, in spite of the fact that the tendency to do so is known and blathered about incessantly in the weeks leading up to the conference call. The AAPL market is extremely reactionary and driven by short-term thinking, which means it is definitely ripe for a "surprise" that they should have seen coming.
Based on the arguments and "analyses" I have seen, I am certain that there will still be significant surprise out there when the GAAP numbers hit their true growth.
Thompson
Based on the arguments and "analyses" I have seen, I am certain that there will still be significant surprise out there when the GAAP numbers hit their true growth.
Ah, I see -- you expect some semblance of investor rationality to return. I didn't know it ever existed. I've seen little more than fleeting glimpses of rationality in my 12 years as an AAPL investor.
Well, we'll see I suppose. If you're right, maybe I can retire.
There were several wall street analysts hitting quite a few columns of unit sales right --- then got it wrong on the profit margin (and thus got in wrong on the quarterly earnings). Well, you can forgive them for getting the profit margin wrong --- they are human after all.
It is a lot different from Andy Zaky which basically missed everything but got the final number correct --- that basically meant he was guessing the whole way.
But recent quarters have not been kind to Andy Zaky --- he missed basically everything on unit sales numbers and then got it right on the profit column, which meant that he pulled a number out of nowhere.
There were several wall street analysts hitting quite a few columns of unit sales right --- then got it wrong on the profit margin (and thus got in wrong on the quarterly earnings). Well, you can forgive them for getting the profit margin wrong --- they are human after all.
It is a lot different from Andy Zaky which basically missed everything but got the final number correct --- that basically meant he was guessing the whole way.
Everybody is guessing to some extent. Zaky got closer to the important number than anyone else. I notice he's done that for the last several quarters, which is how long I've been reading him.
Everybody is guessing to some extent. Zaky got closer to the important number than anyone else. I notice he's done that for the last several quarters, which is how long I've been reading him.
I disagree --- it is the "process" that is important.
To paraphrase Warren Buffett --- any idiot can get it right in the good times, but when the bad times come then we will know that they are swimming without any clothes.
If you read Andy's more recent stuff, he no longer has that everybody is wrong bravado. He was rightfully criticized by many people in recent quarters for getting every unit sales wrong and then getting the final profit number correct ---- it only means ONE thing, he was pulling a number out of a hat.
Ah, I see -- you expect some semblance of investor rationality to return. I didn't know it ever existed. I've seen little more than fleeting glimpses of rationality in my 12 years as an AAPL investor.
Look back at the charts for those 12 years. Notice that many of the extreme peaks and troughs have no associated fundamental driver? That's the irrationality you speak of, and you are right to expect it to remain. (OK, one big trough WAS fundamental: iMac sales fell off a cliff during the dot-com bust.) Now notice the incredible multi-bagger trend that is underlying all the noise and which generally tracks the growth of Apple's earnings? That's the rationality that is hard to discern on shorter time scales, and I expect it to remain as well.
So...
? I expect that fear, uncertainty, and doubt from numerous sources will remain and will heavily influence investor sentiment (e.g. economy, health of Steve, crisis du jour, etc). I expect irrational behavior to "modulate" the signal so that there are significant peaks and troughs of euphoria and fear, respectively. I expect that the irrationality will always be present and cause volatility.
? But I also expect many investors to continue to rely on the same shallow indicators that consistently get the lion's share of the media attention (e.g. the EPS and P/E that are based on GAAP numbers). And no, I don't think that the majority of potential AAPL investors even realize that the Apple GAAP EPS is about to skyrocket, in spite of the fact that it is easy to compute that fact, if they only knew to try. I expect that the realities of sharply increasing GAAP EPS and P/E will be rewarded by an underlying uptrend.
? I expect that a small fraction of bold investors (that would be us) understands AAPL fundamentals at a deeper level than the majority and so isn't feeling like the current valuation (always based on GAAP) is in any way near the danger zone. Eventually, even the GAAP earnings numbers will bring valuation down to a safer level for the fence-sitters, and the share price will rise accordingly.
You know, I find that Wall Street is an uber-efficient handicapper of short term information. Every scrap of rumor or news that could influence this year's earnings is instantly "baked in". This is in accord with your message of the past few posts.
So you may wonder how the not-so-hidden news of the effects of deferred revenue isn't already "baked in" too. Well, as efficient as I think Wall Street may be, it is almost completely lost in the "long term" department. It seems like the majority of traders and fair-weather investors don't carefully consider fundamental details that are years away from significant import. I believe that if you have patience, vision, and a plan, you can really trounce Wall Street. Otherwise, they kill you.
Well, we'll see I suppose. If you're right, maybe I can retire.
Why do I get the impression you are disagreeing without even actually disagreeing? If you really have a strong opinion that I am wrong, just go ahead and post it with reasoning. (It won't hurt my feelings... debate is just exercise for the mind when it is kept professional and respectful.)
Thompson
? I expect that a small fraction of bold investors (that would be us) understands AAPL fundamentals at a deeper level than the majority and so isn't feeling like the current valuation (always based on GAAP) is in any way near the danger zone. Eventually, even the GAAP earnings numbers will bring valuation down to a safer level for the fence-sitters, and the share price will rise accordingly.
So you may wonder how the not-so-hidden news of the effects of deferred revenue isn't already "baked in" too. Well, as efficient as I think Wall Street may be, it is almost completely lost in the "long term" department. It seems like the majority of traders and fair-weather investors don't carefully consider fundamental details that are years away from significant import. I believe that if you have patience, vision, and a plan, you can really trounce Wall Street. Otherwise, they kill you.
The problem is that everybody CLAIMS that they know more or understand more than everybody else.
Not so long after Andy Zaky's now famous article on non-GAAP effects from revenue deferring --- he was shown to miss mac computers sales unit by a mile, ipod sales unit by a mile and iphone sales unit by a mile. But the funny thing was that Andy Zaky hit the jackpot on EPS.
It's like math exams in school --- the teacher is going to give you a lot of partial points when you get all the math equation proofs correct and then got the final answer wrong. Andy Zaky was basically the exact opposite --- getting all his proofs wrong and then got the final answer correct. It means what exactly --- he didn't understand a single thing about Apple at all.
The problem is that everybody CLAIMS that they know more or understand more than everybody else.
Not so long after Andy Zaky's now famous article on non-GAAP effects from revenue deferring --- he was shown to miss mac computers sales unit by a mile, ipod sales unit by a mile and iphone sales unit by a mile. But the funny thing was that Andy Zaky hit the jackpot on EPS.
It's like math exams in school --- the teacher is going to give you a lot of partial points when you get all the math equation proofs correct and then got the final answer wrong. Andy Zaky was basically the exact opposite --- getting all his proofs wrong and then got the final answer correct. It means what exactly --- he didn't understand a single thing about Apple at all.
Trying to predict near term unit sales, margins, and EPS, etc, is a not game I would even attempt. It didn't take a rocket scientist to know that Apple was going to announce strong numbers at the last conference call along with disappointing guidance. The final numbers were not easy to predict, but it was fairly clear that expectations would be handily exceeded. I am not surprised that Andy Zaky's unit sales numbers were bogus and that his profit was luckily correct. And I don't care one way or the other.
All I need to know is this:
? iPhone has HUGE margins which have yet to make themselves apparent in the GAAP numbers,
? many people are still using GAAP numbers to calculate valuation and determine entry points,
? iPhone is growing market share in a market that will experience extreme growth. (If someone can't see the endgame of the cell phone industry, which has traditional cell phones almost completely annihilated within 5-10 years, then I guess they didn't foresee the mass market demise of the typewriter and film camera either.)
If those three things are true (and I wonder if anyone can challenge them) then the conclusions are simple:
? iPhone profits will grow because of unit sales increase and exponential revenue recognition,
? people focused only on GAAP numbers will be surprised at the profit growth, and
? Apple's share price will benefit greatly.
Given a long term view, one doesn't get all caught up in the tedium of guessing what the details will be each and every quarter. I watch the results to help determine my future exit strategy, but I don't generally prognosticate about short-term numbers. So if anything, your Andy Zaky example only serves to further amplify my point.
This is the biggest no-brainer in tech that I can ever recall, and I am even more giddy from the fact that some folks still don't realize it yet. (I can buy more when I find some spare capital.) So much for Wall Street vision.
Cheers,
Thompson
Trying to predict near term unit sales, margins, and EPS, etc, is a not game I would even attempt. It didn't take a rocket scientist to know that Apple was going to announce strong numbers at the last conference call along with disappointing guidance. The final numbers were not easy to predict, but it was fairly clear that expectations would be handily exceeded. I am not surprised that Andy Zaky's unit sales numbers were bogus and that his profit was luckily correct. And I don't care one way or the other.
All I need to know is this:
? iPhone has HUGE margins which have yet to make themselves apparent in the GAAP numbers,
? many people are still using GAAP numbers to calculate valuation and determine entry points,
? iPhone is growing market share in a market that will experience extreme growth. (If someone can't see the endgame of the cell phone industry, which has traditional cell phones almost completely annihilated within 5-10 years, then I guess they didn't foresee the mass market demise of the typewriter and film camera either.)
If those three things are true (and I wonder if anyone can challenge them) then the conclusions are simple:
? iPhone profits will grow because of unit sales increase and exponential revenue recognition,
? people focused only on GAAP numbers will be surprised at the profit growth, and
? Apple's share price will benefit greatly.
Given a long term view, one doesn't get all caught up in the tedium of guessing what the details will be each and every quarter. I watch the results to help determine my future exit strategy, but I don't generally prognosticate about short-term numbers. So if anything, your Andy Zaky example only serves to further amplify my point.
This is the biggest no-brainer in tech that I can ever recall, and I am even more giddy from the fact that some folks still don't realize it yet. (I can buy more when I find some spare capital.) So much for Wall Street vision.
Cheers,
Thompson
The iphone carries such high media profile that the carriers selling them have a big bulleye on their back. Sooner or later, the carriers have to justify their iphone business model --- in the light of the recent analyst report that not a single carrier makes money off the iphone.
Why do I get the impression you are disagreeing without even actually disagreeing? If you really have a strong opinion that I am wrong, just go ahead and post it with reasoning. (It won't hurt my feelings... debate is just exercise for the mind when it is kept professional and respectful.)
Because we're discussing not arguing? It happens sometimes, even on the net.
True, the markets are rarely very sensible in the short-run, but my feeling is that the general rationality level when it comes to AAPL has always been sub-normative. My hunch about this (from years of investing in the company, and generally being a fan of their products) is that the conventional wisdom about Apple is they are bound to fail. If not now, probably soon. Even when they succeed, it tends to be regarded as a provisional success. Unlike other companies which become accepted as successful, Apple never seems to get a pass when they don't whack the ball out of the park.
As evidence of this, witness the number of journalist who persist in writing about Apple as a cult, and their customers as true believers. This nonsense survives the selling of hundreds of millions of products. So something cultural is going on here, and I believe it translates into investor behavior. How could it not? I think this is at least one reason why investors have such a hair-trigger when it comes to selling. This story could be over any minute, right?
Recall the 2000 debacle, when AAPL shares fell 50% in one after-hours session. That was bad enough, but then during the three years following, AAPL's market cap was frequently at or near cash on hand. Investors were valuing everything else the company owned, including its business, as completely worthless. Less than worthless, actually. How normal is that, even in times when fear overwhelms greed?
And did we not just see AAPL fall 60% from its high? Granted, in the midst of a general market panic, but still. I've been through too many of these gut-wrenching falls into the bottomless pit to have much faith that logic or good sense wills out in the end. Well okay, maybe in the end -- but you know what they say about the end.
App Store is stuffed with limited simplistic applications.
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
Is that really your definition of "limited simplistic applications?"
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store
I use actively - on daily basis - about 30 apps downloaded from AppStore. This is where the difference of our views comes from.
to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
What's so special about that? Your application is limited to one single version of operating system, isn't it? We, for instance, connect to our Domino servers from our iPhones. No big deal.
Is that really your definition of "limited simplistic applications?"
No. Look, I'm gonna tell you, what it really is.
I download social network app from AppStore and it appears not to support the network's internal mailing service. I download car navigation app and discover instantly, that traffic jam notifications and speed camera database updates are not implemented; and all that -on the platform, which is seen by everyone as being the richest in wireless options one on the market. I download mobile TV app and it is said to work over WiFi, but it does not. I download date calculator (because gas expenses app doesn't have the ability to calculate dates) and it calculates business days and can't calculate calendar days...
I can connect to my employer's network via VPN (built in to the iPhone) and use an app I downloaded from the App Store to do a remote desktop session to any of the Windows machines at work or use a VNC client (also downloaded from the App Store) to do the same with the Macs. I also have a command line app which is useful for the Macs.
Let me summarize: my cell phone can act as a full screen remote desktop client over an encrypted tunnel over the public Internet. I have full control over servers and workstations from anywhere I happen to be using a gadget the size of a deck of cards thanks to the apps I got from the App Store.
Is that really your definition of "limited simplistic applications?"
Good example. But it might be over his head.