There are many fallacies with your assumptions, but I'm going to hold off on making a long post until you can show me that an HP, Lenovo or any other major brand is $300?$500 more than a Mac with essentially the same guts, because in the US that is not the case. Sure, the lowest priced Mac notebook is $700 more than the lowest priced Dell or HP notebook, but the guts are not even close to being the same.
This is what Apple wants you to believe. But, in Canada, consumer iMacs are $100 more expensive than the same models in the U.S.A. And there is no computers sold on Amazon Canada where, unlike in the U.S.A., consumers can't buy Macs below Apple suggested retail price.
Now, for the Windows competition, compare the prices at Staples.com, a large office supply chain with stores in Britain, Canada and the U.S.A. You'll find some computer models with lower frequency CPUs than what Apple offers (where Apple decides for you that one size fits all).
By the way, my brother is a programmer (he did Mac programming long ago) and bought a Vista quad-core desktop computer from HP last Christmas. Contrary to what Apple propaganda would have you believe, Vista runs perfectly on a quad-core computer. I'm still waiting for a quad-core iMac, just because someone at Apple has a psychotic fixation on anorexic computers with mobile CPUs.
To come back to AppleInsider's article by a stock option investor, his argument was that Apple is a gold mine because Apple can charge so much for the iPhones it sells. My point is that 5% of the people don't mind high prices. They are called the Mac faithfuls and Apple has no chance to expand its market share beyond Mac faithfuls.
The stock option investor failed to mention the (very real) possibility that Apple will go through another of its life crisis the day Steve Jobs retires, goes back for cancer treatment, or faces criminal charges for stock option fraud.
Also missing was the impact of iPhone competitors with lower prices under the royalty free, open source Android or Symbian cell phone operating systems.
My brother also bought a 3G cell phone last year for $300 or so and didn't wait around for the overpriced iPhone to arrive in Canada. My point is that he is not alone. Our stock option investor didn't seem to anticipate that consumers could resist the high prices and high monthly charges of the iPhone, impacting the size of Apple's profits and the value of its stock in the years to come.
This is what Apple wants you to believe. But, in Canada, consumer iMacs are $100 more expensive than the same models in the U.S.A. And there is no computers sold on Amazon Canada where, unlike in the U.S.A., consumers can't buy Macs below Apple suggested retail price.
Now, for the Windows competition, compare the prices at Staples.com, a large office supply chain with stores in Britain, Canada and the U.S.A. You'll find some computer models with lower frequency CPUs than what Apple offers (where Apple decides for you that one size fits all).
By the way, my brother is a programmer (he did Mac programming long ago) and bought a Vista quad-core desktop computer from HP last Christmas. Contrary to what Apple propaganda would have you believe, Vista runs perfectly on a quad-core computer. I'm still waiting for a quad-core iMac, just because someone at Apple has a psychotic fixation on anorexic computers with mobile CPUs.
To come back to AppleInsider's article by a stock option investor, his argument was that Apple is a gold mine because Apple can charge so much for the iPhones it sells. My point is that 5% of the people don't mind high prices. They are called the Mac faithfuls and Apple has no chance to expand its market share beyond Mac faithfuls.
The stock option investor failed to mention the (very real) possibility that Apple will go through another of its life crisis the day Steve Jobs retires, goes back for cancer treatment, or faces criminal charges for stock option fraud.
Also missing was the impact of iPhone competitors with lower prices under the royalty free, open source Android or Symbian cell phone operating systems.
My brother also bought a 3G cell phone last year for $300 or so and didn't wait around for the overpriced iPhone to arrive in Canada. My point is that he is not alone. Our stock option investor didn't seem to anticipate that consumers could resist the high prices and high monthly charges of the iPhone, impacting the size of Apple's profits and the value of its stock in the years to come.
I disagree with your 5% figures because I am a fairly broke graduate student and yet, still expect to get an iPhone in the next two months. Anecdotally, I know many others in the same situation, but I am the only Apple aficionado among that group. Also, please read my above posts on the actual reasons for Apples' accounting methods.
I have not had a single days downtime on my work computer since I moved away from Windows 98. (never used xp as a regular desktop). With my consulting charge out rate over $200 per hour a single days downtime a year cause by virus screwing up my machine would cost over $1600. I explain this to other self-employed consultants and small business owners and the next time they need a new laptop or desktop computer its a Mac.
The point of this post is it's really only the retail customer who cares about the retail cost. Most business purchases (well smart companies) look at the TCO.
You have a point there. Apple's only hope in business is with small, one man consultants who choose their own computers and claim it as a tax deductible expense. Law firms are also a good target for Apple.
But insurance agents must use Windows laptops because the company has some specialized, company software written specifically for the insurance company.
And, as you recognize, middle class retail consumers care about the cost of what they buy.
It's a pity you didn't try Windows XP. Microsoft finally made it right and very few people complain.
-Yup. Just the way Porsche, the most profitable automaker in the world should pack up the tent. -And Lambo, Maser, Ferrari, etc.
-I could not agree MORE. Divide x by 1, multiply by 2/2, subtract zero. -oof!
Andy Zaky did a just AMAZING article here, the likes of which I don't think I've seen more than 1-2x on any blog or site like AI. So, Big Ups to you! -Excellent job, Andy!
-That being said, I am now reminded of why I Hate accountants and am so very glad that I am a Warrior Poet instead of an Accountant.
Please see my above posts before you respond, but I feel sorry for you that you hate accountants. Since Sarbannes Oxley, professors explicitly trained us as a public servant for investors in public companies; we are not like SOME lawyers @$$hole (sorry for my vehemence, but I feel strongly about 'hate'). We do our job like anyone else. I want to eventually retire as a history professor, but in the interim why do something that receives relatively little pay and not do something that I enjoy and is challenging?
I disagree with your 5% figures because I am a fairly broke graduate student and yet, still expect to get an iPhone in the next two months. Anecdotally, I know many others in the same situation, but I am the only Apple aficionado among that group. Also, please read my above posts on the actual reasons for Apples' accounting methods.
You are a Mac faithful! Time will tell what competitors do and how many iPhones Apple can sell. I believe that some caveats were needed for the over enthusiastic analysis of our stock option investor.
I do not have a whole lot of time to respond to each issue raised on this board. But here are few issue that I feel almost obligated to answer:
1. The Basis for Apple's Subsciption Accouting.
This has absolutely nothing to do with payments received from AT&T. I have done thorough research with Apple, have listened to every conference call for the past 2 and a half years, and have done some major analysis on the last 10 quarters of Apple's financial statements. In that research, I have found no such statement from Peter Oppenheimer indicated that Apple has chosen to use the subsciption accounting method due to revenue streams received from AT&T. In fact, here is the relevant conference call transcipt where Oppenheimer indicates that the subsciption accounting method is used simply for the fact that it offers free software upgrades to its customers (not the case with the iPod Touch):
"We plan to build on this incredible foundation by continuing to develop new software features as well as entirely new applications and incorporate them into the iPhone. Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available. Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business."
"Similar to iPhone, we plan to periodically provide new software features and enhancements at no charge to our Apple TV customers. We will also recognize the revenue and product cost of goods sold associated with Apple TV on a straight line basis over 24 months. This will be included in the other music-related products and services in the data summary we provide you each quarter. Additionally, we will provide you with a schedule each quarter in our earnings release that indicates the total deferred revenue, including the combined amounts related to the iPhone and Apple TV."
Page 1, Conference Call Transcipt of Q2 2007 (where Apple announced that it would be using subsciption accounting).
I would like to stress that Apple will continue to use subsciption accounting as long as it continues to offer free upgrades to its customers.
------------------------------------------------
2. I can't stand the subscription accounting method!
And no, it is not baked into the stock price because Wall Street is too stupid to understand the financial force behind the subsciption accounting method. Apple is still valuated on a P/E basis when it should be analyzed and evaluated on a P/DCF basis. You often hear analysts say that Apple is trading at a "premium valuation" based on Apple's P/E ratio, depsite the huge net positive cash flow Apple is pulling in with the iPhone. Recently, some jackass (pardon my french) at Zachs tried to argue that Apple was trading at a premium due to its P/E. Sorry. But that's just complete nonsense. Here's the article published yesterday:
Thus, as long as Wall Street continues to use the P/E ratio to valuate shares of Apple, it will continue to price-out the impact of the iPhone. At least one other writers agrees with me here:
That MacDailyNews article hits the nail on the head with Apple's valuation. To say that Wall Street has baked in the impact of the iPhone assumes that Wall Street is intelligent--which in my estimation, it generally isn't. That why it allows people like Katy Huberty of Morgan Stanley, or Tony from Bernstein to actively manipulate the stock with their garbage analysis. See my evaluation of Katy Huberty here:
3. My Evaluation of the iPhone is not the Same as my evaluation of Apple:
While I generally hate the subsciption method of accounting due to its confusing aspects to the fifth graders who work on Wall Street, and while I generally think that Apple should be evaluated using the DCF, I will submit to Wall Street's notion of valuation and analyze Apple under that method. Wall Street is the one making the decisions and until Wall Street changes its views on Apple, it would be wise to continue using Wall Street's method of valuating Apple's shares. The market will reflect Wall Street's view as it currently does.
When will Wall Street wisen-up with Apple is anyone's guess. They've obvously understated the potential impact of the iPhone over the past year and continue to do so.
Ask yourself the following question:
If Apple never released an iPhone in January of 2007, what would Apple be currently trading at considering the fact that Mac sales having been growing at a near 50%?
Apple was trading in the 80's over one year before the iPhone was even introduced (Jan 2006). And that was when Mac sales were contracting and iPod sales hit 14 million units in the winter of 2006. Mac sales started to take off in Q2 2006 when Apple announced boot camp. Apple reported sales of 1.3 million macs in July of 2006 leading to a huge surge in shares of Apple (from $54 to $82). This surge in the stock price continued in Q4 of 2006 when Apple reported sales of approximately 1.6 million macs. The mac story has continued ever since and has helped Apple to report between 40-50% in EPS growth over the past two years.
So without the iPhone, I think Apple could be reasonably trading in the 140's - 150's. That's based entirely on a reasonable trailing P/E of 28-30. As a matter of fact, if the iPhone was never introduced, Apple would have probably reported more in revenue and EPS than it has over the past four quarters. The wide screen video iPod, now known as the iPod Touch, would have probably seen bigger sales if the iPhone didn't exist. Moreover, we would have seen no cannibalization of the iPod, thus allowing Apple to show moderate growth to strong growth in the MP3 market. At least Apple would have demonstrated some major growth in revenue and EPS.
Apple is trading at a 36.58 trailing P/E despite the fact that revenue from the iPhone has been complete deferred as indicated in this article, and despite the fact that Apple has grown at a rate of 52.9968% (53%) over the past year. Apple has earned $4.85 over the past four quarters and $3.17 over the previous four quarters.
Thus, I don't understand how one could seriously say that the impact of the iPhone has been priced into the stock! Even when using the P/E method for valuating Apple. Moreover, the consensus estimates for 2009 clearly demonstrates the severe lack of knowledge on Wall Street. Right now, the consensus is for $6.36! How? I have no clue. I will be completely shocked to see anything with a 6 or even 7 handle on it. If two or more of the following three things happen, then maybe we will see EPS in the $6 range:
1. Mac sales show 5% growth.
2. iPod sales show 5% growth
3. The 3G iPhone miserably fails.
Even under this scenario, component pricing alone would bring down gross margins enough to allow Apple to breach the $6.00 range. Thus, even the consensus estimates on Wall Street price out any impact of the iPhone.
I will leave valuation for another day. But the point of this article is to demonstrate how Wall Street has generally undestimated the financial impact of the iPhone.
I do not have a whole lot of time to respond to each issue raised on this board. But here are few issue that I feel almost obligated to answer:
1. The Basis for Apple's Subsciption Accouting.
This has absolutely nothing to do with payments received from AT&T. I have done thorough research with Apple, have listened to every conference call for the past 2 and a half years, and have done some major analysis on the last 10 quarters of Apple's financial statements. In that research, I have found no such statement from Peter Oppenheimer indicated that Apple has chosen to use the subsciption accounting method due to revenue streams received from AT&T. In fact, here is the relevant conference call transcipt where Oppenheimer indicates that the subsciption accounting method is used simply for the fact that it offers free software upgrades to its customers (not the case with the iPod Touch):
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
But insurance agents must use Windows laptops because the company has some specialized, company software written specifically for the insurance company.
See Parallels and VMware Fusion or Boot Camp. The need to run windows applications is no longer a barrier to sales of Mac computers.
Also Mid-Sized enterprises who have volume license agreements with Microsoft (sorry can remember the name of the specific program) can install any number of MS applications on as many machines as they like. For this reason they can load up a corp edition of XP or Vista on a Mac via BootCamp partition, Parallels or VMWare for no additional license fees.
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
Your posting of the relevant accounting meathod is beyond my area of expertise and I'll take your word for it as you clearly know more about it than I do. I was just trying to point out that Oppenheimer, by his own words, has said that it has to do with the software updates and not from the revenue streams gained from AT&T. Lots of people have tried to claim that Apple uses subscription accounting due to payments from AT&T, and I just wanted to *help* clear up the misconception. Your post gives the actual reason, whereas my post just points out Apple's own comments on the issue. But like I said, its not my area of expertise and I defer to your knowledge on the area.
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
Quote:
Originally Posted by kiwirob
See Parallels and VMware Fusion or Boot Camp. The need to run windows applications is no longer a barrier to sales of Mac computers.
Also Mid-Sized enterprises who have volume license agreements with Microsoft (sorry can remember the name of the specific program) can install any number of MS applications on as many machines as they like. For this reason they can load up a corp edition of XP or Vista on a Mac via BootCamp partition, Parallels or VMWare for no additional license fees.
By the way, my post was in response to Vasco Bill and not to yours.
The PEG is the real number to look at for a stock's priciness.
It's the P/E divided by the Average EPS Growth Rate (I think over the last year from the most recent quarter reported backward, ex: Q1,2007-Q1,2008). ....... etc etc.
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Think simple, if Apple does not have iPhone product line at all, is Apple still a profitable company to date? If so, wouldn't the additional earning generated from iPhone sales actually boost Apple to much higher stock rating than analyst forecast? If so, is AAPL much undervalued?
Wow. So much difference is made when smart people are around to explain why finance and accounting is done a certain way. No way I could get this information from a lot of the drones I used to work with at companies. Or maybe, they didn't trust me enough to tell me some of the facts.
Heh. Maybe one day I will get my Masters in Finance, starting with a PostGrad Dip/Cert first.
Think simple, if Apple does not have iPhone product line at all, is Apple still a profitable company to date? If so, wouldn't the additional earning generated from iPhone sales actually boost Apple to much higher stock rating than analyst forecast? If so, is AAPL much undervalued?
Think simple = think wrong.
I guess this thread illustrates why many people can't and shouldn't manage their own money.
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Ok, well you know more about this than I do. At least make your critique Constructive; -Help me out and give us some investing advice. -Name some predictive metrics you like better and explain the thinking behind why.
Sources --I think the Motley Fool's 1st book was where I read about PEG???
I don't read academic finance journals. Strangely enough-- I think the most successful academic I'd met at investing was a psych. prof.; more successful even than the guy who taught 'Money & Banking'!!
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Well, I don't know how blithe I was feeling at the time, but it was wrong if I gave the impression that PEG is everything.
Here are a few links that have BOTH plusses and minuses of PEG:
Does anyone know the actual FASB Codification number that is associated with the subscription accounting method that Apple currently uses? I would be interested in reading the actual codification because I have a subscription to the codification database, but can't find it.
Comments
There are many fallacies with your assumptions, but I'm going to hold off on making a long post until you can show me that an HP, Lenovo or any other major brand is $300?$500 more than a Mac with essentially the same guts, because in the US that is not the case. Sure, the lowest priced Mac notebook is $700 more than the lowest priced Dell or HP notebook, but the guts are not even close to being the same.
This is what Apple wants you to believe. But, in Canada, consumer iMacs are $100 more expensive than the same models in the U.S.A. And there is no computers sold on Amazon Canada where, unlike in the U.S.A., consumers can't buy Macs below Apple suggested retail price.
Now, for the Windows competition, compare the prices at Staples.com, a large office supply chain with stores in Britain, Canada and the U.S.A. You'll find some computer models with lower frequency CPUs than what Apple offers (where Apple decides for you that one size fits all).
By the way, my brother is a programmer (he did Mac programming long ago) and bought a Vista quad-core desktop computer from HP last Christmas. Contrary to what Apple propaganda would have you believe, Vista runs perfectly on a quad-core computer. I'm still waiting for a quad-core iMac, just because someone at Apple has a psychotic fixation on anorexic computers with mobile CPUs.
To come back to AppleInsider's article by a stock option investor, his argument was that Apple is a gold mine because Apple can charge so much for the iPhones it sells. My point is that 5% of the people don't mind high prices. They are called the Mac faithfuls and Apple has no chance to expand its market share beyond Mac faithfuls.
The stock option investor failed to mention the (very real) possibility that Apple will go through another of its life crisis the day Steve Jobs retires, goes back for cancer treatment, or faces criminal charges for stock option fraud.
Also missing was the impact of iPhone competitors with lower prices under the royalty free, open source Android or Symbian cell phone operating systems.
My brother also bought a 3G cell phone last year for $300 or so and didn't wait around for the overpriced iPhone to arrive in Canada. My point is that he is not alone. Our stock option investor didn't seem to anticipate that consumers could resist the high prices and high monthly charges of the iPhone, impacting the size of Apple's profits and the value of its stock in the years to come.
This is what Apple wants you to believe. But, in Canada, consumer iMacs are $100 more expensive than the same models in the U.S.A. And there is no computers sold on Amazon Canada where, unlike in the U.S.A., consumers can't buy Macs below Apple suggested retail price.
Now, for the Windows competition, compare the prices at Staples.com, a large office supply chain with stores in Britain, Canada and the U.S.A. You'll find some computer models with lower frequency CPUs than what Apple offers (where Apple decides for you that one size fits all).
By the way, my brother is a programmer (he did Mac programming long ago) and bought a Vista quad-core desktop computer from HP last Christmas. Contrary to what Apple propaganda would have you believe, Vista runs perfectly on a quad-core computer. I'm still waiting for a quad-core iMac, just because someone at Apple has a psychotic fixation on anorexic computers with mobile CPUs.
To come back to AppleInsider's article by a stock option investor, his argument was that Apple is a gold mine because Apple can charge so much for the iPhones it sells. My point is that 5% of the people don't mind high prices. They are called the Mac faithfuls and Apple has no chance to expand its market share beyond Mac faithfuls.
The stock option investor failed to mention the (very real) possibility that Apple will go through another of its life crisis the day Steve Jobs retires, goes back for cancer treatment, or faces criminal charges for stock option fraud.
Also missing was the impact of iPhone competitors with lower prices under the royalty free, open source Android or Symbian cell phone operating systems.
My brother also bought a 3G cell phone last year for $300 or so and didn't wait around for the overpriced iPhone to arrive in Canada. My point is that he is not alone. Our stock option investor didn't seem to anticipate that consumers could resist the high prices and high monthly charges of the iPhone, impacting the size of Apple's profits and the value of its stock in the years to come.
I disagree with your 5% figures because I am a fairly broke graduate student and yet, still expect to get an iPhone in the next two months. Anecdotally, I know many others in the same situation, but I am the only Apple aficionado among that group. Also, please read my above posts on the actual reasons for Apples' accounting methods.
I have not had a single days downtime on my work computer since I moved away from Windows 98. (never used xp as a regular desktop). With my consulting charge out rate over $200 per hour a single days downtime a year cause by virus screwing up my machine would cost over $1600. I explain this to other self-employed consultants and small business owners and the next time they need a new laptop or desktop computer its a Mac.
The point of this post is it's really only the retail customer who cares about the retail cost. Most business purchases (well smart companies) look at the TCO.
You have a point there. Apple's only hope in business is with small, one man consultants who choose their own computers and claim it as a tax deductible expense. Law firms are also a good target for Apple.
But insurance agents must use Windows laptops because the company has some specialized, company software written specifically for the insurance company.
And, as you recognize, middle class retail consumers care about the cost of what they buy.
It's a pity you didn't try Windows XP. Microsoft finally made it right and very few people complain.
-Yup. Just the way Porsche, the most profitable automaker in the world should pack up the tent. -And Lambo, Maser, Ferrari, etc.
-I could not agree MORE. Divide x by 1, multiply by 2/2, subtract zero. -oof!
Andy Zaky did a just AMAZING article here, the likes of which I don't think I've seen more than 1-2x on any blog or site like AI. So, Big Ups to you! -Excellent job, Andy!
-That being said, I am now reminded of why I Hate accountants and am so very glad that I am a Warrior Poet instead of an Accountant.
Please see my above posts before you respond, but I feel sorry for you that you hate accountants. Since Sarbannes Oxley, professors explicitly trained us as a public servant for investors in public companies; we are not like SOME lawyers @$$hole (sorry for my vehemence, but I feel strongly about 'hate'). We do our job like anyone else. I want to eventually retire as a history professor, but in the interim why do something that receives relatively little pay and not do something that I enjoy and is challenging?
Edit for HTML sucking
I disagree with your 5% figures because I am a fairly broke graduate student and yet, still expect to get an iPhone in the next two months. Anecdotally, I know many others in the same situation, but I am the only Apple aficionado among that group. Also, please read my above posts on the actual reasons for Apples' accounting methods.
You are a Mac faithful! Time will tell what competitors do and how many iPhones Apple can sell. I believe that some caveats were needed for the over enthusiastic analysis of our stock option investor.
But time will tell.
1. The Basis for Apple's Subsciption Accouting.
This has absolutely nothing to do with payments received from AT&T. I have done thorough research with Apple, have listened to every conference call for the past 2 and a half years, and have done some major analysis on the last 10 quarters of Apple's financial statements. In that research, I have found no such statement from Peter Oppenheimer indicated that Apple has chosen to use the subsciption accounting method due to revenue streams received from AT&T. In fact, here is the relevant conference call transcipt where Oppenheimer indicates that the subsciption accounting method is used simply for the fact that it offers free software upgrades to its customers (not the case with the iPod Touch):
"We plan to build on this incredible foundation by continuing to develop new software features as well as entirely new applications and incorporate them into the iPhone. Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available. Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business."
"Similar to iPhone, we plan to periodically provide new software features and enhancements at no charge to our Apple TV customers. We will also recognize the revenue and product cost of goods sold associated with Apple TV on a straight line basis over 24 months. This will be included in the other music-related products and services in the data summary we provide you each quarter. Additionally, we will provide you with a schedule each quarter in our earnings release that indicates the total deferred revenue, including the combined amounts related to the iPhone and Apple TV."
http://seekingalpha.com/article/3353...all-transcript
Page 1, Conference Call Transcipt of Q2 2007 (where Apple announced that it would be using subsciption accounting).
I would like to stress that Apple will continue to use subsciption accounting as long as it continues to offer free upgrades to its customers.
------------------------------------------------
2. I can't stand the subscription accounting method!
And no, it is not baked into the stock price because Wall Street is too stupid to understand the financial force behind the subsciption accounting method. Apple is still valuated on a P/E basis when it should be analyzed and evaluated on a P/DCF basis. You often hear analysts say that Apple is trading at a "premium valuation" based on Apple's P/E ratio, depsite the huge net positive cash flow Apple is pulling in with the iPhone. Recently, some jackass (pardon my french) at Zachs tried to argue that Apple was trading at a premium due to its P/E. Sorry. But that's just complete nonsense. Here's the article published yesterday:
http://biz.yahoo.com/zacks/080624/13353.html?.v=1
Thus, as long as Wall Street continues to use the P/E ratio to valuate shares of Apple, it will continue to price-out the impact of the iPhone. At least one other writers agrees with me here:
http://macdailynews.com/index.php/we.../17105/opinion
That MacDailyNews article hits the nail on the head with Apple's valuation. To say that Wall Street has baked in the impact of the iPhone assumes that Wall Street is intelligent--which in my estimation, it generally isn't. That why it allows people like Katy Huberty of Morgan Stanley, or Tony from Bernstein to actively manipulate the stock with their garbage analysis. See my evaluation of Katy Huberty here:
http://bullcross.blogspot.com/2008/0...t-in_1251.html
------
3. My Evaluation of the iPhone is not the Same as my evaluation of Apple:
While I generally hate the subsciption method of accounting due to its confusing aspects to the fifth graders who work on Wall Street, and while I generally think that Apple should be evaluated using the DCF, I will submit to Wall Street's notion of valuation and analyze Apple under that method. Wall Street is the one making the decisions and until Wall Street changes its views on Apple, it would be wise to continue using Wall Street's method of valuating Apple's shares. The market will reflect Wall Street's view as it currently does.
When will Wall Street wisen-up with Apple is anyone's guess. They've obvously understated the potential impact of the iPhone over the past year and continue to do so.
Ask yourself the following question:
If Apple never released an iPhone in January of 2007, what would Apple be currently trading at considering the fact that Mac sales having been growing at a near 50%?
Apple was trading in the 80's over one year before the iPhone was even introduced (Jan 2006). And that was when Mac sales were contracting and iPod sales hit 14 million units in the winter of 2006. Mac sales started to take off in Q2 2006 when Apple announced boot camp. Apple reported sales of 1.3 million macs in July of 2006 leading to a huge surge in shares of Apple (from $54 to $82). This surge in the stock price continued in Q4 of 2006 when Apple reported sales of approximately 1.6 million macs. The mac story has continued ever since and has helped Apple to report between 40-50% in EPS growth over the past two years.
So without the iPhone, I think Apple could be reasonably trading in the 140's - 150's. That's based entirely on a reasonable trailing P/E of 28-30. As a matter of fact, if the iPhone was never introduced, Apple would have probably reported more in revenue and EPS than it has over the past four quarters. The wide screen video iPod, now known as the iPod Touch, would have probably seen bigger sales if the iPhone didn't exist. Moreover, we would have seen no cannibalization of the iPod, thus allowing Apple to show moderate growth to strong growth in the MP3 market. At least Apple would have demonstrated some major growth in revenue and EPS.
Apple is trading at a 36.58 trailing P/E despite the fact that revenue from the iPhone has been complete deferred as indicated in this article, and despite the fact that Apple has grown at a rate of 52.9968% (53%) over the past year. Apple has earned $4.85 over the past four quarters and $3.17 over the previous four quarters.
Thus, I don't understand how one could seriously say that the impact of the iPhone has been priced into the stock! Even when using the P/E method for valuating Apple. Moreover, the consensus estimates for 2009 clearly demonstrates the severe lack of knowledge on Wall Street. Right now, the consensus is for $6.36! How? I have no clue. I will be completely shocked to see anything with a 6 or even 7 handle on it. If two or more of the following three things happen, then maybe we will see EPS in the $6 range:
1. Mac sales show 5% growth.
2. iPod sales show 5% growth
3. The 3G iPhone miserably fails.
Even under this scenario, component pricing alone would bring down gross margins enough to allow Apple to breach the $6.00 range. Thus, even the consensus estimates on Wall Street price out any impact of the iPhone.
I will leave valuation for another day. But the point of this article is to demonstrate how Wall Street has generally undestimated the financial impact of the iPhone.
I do not have a whole lot of time to respond to each issue raised on this board. But here are few issue that I feel almost obligated to answer:
1. The Basis for Apple's Subsciption Accouting.
This has absolutely nothing to do with payments received from AT&T. I have done thorough research with Apple, have listened to every conference call for the past 2 and a half years, and have done some major analysis on the last 10 quarters of Apple's financial statements. In that research, I have found no such statement from Peter Oppenheimer indicated that Apple has chosen to use the subsciption accounting method due to revenue streams received from AT&T. In fact, here is the relevant conference call transcipt where Oppenheimer indicates that the subsciption accounting method is used simply for the fact that it offers free software upgrades to its customers (not the case with the iPod Touch):
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
But insurance agents must use Windows laptops because the company has some specialized, company software written specifically for the insurance company.
See Parallels and VMware Fusion or Boot Camp. The need to run windows applications is no longer a barrier to sales of Mac computers.
Also Mid-Sized enterprises who have volume license agreements with Microsoft (sorry can remember the name of the specific program) can install any number of MS applications on as many machines as they like. For this reason they can load up a corp edition of XP or Vista on a Mac via BootCamp partition, Parallels or VMWare for no additional license fees.
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
Your posting of the relevant accounting meathod is beyond my area of expertise and I'll take your word for it as you clearly know more about it than I do. I was just trying to point out that Oppenheimer, by his own words, has said that it has to do with the software updates and not from the revenue streams gained from AT&T. Lots of people have tried to claim that Apple uses subscription accounting due to payments from AT&T, and I just wanted to *help* clear up the misconception. Your post gives the actual reason, whereas my post just points out Apple's own comments on the issue. But like I said, its not my area of expertise and I defer to your knowledge on the area.
You hint at the actual reason for Apple's accounting method, but please see my above updates for the correct explanations. You are right that Apple received little to no input from AT&T in their accounting methods, and Oppenheimer is absolutely correct when he says their methods provides free future upgrades to customers. The AICPA's Statement of Position 97-2 provides the appropriate guidance on the correct accounting for software and hardware that provide multiple deliverables. They do all this to avoid legal liability from shareholders.
See Parallels and VMware Fusion or Boot Camp. The need to run windows applications is no longer a barrier to sales of Mac computers.
Also Mid-Sized enterprises who have volume license agreements with Microsoft (sorry can remember the name of the specific program) can install any number of MS applications on as many machines as they like. For this reason they can load up a corp edition of XP or Vista on a Mac via BootCamp partition, Parallels or VMWare for no additional license fees.
By the way, my post was in response to Vasco Bill and not to yours.
A few things I can think of are:
The PEG is the real number to look at for a stock's priciness.
It's the P/E divided by the Average EPS Growth Rate (I think over the last year from the most recent quarter reported backward, ex: Q1,2007-Q1,2008). ....... etc etc.
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Heh. Maybe one day I will get my Masters in Finance, starting with a PostGrad Dip/Cert first.
Cheers to all.
Think simple, if Apple does not have iPhone product line at all, is Apple still a profitable company to date? If so, wouldn't the additional earning generated from iPhone sales actually boost Apple to much higher stock rating than analyst forecast? If so, is AAPL much undervalued?
Think simple = think wrong.
I guess this thread illustrates why many people can't and shouldn't manage their own money.
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Ok, well you know more about this than I do. At least make your critique Constructive; -Help me out and give us some investing advice. -Name some predictive metrics you like better and explain the thinking behind why.
Sources --I think the Motley Fool's 1st book was where I read about PEG???
I don't read academic finance journals. Strangely enough-- I think the most successful academic I'd met at investing was a psych. prof.; more successful even than the guy who taught 'Money & Banking'!!
Cheers!
ps: I Do love Jim Cramer's advice on Bear Stearns, though. hee hee ! http://www.youtube.com/watch?v=gUkbd...eature=related
Think simple = think wrong.
I guess this thread illustrates why many people can't and shouldn't manage their own money.
And your recommendation? Buy or sell?
Sorry to rain on this, but please be careful in blithely dispensing stock-picking advice!
'PEG' is among the most useless, conceptually-suspect, non-predictive measures associated with stock-screening and stock performance (I challenge you to name one credible academic study in a leading journal that shows a link between PEG and subsequent stock performance! And, please don't respond by saying that some pros on Wall Street use it - the so-called pros on WS do a lot of stupid things).
Using PEG is about as credible correlating AAPL's stock price performance to tides or astrological forecasts.
Well, I don't know how blithe I was feeling at the time, but it was wrong if I gave the impression that PEG is everything.
Here are a few links that have BOTH plusses and minuses of PEG:
http://www.fool.com/investing/value/...peg-ratio.aspx
http://www.investopedia.com/articles/analyst/043002.asp
http://www.moneychimp.com/articles/valuation/peg.htm
http://en.wikipedia.org/wiki/PEG_ratio
http://www.marketoracle.co.uk/Article140.html
http://marketstockwatch.blogspot.com...peg-ratio.html
Does anyone know the actual FASB Codification number that is associated with the subscription accounting method that Apple currently uses? I would be interested in reading the actual codification because I have a subscription to the codification database, but can't find it.
Thanks