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.
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.
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.
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.
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...
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.
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.
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.
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.
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.
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.
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?
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.
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.
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).
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.
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.
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.
Comments
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.
It is a stupid idea anyway and serve only to fatten icahn's purse.
All what's to be said in one little sentence...
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.
And then you have Amazon...
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.
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.
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.
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.
Is that a good thing or a bad thing?
http://www.thedailyshow.com/watch/tue-october-29-2013/last-gay-standing
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
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.
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?
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.
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.
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).
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.
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.