Evolving Apple seen entering rental space for video games, movies

Posted:
in General Discussion edited January 2014
Apple on Wednesday again showed its unparalleled ability to think and execute the unconventional, says American Technology Analyst Shaw Wu, who in a note to clients argued that earnings per share (EPS) may no longer be the best way to value the consumer electronics maker.



Wu, who maintains a $145 price target on shares of the Cupertino-based company, says there were "three notable surprises" in the firm's March quarter report. Specifically, its ability to capitalize in a favorable component pricing environment, its strong Mac shipments despite evidence of a pause ahead of Leopard, and its grander plans with iPhone and Apple TV.



"Apple reported surprisingly strong March quarter results of $5.26 billion in revenue and $0.87 in EPS, well above consensus of $5.17 billion and $0.64 and its guidance of $4.8 - 4.9 billion and $0.54 - $0.56," he wrote. "The gross margin came in at 35.1 percent, well beyond expectations of around 30 percent due to [the company's] surprising ability to capitalize on the favorable component pricing environment in NAND flash, memory, panels, and processors."



On the Mac front, Wu was surprised to see Mac shipments rise 36 percent year-over-year despite perceived evidence of a slowdown ahead of the Leopard operating system roll-out. "We believe if not for a Leopard pause, Mac shipments would have been even stronger," he wrote.



Meanwhile, the analyst said there may be some near-term confusion and concern over Apple's special and conservative accounting treatment of both Apple TV and the upcoming iPhone. "Apple plans to amortize revenue over two years or eight quarters, meaning total hardware revenue is recognized in increments of 1/8 and the rest recorded in deferred revenue," he explained. "We would like to note that the cash flow impact is unchanged as Apple collects cash upon the point of sale of the hardware."



While the new accounting allows Apple to state only 1/8 of a hardware sale each quarter, over the longer-term, Wu believes it will improve the company's linearity and his ability to predict future revenue streams. It may also be a sign of future initiatives on the subscription front.



"We believe Apple is in the midst of building a more serious effort in the subscription business where it could enter the 'rental' space with video games and music, TV, and movie content," he told clients. "We would not be surprised to see Apple compete with the likes of Netflix and Blockbuster in a bigger way."



For fiscal 2007, Wu now estimates Apple to earn $3.45 per share on sales of approximately $23.3 billion, up from $3.12 and from $23.3 billion. He's modeling for earnings of $4.00 on sales of $30 billion the following year, down from $4.15 and $31.1 billion, due to the company's new accounting procedures.



In his note to clients, the AmTech analyst concluded that EPS may no longer be the right way to value the multi-directional electronics firm. "In our view, Apple's move to subscription accounting in its new, high-growth business areas iPhone and Apple TV may signal that EPS is not the best way to value Apple shares," he wrote. "This is because EPS is amortized and understated on a quarterly basis while cash flow remains the same. Because of this, cash flow from operations may be a more appropriate way to value Apple shares."
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Comments

  • Reply 1 of 35
    it almost sounds like Apple is biting more than it can chew.
  • Reply 2 of 35
    melgrossmelgross Posts: 32,949member
    Well, while I know that some will come here and skewer him, as this seems to be a popular game, what he says does make sense.
  • Reply 3 of 35
    mgkwhomgkwho Posts: 167member
    Wu is such an idiot.



    -=|Mgkwho
  • Reply 4 of 35
    bageljoeybageljoey Posts: 1,915member
    Quote:
    Originally Posted by syklee26 View Post


    it almost sounds like Apple is biting more than it can chew.



    On the contrary, it seems that Appl only does what they have planned to do. They keep an even keel and stick to their plan.



    While they are making scads of money, they are not changing their plans to go for the easy money. Maybe a mini tower would cause sales to rocket--but it isn't part of their current plan. Maybe they see sustainable 30-40% year over year growth as better than an explosion in growth that could cause problems in production, quality, and/or support.



    Meanwhile, they push on with their plans to expand into the living room even though critics have complained.



    I don't see them biting off more than they can chew, I see a deliberate, thought out plan.





    (Not that I wouldnt like a mini tower option...)
  • Reply 5 of 35
    joekjoek Posts: 93member
    these analyst stories are lame.
  • Reply 6 of 35
    melgrossmelgross Posts: 32,949member
    Quote:
    Originally Posted by mgkwho View Post


    Wu is such an idiot.



    -=|Mgkwho



    Congrats for being the first.
  • Reply 7 of 35
    Quote:
    Originally Posted by AppleInsider View Post




    While the new accounting allows Apple to state only 1/8 of a hardware sale each quarter, over the longer-term, Wu believes it will improve the company's linearity and his ability to predict future revenue streams. It may also be a sign of future initiatives on the subscription front.



    "We believe Apple is in the midst of building a more serious effort in the subscription business where it could enter the 'rental' space with video games and music, TV, and movie content," he told clients. "We would not be surprised to see Apple compete with the likes of Netflix and Blockbuster in a bigger way."




    Apple may or may not be planning on entering the subscription market. Yesterday's announcement is not a sign of anything.



    Apple doesn't need to practise how it accounts for subscriptions by testing it on the iPhone and Apple TV before going into music, video etc. This subscription model is to avoid charges similar to the Airport N enabler.



    P.S. Based on other, SEC announcements, it is possible that Apple needs to practise accounting in general.
  • Reply 8 of 35
    Wu may be closer than some think. Amortizing iPhone and Apple TV revenues over 8 quarters is one of the real sleepers in pointing to potential directions Apple is heading in.



    While I could care less about subscriptions for music and games, I believe that Video "rentals" have a lot of potential, especially if there is one price for "just released" movies and a lower price for older ones. The challenge is how to limit the rental download. Something like 3 days or 3 viewing?



    So is Wu nuts for looking at $145? Don't think so.
  • Reply 9 of 35
    Quote:
    Originally Posted by mgkwho View Post


    Wu is such an idiot.



    Wow, y'know believe it or not, this is the first time I haven't had the urge to impail him with a forklift.



    And for me, that's saying a lot...



    Quote:
    Originally Posted by Clive At Five View Post


    Wu is a douche-bag. He is fabricating "insider info" to affect stock prices and/or getting investors behind him to bully Apple into doing what he wants it to.



    Quote:
    Originally Posted by Clive At Five View Post


    OMG, doesn't Shaw Wu ever shut the hell up?



    and what's with this? "1GB = $5 so 32GB = $160" WRONG. That statement is only true if you want 32 independent 1GB NAND units! By that time, we're talking two times thicker than the Zune...



    Quote:
    Originally Posted by Clive At Five View Post


    Ah, the Wu Insider strikes again.



    Seriously, this guy doesn't know any more than the rest of us. If we used our combined knowledge of providers and strategies and just plain knowing what we want, we could churn out a better report than this guy.



    I'll begin:



    I predict Apple has made a prototype phone.



    Need I continue?



    -Clive
  • Reply 10 of 35
    melgrossmelgross Posts: 32,949member
    Quote:
    Originally Posted by Clive At Five View Post


    Wow, y'know believe it or not, this is the first time I haven't had the urge to impail him with a forklift.



    And for me, that's saying a lot...











    Need I continue?



    -Clive



    Wow! You sure edited this one down quickly.
  • Reply 11 of 35
    Quote:
    Originally Posted by melgross View Post


    Wow! You sure edited this one down quickly.



    I like to cut the baggage...



    ...and I'm making room for more of my historical Wu-bashings.







    -Clive
  • Reply 12 of 35
    guarthoguartho Posts: 1,208member
    Was anyone else surprised when they happened upon a picture of Shaw Wu? I always pictured him looking a lot like HIro from Heroes.
  • Reply 13 of 35
    eaieai Posts: 417member
    Quote:
    Originally Posted by Guartho View Post


    Was anyone else surprised when they happened upon a picture of Shaw Wu? I always pictured him looking a lot like HIro from Heroes.



    Because hes the only Japanese person you can think of?
  • Reply 14 of 35
    Quote:
    Originally Posted by syklee26 View Post


    it almost sounds like Apple is biting more than it can chew.



    I would say the biting would apply more to Microsoft.

    Billions lost on Xbox, coming out with Zune and shafting all the other MS music stores, Ballmer hinting and them making their own phone (hey, don't they have a common platform portable Windows thingee for that?). What? MS couldn't come out with something to compete with the Blackberry when RIM introduced it?



    Why does MS wait until Apple gets involved?



    As we've heard before, Apple is a hardware company that makes the stuff work great with fantastic software. Today's hardware requires engineering via software along with traditional hardware. Microsoft is a software company - and not a good one at that.
  • Reply 15 of 35
    brussellbrussell Posts: 9,812member
    Can someone explain this accounting method? It almost seems like cheating to me - how can you count money that you get in one quarter over 8 quarters? What's the point?
  • Reply 16 of 35
    SpamSandwichSpamSandwich Posts: 33,408member
    Quote:
    Originally Posted by eAi View Post


    Because hes the only Japanese person you can think of?



    Uh-oh.
  • Reply 17 of 35
    Quote:
    Originally Posted by Guartho View Post


    Was anyone else surprised when they happened upon a picture of Shaw Wu? I always pictured him looking a lot like HIro from Heroes.



  • Reply 18 of 35
    Quote:
    Originally Posted by Guartho View Post


    Was anyone else surprised when they happened upon a picture of Shaw Wu? I always pictured him looking a lot like HIro from Heroes.



    Okay, I'll give you the benefit of the doubt and assume that this is not a borderline racist comment. Ignorant, yes, but that's about all you're guilty of.



    And to answer your question, no, I did not.



    I pictured a pompous, know-it-all, douche-bag.







    I was right.



    Look at that smug grin...



    -Clive
  • Reply 19 of 35
    porchlandporchland Posts: 478member
    Quote:
    Originally Posted by kenaustus View Post


    Wu may be closer than some think. Amortizing iPhone and Apple TV revenues over 8 quarters is one of the real sleepers in pointing to potential directions Apple is heading in.



    While I could care less about subscriptions for music and games, I believe that Video "rentals" have a lot of potential, especially if there is one price for "just released" movies and a lower price for older ones. The challenge is how to limit the rental download. Something like 3 days or 3 viewing?



    I wondered the same thing, but it seems like the likeliest movie rental model would NOT be a subscription.



    That makes sense for Netflix because the process of shipping and returning the DVD limits the number of times you can practically do that in a one-month period. I would expect Apple TV movie rentals to be more like the cable/satellite PPV model where you pick a movie, pay your $4 and watch it.



    A movie subscription that allows you to watch x-number of movies a month for x-price does not seem very appealing. Is it conceivable that Apple would have a subscription that would allow you to watch any movie in the store anytime you want to watch? Seems like that would be cost-prohibitive.



    I think the subscription model makes a LOT of sense, though, for TV because it then competes directly with cable and satellite. Figure out a way for me to watch the Oscars and college football live and I'm in!
  • Reply 20 of 35
    mgkwhomgkwho Posts: 167member
    aaaaaaaaaaaahahahha Wu's picture is soooo funny



    i got digged down for saying that about wu last night...i frequently get dugg down for speakin' the truth yo



    homie











    -=|Mgkwho
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