That's the opposite of what I said. Costs are recognized when revenues are recognized, so the costs are spread evenly over 2 years just as the revenues.
Ah, so according to you, as I mentioned in the "2nd scenario", now Apple has also *deferred costs* happening.
So while constant guaranteed revenue is all sexy and exciting, this should be tempered by the fact that constant guaranteed costs will also be occurring.
Some analysts will spin this as, well, even if Apple does not generate any sales in a particular month, hell, they'd still have to spend a few hundred million. Yeah, they have guaranteed revenue, but also guaranteed costs. This would also be a big point. That's why I'm trying to figure out the profit that will be accounted for each day. Revenues are always nice big numbers and healthy cash flow is all well and good, but profits are important too.
Would one of you brilliant number crunchers tell me when all of this huge pile of money is going to show up in Apple's stock price. Or is this money just going to sit in Apple's cash horde doing nothing for the investor. Many people on WS are still calling Apple an overvalued stock whose share price is not even worth $170. So how long will it take for WS to get a clue that all of his deferred moola is going to end up in Apple's hands? I don't see any investors rushing to jump on the Apple launch to the stars. Looks to me like investors are still worried about current revenue more than future revenue.
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
Would one of you brilliant number crunchers tell me when all of this huge pile of money is going to show up in Apple's stock price. Or is this money just going to sit in Apple's cash horde doing nothing for the investor. Many people on WS are still calling Apple an overvalued stock whose share price is not even worth $170. So how long will it take for WS to get a clue that all of his deferred moola is going to end up in Apple's hands? I don't see any investors rushing to jump on the Apple launch to the stars. Looks to me like investors are still worried about current revenue more than future revenue.
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
But you're talking about the difference between stocks that pay dividends, and those that don't.
From a consumer investor point of view, why would someone buy a stock.
If I am into a stock that pays dividends, then yes, I would want to see a healthy cash flow, strong, reliable sources of income, so that the amount of money I put in the stock would be rewarded by the dividends it pays on me investing in a company.
Growth stocks are an entirely different story. This is more short term, which leads to all sorts of problems short-term thinking does. Sometimes investors want some splashy news that drives things up, and then when they've made their profit of say $135 a share to $188 a share, they think it is enough, and then they bail, profit-taking, etc. etc.
The returns for investors in AAPL depends on their time horizon, I would imagine.
Let's say you bought at January 2006, $75. Feb 2008, it's at $122. So that means that the return on your investment is 62% in two years. That is massive.
Someone going in now would be looking at say $175, and to achieve a 10% return in one year's time, they would have to sell at $192.
Therefore, for those with a 12-18 month investment time horizon, this is precisely what they would be considering, ie, what is the volume of revenue, amount of profit, product portfolio that Apple will have in June 2009? Is it something that justifies a $200 share price in June 2009?
Dividends have always been an issue for AAPL, which doesn't pay dividends, AFAIK. Therefore, how would someone make money off AAPL NOW?
They would have to look at short term increases, or whatever other 1 hour to 2 month share strategy they employ in the market.
Otherwise, people would be getting in soon if they thought, maybe AAPL would redistribute the cash hoard.
Again, I am pretty much a finance n00b, so I don't know about NASDAQ and DJI that much.
Let's just say with the cash hoard for some reason, this is just going to accumulate and it is not going to go anywhere. That's my opinion. I'm sure there's many many other theories out there. As many that try to predict what AAPL is going to be 1 month, 10 months, etc.
One may say, what is that big pile of money Apple has doing for me, the investor? Apple may "say", well, what is the expected rate of return on your investment you want? 3%? 10%? 45%? An investor would have to think, okay, how is Apple using the money, what is it for? Which is of course, the next big question.
The best example is Apple having a massive cash reserve is buying other companies. Some theories circulate around this idea, because Apple is well known to be very specific about their hardware, software, solutions, etc, and a "charismatic" leadership that pretty much wants to do whatever it wants to do without "playing well" with others.
Meaning, for example, it may want to design a lot of it's new chips, hence the purchase of PA Semi which confounds Intel...
So what else could Apple buy? Adobe is widely touted, in that "Apple will once and for all takeover the publishing/ design market completely", etc. etc.
I think at the end of the day the huge cash hoard is about Apple's core value, which is innovation. In-house, they work very hard to come up with new and great stuff. But sometimes, you just have to go out and shop for great R&D and integrate it into your product portfolio. As "Cringely" says:
"..With that starting point, Mr. Cringely analyzed Apple's business model and what they're really after. "Last year, for example, Apple bought an application called FinalTouch from Silicon Color that was essentially video color correction on steroids," Mr. Cringely noted. "They [Apple] changed the product name to Color, added a couple features, then rolled it into Final Cut Studio, Apple's top-end video application suite. Though FinalTouch sold for up to $25,000, Color is included in Final Cut Studio FOR FREE, which is a kick in the head to Apple competitors like Avid that don't have hardware sales to count on for profitability..."
Although the Constitution does not explicitly mention corporations, courts long ago gave corporations nearly the same rights as in-the-flesh individuals.
However as I may try, the IRS still doesn't acknowledge when I make my payments in 730 equal installments spread out over 2 years.
So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
...So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
EXACTLY. If I was a hard-working schmoe doing my taxes dilligently and listening to my accountant, I wouldn't do as well (yes, legally*) as if I was running many businesses, hiring and firing my own accountants and tax consultants, or hell, I might as well be a CPA/CFA/whatever-A myself. That is the impression I get.
You can imagine what the situation is in developing nations. Even worse, especially when government officials are all tied up in the mix.
*Legality is defined not by what the law says, but the practise of law! That is, not what the rules are, but what you can do to the rules.
If what you say is true, anantksundaram, how do you account for the AAPL pullback to $117 (+/-) earlier this year and $176 today? Does the backend iPhone revenue come and go with the tide? And if so, what will happen when 20 million (+) units reach customers' hands in the next twelve months? Looks like a tsunami to me. What say you?
A substantial portion of Apple's pullback was related to the market's pullback. With a beta of 2+ (sorry for the jargon, but see a quick-and-dirty explanation below), Apple would have been expected to drop more than twice as much as the market did. From the time of AAPL's price peak late last-Dec, the S&P dropped about 13% in Jan '08, so about 25%-30% of AAPL's price decline would have been "expected".
Granted, Apple did fall by more than that, but I am not a 100% sure as to what caused that firm-specific movement. Perhaps someone reading this recalls better than I do.
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Beta (ß): A widely-used measure of the expected percentage change in the value of a particular stock or asset for every 1% change in the market as a whole.
So, what happens to the money in the meantime?. Does it have to be "declared" as entered into the total cash hoard that Apple has? And then subtracted from the "loose cash" and placed in the "revenue stream"??
The money is real. The accounting for it is not. It's just numbers on paper, rules decided over decades and determined to be the best way to deal with these things to give investors a true idea of how things are going. So when Apple gets a check for $500, they put it in the bank and they can use it just as if it was "real money" (which of course is exactly what it is).
The recognition of revenue and costs is real only in the sense that it is what is reported to the public. This is why the best investors spend very little time poring over profit and loss statements and focus on cash flow - you can't fudge cash (well, at least it's harder).
So while constant guaranteed revenue is all sexy and exciting, this should be tempered by the fact that constant guaranteed costs will also be occurring.
The real point is, none of this is sexy and exciting. This was all already known the moment Apple declared its revenue recognition model and this "news" reads more like a fanboy stock owner trying to hype himself up about the stock he holds. Nothing in that "article" is going to move the stock one way or another. I found it rather like reading an article written by an overexcited Accounting 101 student.
Although the Constitution does not explicitly mention corporations, courts long ago gave corporations nearly the same rights as in-the-flesh individuals.
However as I may try, the IRS still doesn't acknowledge when I make my payments in 730 equal installments spread out over 2 years.
So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
Touche!
PS: I am just blown away by the overall quality of this discussion thread (ignoring my own) -- one of the reasons I like AI.
I tell you, now that I am going to be 30 by the end of the year, this Finance stuff really intrigues me.
Because, as you mention, Apple gets the money fairly soon (within 30-60 days from the sale), for the total sale price of the iPhone.
However, the accounting shows the revenue as deferred.
So, what happens to the money in the meantime?. Does it have to be "declared" as entered into the total cash hoard that Apple has? And then subtracted from the "loose cash" and placed in the "revenue stream"??
Is this why accountants get so much money for doing all this seemingly purposeless hax?
Finance and accounting. Most of it is seems like just legalised hacking. This is why it frustrates me so much when I go to a place like H&R Block, when, sometimes the service is good, but other times, it is like, why the F can't I expense this and this, when big corporations (not necessarily Apple) are getting away with, well, whatever they get away with???
Some pretty darn good observations there for a self-professed 'finance n00b!' You instinctively know more finance than you think you know!
Stocks are valued by the market on 'cash flows,' which are not the same as 'profit' or 'net income'. Cash flows - as cameronj hinted at in an earlier post - focus on the money that actually comes in/goes out. 'Profit' or 'net income,' on the other hand is based on accounting logic which is founded on the principle of 'accruals.' (Don't ask). And some of it is, indeed, legalized hacking.
There is a huge difference between finance (focused on assessing future value, forward-looking, hones in on cash flows) and accounting (focused on recording past activities, backward-looking, fixated on net income).
A substantial portion of Apple's pullback was related to the market's pullback. With a beta of 2+ (sorry for the jargon, but see a quick-and-dirty explanation below), Apple would have been expected to drop more than twice as much as the market did. From the time of AAPL's price peak late last-Dec, the S&P dropped about 13% in Jan '08, so about 25%-30% of AAPL's price decline would have been "expected".
Granted, Apple did fall by more than that, but I am not a 100% sure as to what caused that firm-specific movement. Perhaps someone reading this recalls better than I do.
Two things accelerated the drop. The first was a "lackluster" MacWorld (compared to the previous year's iPhone announcement). The "frosting on the cake" was the conservative guidance on Q2 financials.
When you own a stock with a beta of 2 and an average daily trading volume of 5% of all outstanding stock (which indicates the extent of hedge fund interest in manipulating the stock price), you come to expect these things.
I think Apple's accounting approach is very unusual for a cell phone or any other device, programmable or not. The original iPhone and the Apple TV were both works in progress and the accounting approach may have made sense in that there was a promise that the full expected capability was coming. The changes coming were so extensive that one almost got a whole new box when the new SW was installed. I did with our old Apple TV.
But now, I would expect that the current Apple TV HW/SW and the 3G iPhone are more like regular computers and cell phones, being sold with small SW updates provided free and major updates for a modest fee. And the sales profit booked as sold, not extended over two years.
Would one of you brilliant number crunchers tell me when all of this huge pile of money is going to show up in Apple's stock price.
It already did.
Quote:
Originally Posted by Constable Odo
Or is this money just going to sit in Apple's cash horde doing nothing for the investor. Many people on WS are still calling Apple an overvalued stock whose share price is not even worth $170.
Tell me what Apple is worth? I'll expect some good long term cash flow models, a comparative valuation examination and the like. Just because you bought it and they seem to be doing well doesn't mean the stock is going to rise. The stock price is a very well understood valuation technique and it's "right" given all generally held future profitability scenarios and their relative likelihood of coming to be.
Quote:
Originally Posted by Constable Odo
So how long will it take for WS to get a clue that all of his deferred moola is going to end up in Apple's hands?
It's already in Apple's hands, and everyone already knew it. Except apparently some people on this board.
Quote:
Originally Posted by Constable Odo
I don't see any investors rushing to jump on the Apple launch to the stars. Looks to me like investors are still worried about current revenue more than future revenue.
Nope, they're worried about the future. The stock market never cares about current anything.
Quote:
Originally Posted by Constable Odo
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
This doesn't make any sense. Everyone buys stocks so they can make money in the future. And I presume everyone would want it sooner rather than later if given the chance. But why would anyone tell a client they wouldn't see any profits for a year or two? Nobody knows when Apple will go up, or if it will go up at all. All the news that you or I know about the company is already priced into the stock. If Apple does better than the average expectation (and that's expectations of you and me, and everyone else, not analysts) then the stock will go up. And if they make a ton of money, but less than the average expectation, the stock will go down.
The results are pretty staggering.* If Apple sold 10 million iPhones in Q4 at a $400 ASP, Apple would automatically get to record roughly $800 in revenue each quarter starting in Q1 of 2009, even if it did not sell another iPhone for the rest of the year.*
Sell 10 million phones and take in $3200 for the year?
BMWs are sooooo expensive, too expensive for 95% of the population, that product will never last. BMW should fold up their tents and start selling toasters, 95% of the population can afford toasters so that will be a good investment.
In 1997 I bought a mac performa for $1800.00, it was a piece of crap compared to computers now days, This year I bought a 24" imac for ....$1800.00. What exactly do you mean the mac will not survive at current prices? Comparatively speaking Macs are cheaper now than ever before? The Mac has lasted a long time and is now more popular than ever, why would forecast the demise of the Mac when it's at an all time high?? People don't chose PCs over a Mac because PCs are cheaper, they chose PCs because they don't know any better or only want to play video games with their computers.
Please explain why the Mac and iPhone will not last (remember the Mac has lasted over 20 years now and the iphone price has been reduced 3 times with more price reductions to come)?
Can we please stop hearing that Macs are too expensive, it's old news and not true.
Let me explain. A computer is just a collection of parts assembled in China by workers who are paid $2 a day. By and large, computers serve a purpose and they are much the same.
It would seem that, in addition to the high prices, Macs are designed and engineered by Apple so that users buy a new computer every 3 years. And iPods and iPhones are designed without a user replaceable battery so that owners buy a new iPod or iPhone every 2 years.
Obviously, if you buy a Mac, or an iPhone, you don't care about the price or the cost of a monthly subscription to a cell phone service.
My point is that 5% of people don't care about the cost of what they buy. But 95% of people and 100% of companies do.
There are now 1 billion computers in the world. There could be 2 billion computers by 2014, but the growth will occur in developping countries like China, India and Brazil where costs and price do matter.
Going forward, Apple is locked out of any meaningful growth beyond its 5% of Mac faithful. That was my point.
In Canada, Macs are $300 to $500 more expensive than Windows Vista computers from HP, Lenovo or any other major brand. Why should consumers and companies pay that premium just to get a computer with the Apple brand name?
Most people, 95% of consumers and 99% of companies, don't buy Macs because there is no reason to support a company with outrageously expensive products.
The whole article by this stock option buyer is a long explanation on how EXPENSIVE an iPhone really is to the end user, given the royalty payments paid every month by ATT to Apple.
Which brings into question the corporate policies of Apple, adherence to its once stated objectives to grow the Mac user base beyond the 10% mark, to transform the Mac into a game platform, to invade the corporate IT world, etc.
The Apple board of directors is charged by law and the shareholders to ensure that corporate policies go beyond lofty goals. The Apple board of directors is also in charge of limiting the compensation of higher management and should never have allowed backdated stock option plans which transferred more than a billion dollars to Steve Jobs and an equal amount of a billion dollars shared among Apple Vice-Presidents.
Finally, it is always wrong to reward executives without asking for results. The compensation has to be proportional to the results achieved, i.e. the global market share of Macs or iPhones, and not the yearly growth from previous years.
Under Steve Jobs, Apple has focused on high prices rather than competitive prices to expand the global market share. That was needed to transfer $2 billions to Steve Jobs and Apple Vice-Presidents. But what did it mean for Apple customers, developpers and investors? How did they benefit from the $2 billions appropriated, illegaly, by Steve Jobs and Apple Vice-Presidents?
5% is the market share of Mac faithfuls. BMW, Mercedes and Ferari have a small, elitist following who don't mind high prices. But most people do. And companies always care about costs and prices.
Under its current CEO and management, Apple is condemned to a 5% market share of Apple faithfuls who don't mind the high prices they pay for Apple Macs and iPhones.
Let me explain. A computer is just a collection of parts assembled in China by workers who are paid $2 a day. By and large, computers serve a purpose and they are much the same.
It would seem that, in addition to the high prices, Macs are designed and engineered by Apple so that users buy a new computer every 3 years. And iPods and iPhones are designed without a user replaceable battery so that owners buy a new iPod or iPhone every 2 years.
Obviously, if you buy a Mac, or an iPhone, you don't care about the price or the cost of a monthly subscription to a cell phone service.
[...]
My point is that 5% of people don't care about the cost of what they buy. But 95% of people and 100% of companies do.
[...]
In Canada, Macs are $300 to $500 more expensive than Windows Vista computers from HP, Lenovo or any other major brand. Why should consumers and companies pay that premium just to get a computer with the Apple brand name?
[...]
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.
I think a new topic of interest is whether Apple will change the accounting approach for the new iPhones...
The article by the Bullish Cross author was a good description of subscription accounting as Apple has used it to date on the iPhone and Apple TV. But the larger point was missed by the author. KingLear put his finger on it, as to whether or not Apple would continue to use this accounting method on the iPhone 3G. But I don't think there is any question about it! Apple will CHANGE its accounting treatment of the iPhone revenues, and discontinue to use subscription accounting for the NEW 3G iPhones.
Why? If you recall, Peter Oppenheimer said that this method would be used because the nature of the AT&T payment stream (the sharing of the revenue received by AT&T on its customer contacts) allowed Apple to move to a subscription-basis for accounting purposes. This had an additional beneficial effect of enabling Apple to provide free software upgrades, with additional iPhone functionality, at no additional cost to the customer.
Because Apple received a share of the subscription revenue from the customer, by way of AT&T, Apple could take the sales revenue from the phone itself and decide to account for BOTH under the subscription method of accounting. But with the 3G phone, Apple will be paid up front by AT&T for the phone, with no sharing in T's revenue stream after the sale. I tend to agree with the higher estimates that run to $350 and even $400 as the amount of the "subsidy" for the phone, bringing Apple's actual sales price to as high as $600. Especially in the case of T, they need to pay Apple this amount to compensate Apple for the loss of the shared revenues Apple received on last year's phone.
As Apple will receive $500 to $600 from T on each iPhone sold beginning 7/11, and on DAY ONE, the full amount of each sale will have to be recorded as of that accounting period. There is no way around that!
Apple, by choosing the subscription method before, seems to have liked the idea of spreading its revenues on the iPhone out over the 2-year period of the contract. That is what is called "revenue smoothing," a trick a lot of companies like to do whenever they can, so that their revenues and profits are more predictable, and not as much subject to booms and busts in the economic cycle, like most companies are seeing today. (Apple, so far, an exception.)
A much clearer picture of Apple's true, financial performance would be seen without this accounting method being used, and I for one am extremely happy to see it go!
The implications are great for Apple's upside! If the author of this article was excited by what subscription accounting was doing for Apple's finances on sales of 10 iPhones per quarter (the highest estimate from the most accurate analyst), just think what the implications are of having all that revenue and profit recorded in the quarter the products are sold, not spread out over 8 quarters!
Apple has never been a company that has tried to manipulate its stock price higher. Just the opposite! It is a conservatively run operation on the financial side. Using subscription accounting for taking revenue on the iPhone itself was proper, but unnecessary, and overly conservative. Now Apple will record that revenue when earned. And that revenue, in its totality, is earned at the TIME OF SALE!
There are several analysts that realize this and have properly calculated a target price on the CORRECT projected EPS. Gene Munster is one of them, and his $250 price target, set many months ago, is looking more and more reachable within the next 6 months.
Comments
That's the opposite of what I said. Costs are recognized when revenues are recognized, so the costs are spread evenly over 2 years just as the revenues.
Ah, so according to you, as I mentioned in the "2nd scenario", now Apple has also *deferred costs* happening.
So while constant guaranteed revenue is all sexy and exciting, this should be tempered by the fact that constant guaranteed costs will also be occurring.
Some analysts will spin this as, well, even if Apple does not generate any sales in a particular month, hell, they'd still have to spend a few hundred million. Yeah, they have guaranteed revenue, but also guaranteed costs. This would also be a big point. That's why I'm trying to figure out the profit that will be accounted for each day. Revenues are always nice big numbers and healthy cash flow is all well and good, but profits are important too.
I am finance n00b. Bear with me.
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
Would one of you brilliant number crunchers tell me when all of this huge pile of money is going to show up in Apple's stock price. Or is this money just going to sit in Apple's cash horde doing nothing for the investor. Many people on WS are still calling Apple an overvalued stock whose share price is not even worth $170. So how long will it take for WS to get a clue that all of his deferred moola is going to end up in Apple's hands? I don't see any investors rushing to jump on the Apple launch to the stars. Looks to me like investors are still worried about current revenue more than future revenue.
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
But you're talking about the difference between stocks that pay dividends, and those that don't.
From a consumer investor point of view, why would someone buy a stock.
If I am into a stock that pays dividends, then yes, I would want to see a healthy cash flow, strong, reliable sources of income, so that the amount of money I put in the stock would be rewarded by the dividends it pays on me investing in a company.
Growth stocks are an entirely different story. This is more short term, which leads to all sorts of problems short-term thinking does. Sometimes investors want some splashy news that drives things up, and then when they've made their profit of say $135 a share to $188 a share, they think it is enough, and then they bail, profit-taking, etc. etc.
The returns for investors in AAPL depends on their time horizon, I would imagine.
Let's say you bought at January 2006, $75. Feb 2008, it's at $122. So that means that the return on your investment is 62% in two years. That is massive.
Someone going in now would be looking at say $175, and to achieve a 10% return in one year's time, they would have to sell at $192.
Therefore, for those with a 12-18 month investment time horizon, this is precisely what they would be considering, ie, what is the volume of revenue, amount of profit, product portfolio that Apple will have in June 2009? Is it something that justifies a $200 share price in June 2009?
They would have to look at short term increases, or whatever other 1 hour to 2 month share strategy they employ in the market.
Otherwise, people would be getting in soon if they thought, maybe AAPL would redistribute the cash hoard.
Again, I am pretty much a finance n00b, so I don't know about NASDAQ and DJI that much.
Let's just say with the cash hoard for some reason, this is just going to accumulate and it is not going to go anywhere. That's my opinion. I'm sure there's many many other theories out there. As many that try to predict what AAPL is going to be 1 month, 10 months, etc.
One may say, what is that big pile of money Apple has doing for me, the investor? Apple may "say", well, what is the expected rate of return on your investment you want? 3%? 10%? 45%? An investor would have to think, okay, how is Apple using the money, what is it for? Which is of course, the next big question.
The best example is Apple having a massive cash reserve is buying other companies. Some theories circulate around this idea, because Apple is well known to be very specific about their hardware, software, solutions, etc, and a "charismatic" leadership that pretty much wants to do whatever it wants to do without "playing well" with others.
Meaning, for example, it may want to design a lot of it's new chips, hence the purchase of PA Semi which confounds Intel...
http://www.engadget.com/2008/04/23/a...ntel-says-wha/
http://www.roughlydrafted.com/2008/0...e-buy-pa-semi/
Cost: almost 300 million.
So what else could Apple buy? Adobe is widely touted, in that "Apple will once and for all takeover the publishing/ design market completely", etc. etc.
http://www.macobserver.com/article/2008/01/11.13.shtml
I think at the end of the day the huge cash hoard is about Apple's core value, which is innovation. In-house, they work very hard to come up with new and great stuff. But sometimes, you just have to go out and shop for great R&D and integrate it into your product portfolio. As "Cringely" says:
"..With that starting point, Mr. Cringely analyzed Apple's business model and what they're really after. "Last year, for example, Apple bought an application called FinalTouch from Silicon Color that was essentially video color correction on steroids," Mr. Cringely noted. "They [Apple] changed the product name to Color, added a couple features, then rolled it into Final Cut Studio, Apple's top-end video application suite. Though FinalTouch sold for up to $25,000, Color is included in Final Cut Studio FOR FREE, which is a kick in the head to Apple competitors like Avid that don't have hardware sales to count on for profitability..."
However as I may try, the IRS still doesn't acknowledge when I make my payments in 730 equal installments spread out over 2 years.
So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
...So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
EXACTLY. If I was a hard-working schmoe doing my taxes dilligently and listening to my accountant, I wouldn't do as well (yes, legally*) as if I was running many businesses, hiring and firing my own accountants and tax consultants, or hell, I might as well be a CPA/CFA/whatever-A myself. That is the impression I get.
You can imagine what the situation is in developing nations. Even worse, especially when government officials are all tied up in the mix.
*Legality is defined not by what the law says, but the practise of law! That is, not what the rules are, but what you can do to the rules.
If what you say is true, anantksundaram, how do you account for the AAPL pullback to $117 (+/-) earlier this year and $176 today? Does the backend iPhone revenue come and go with the tide? And if so, what will happen when 20 million (+) units reach customers' hands in the next twelve months? Looks like a tsunami to me. What say you?
A substantial portion of Apple's pullback was related to the market's pullback. With a beta of 2+ (sorry for the jargon, but see a quick-and-dirty explanation below), Apple would have been expected to drop more than twice as much as the market did. From the time of AAPL's price peak late last-Dec, the S&P dropped about 13% in Jan '08, so about 25%-30% of AAPL's price decline would have been "expected".
Granted, Apple did fall by more than that, but I am not a 100% sure as to what caused that firm-specific movement. Perhaps someone reading this recalls better than I do.
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Beta (ß): A widely-used measure of the expected percentage change in the value of a particular stock or asset for every 1% change in the market as a whole.
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2. What exactly about SarbanesOxcart forces Apple to do this?
Nothing about Sarbanes-Oxcart (
So, what happens to the money in the meantime?. Does it have to be "declared" as entered into the total cash hoard that Apple has? And then subtracted from the "loose cash" and placed in the "revenue stream"??
The money is real. The accounting for it is not. It's just numbers on paper, rules decided over decades and determined to be the best way to deal with these things to give investors a true idea of how things are going. So when Apple gets a check for $500, they put it in the bank and they can use it just as if it was "real money" (which of course is exactly what it is).
The recognition of revenue and costs is real only in the sense that it is what is reported to the public. This is why the best investors spend very little time poring over profit and loss statements and focus on cash flow - you can't fudge cash (well, at least it's harder).
So while constant guaranteed revenue is all sexy and exciting, this should be tempered by the fact that constant guaranteed costs will also be occurring.
The real point is, none of this is sexy and exciting. This was all already known the moment Apple declared its revenue recognition model and this "news" reads more like a fanboy stock owner trying to hype himself up about the stock he holds. Nothing in that "article" is going to move the stock one way or another. I found it rather like reading an article written by an overexcited Accounting 101 student.
Although the Constitution does not explicitly mention corporations, courts long ago gave corporations nearly the same rights as in-the-flesh individuals.
However as I may try, the IRS still doesn't acknowledge when I make my payments in 730 equal installments spread out over 2 years.
So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
Touche!
PS: I am just blown away by the overall quality of this discussion thread (ignoring my own) -- one of the reasons I like AI.
So, when I say nearly the same rights as individuals, what I mean is that corporations have way more rights.
Even though gay corporations still can't get married in California?
PS: I am just blown away by the overall quality of this discussion thread (ignoring my own) -- one of the reasons I like AI.
I just ruined that.
I tell you, now that I am going to be 30 by the end of the year, this Finance stuff really intrigues me.
Because, as you mention, Apple gets the money fairly soon (within 30-60 days from the sale), for the total sale price of the iPhone.
However, the accounting shows the revenue as deferred.
So, what happens to the money in the meantime?. Does it have to be "declared" as entered into the total cash hoard that Apple has? And then subtracted from the "loose cash" and placed in the "revenue stream"??
Is this why accountants get so much money for doing all this seemingly purposeless hax?
Finance and accounting. Most of it is seems like just legalised hacking. This is why it frustrates me so much when I go to a place like H&R Block, when, sometimes the service is good, but other times, it is like, why the F can't I expense this and this, when big corporations (not necessarily Apple) are getting away with, well, whatever they get away with???
Some pretty darn good observations there for a self-professed 'finance n00b!' You instinctively know more finance than you think you know!
Stocks are valued by the market on 'cash flows,' which are not the same as 'profit' or 'net income'. Cash flows - as cameronj hinted at in an earlier post - focus on the money that actually comes in/goes out. 'Profit' or 'net income,' on the other hand is based on accounting logic which is founded on the principle of 'accruals.' (Don't ask). And some of it is, indeed, legalized hacking.
There is a huge difference between finance (focused on assessing future value, forward-looking, hones in on cash flows) and accounting (focused on recording past activities, backward-looking, fixated on net income).
A substantial portion of Apple's pullback was related to the market's pullback. With a beta of 2+ (sorry for the jargon, but see a quick-and-dirty explanation below), Apple would have been expected to drop more than twice as much as the market did. From the time of AAPL's price peak late last-Dec, the S&P dropped about 13% in Jan '08, so about 25%-30% of AAPL's price decline would have been "expected".
Granted, Apple did fall by more than that, but I am not a 100% sure as to what caused that firm-specific movement. Perhaps someone reading this recalls better than I do.
Two things accelerated the drop. The first was a "lackluster" MacWorld (compared to the previous year's iPhone announcement). The "frosting on the cake" was the conservative guidance on Q2 financials.
When you own a stock with a beta of 2 and an average daily trading volume of 5% of all outstanding stock (which indicates the extent of hedge fund interest in manipulating the stock price), you come to expect these things.
But now, I would expect that the current Apple TV HW/SW and the 3G iPhone are more like regular computers and cell phones, being sold with small SW updates provided free and major updates for a modest fee. And the sales profit booked as sold, not extended over two years.
Would one of you brilliant number crunchers tell me when all of this huge pile of money is going to show up in Apple's stock price.
It already did.
Or is this money just going to sit in Apple's cash horde doing nothing for the investor. Many people on WS are still calling Apple an overvalued stock whose share price is not even worth $170.
Tell me what Apple is worth? I'll expect some good long term cash flow models, a comparative valuation examination and the like. Just because you bought it and they seem to be doing well doesn't mean the stock is going to rise. The stock price is a very well understood valuation technique and it's "right" given all generally held future profitability scenarios and their relative likelihood of coming to be.
So how long will it take for WS to get a clue that all of his deferred moola is going to end up in Apple's hands?
It's already in Apple's hands, and everyone already knew it. Except apparently some people on this board.
I don't see any investors rushing to jump on the Apple launch to the stars. Looks to me like investors are still worried about current revenue more than future revenue.
Nope, they're worried about the future. The stock market never cares about current anything.
Aren't any of you looking for some returns now instead of 12 to 18 months in the future? You really find that long-term stuff really satisfying. I don't understand why a broker would even try to sell Apple to a client. Would most clients be happy if he was told that he wouldn't see any profits for a year or two? Sorry, but I'm a bit puzzled on this point.
This doesn't make any sense. Everyone buys stocks so they can make money in the future. And I presume everyone would want it sooner rather than later if given the chance. But why would anyone tell a client they wouldn't see any profits for a year or two? Nobody knows when Apple will go up, or if it will go up at all. All the news that you or I know about the company is already priced into the stock. If Apple does better than the average expectation (and that's expectations of you and me, and everyone else, not analysts) then the stock will go up. And if they make a ton of money, but less than the average expectation, the stock will go down.
Simple
The results are pretty staggering.* If Apple sold 10 million iPhones in Q4 at a $400 ASP, Apple would automatically get to record roughly $800 in revenue each quarter starting in Q1 of 2009, even if it did not sell another iPhone for the rest of the year.*
Sell 10 million phones and take in $3200 for the year?
Sounds like a pretty poor deal to me...
BMWs are sooooo expensive, too expensive for 95% of the population, that product will never last. BMW should fold up their tents and start selling toasters, 95% of the population can afford toasters so that will be a good investment.
In 1997 I bought a mac performa for $1800.00, it was a piece of crap compared to computers now days, This year I bought a 24" imac for ....$1800.00. What exactly do you mean the mac will not survive at current prices? Comparatively speaking Macs are cheaper now than ever before? The Mac has lasted a long time and is now more popular than ever, why would forecast the demise of the Mac when it's at an all time high?? People don't chose PCs over a Mac because PCs are cheaper, they chose PCs because they don't know any better or only want to play video games with their computers.
Please explain why the Mac and iPhone will not last (remember the Mac has lasted over 20 years now and the iphone price has been reduced 3 times with more price reductions to come)?
Can we please stop hearing that Macs are too expensive, it's old news and not true.
Let me explain. A computer is just a collection of parts assembled in China by workers who are paid $2 a day. By and large, computers serve a purpose and they are much the same.
It would seem that, in addition to the high prices, Macs are designed and engineered by Apple so that users buy a new computer every 3 years. And iPods and iPhones are designed without a user replaceable battery so that owners buy a new iPod or iPhone every 2 years.
Obviously, if you buy a Mac, or an iPhone, you don't care about the price or the cost of a monthly subscription to a cell phone service.
My point is that 5% of people don't care about the cost of what they buy. But 95% of people and 100% of companies do.
There are now 1 billion computers in the world. There could be 2 billion computers by 2014, but the growth will occur in developping countries like China, India and Brazil where costs and price do matter.
Going forward, Apple is locked out of any meaningful growth beyond its 5% of Mac faithful. That was my point.
In Canada, Macs are $300 to $500 more expensive than Windows Vista computers from HP, Lenovo or any other major brand. Why should consumers and companies pay that premium just to get a computer with the Apple brand name?
Most people, 95% of consumers and 99% of companies, don't buy Macs because there is no reason to support a company with outrageously expensive products.
The whole article by this stock option buyer is a long explanation on how EXPENSIVE an iPhone really is to the end user, given the royalty payments paid every month by ATT to Apple.
Which brings into question the corporate policies of Apple, adherence to its once stated objectives to grow the Mac user base beyond the 10% mark, to transform the Mac into a game platform, to invade the corporate IT world, etc.
The Apple board of directors is charged by law and the shareholders to ensure that corporate policies go beyond lofty goals. The Apple board of directors is also in charge of limiting the compensation of higher management and should never have allowed backdated stock option plans which transferred more than a billion dollars to Steve Jobs and an equal amount of a billion dollars shared among Apple Vice-Presidents.
Finally, it is always wrong to reward executives without asking for results. The compensation has to be proportional to the results achieved, i.e. the global market share of Macs or iPhones, and not the yearly growth from previous years.
Under Steve Jobs, Apple has focused on high prices rather than competitive prices to expand the global market share. That was needed to transfer $2 billions to Steve Jobs and Apple Vice-Presidents. But what did it mean for Apple customers, developpers and investors? How did they benefit from the $2 billions appropriated, illegaly, by Steve Jobs and Apple Vice-Presidents?
5% is the market share of Mac faithfuls. BMW, Mercedes and Ferari have a small, elitist following who don't mind high prices. But most people do. And companies always care about costs and prices.
Under its current CEO and management, Apple is condemned to a 5% market share of Apple faithfuls who don't mind the high prices they pay for Apple Macs and iPhones.
Let me explain. A computer is just a collection of parts assembled in China by workers who are paid $2 a day. By and large, computers serve a purpose and they are much the same.
It would seem that, in addition to the high prices, Macs are designed and engineered by Apple so that users buy a new computer every 3 years. And iPods and iPhones are designed without a user replaceable battery so that owners buy a new iPod or iPhone every 2 years.
Obviously, if you buy a Mac, or an iPhone, you don't care about the price or the cost of a monthly subscription to a cell phone service.
[...]
My point is that 5% of people don't care about the cost of what they buy. But 95% of people and 100% of companies do.
[...]
In Canada, Macs are $300 to $500 more expensive than Windows Vista computers from HP, Lenovo or any other major brand. Why should consumers and companies pay that premium just to get a computer with the Apple brand name?
[...]
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.
I think a new topic of interest is whether Apple will change the accounting approach for the new iPhones...
The article by the Bullish Cross author was a good description of subscription accounting as Apple has used it to date on the iPhone and Apple TV. But the larger point was missed by the author. KingLear put his finger on it, as to whether or not Apple would continue to use this accounting method on the iPhone 3G. But I don't think there is any question about it! Apple will CHANGE its accounting treatment of the iPhone revenues, and discontinue to use subscription accounting for the NEW 3G iPhones.
Why? If you recall, Peter Oppenheimer said that this method would be used because the nature of the AT&T payment stream (the sharing of the revenue received by AT&T on its customer contacts) allowed Apple to move to a subscription-basis for accounting purposes. This had an additional beneficial effect of enabling Apple to provide free software upgrades, with additional iPhone functionality, at no additional cost to the customer.
Because Apple received a share of the subscription revenue from the customer, by way of AT&T, Apple could take the sales revenue from the phone itself and decide to account for BOTH under the subscription method of accounting. But with the 3G phone, Apple will be paid up front by AT&T for the phone, with no sharing in T's revenue stream after the sale. I tend to agree with the higher estimates that run to $350 and even $400 as the amount of the "subsidy" for the phone, bringing Apple's actual sales price to as high as $600. Especially in the case of T, they need to pay Apple this amount to compensate Apple for the loss of the shared revenues Apple received on last year's phone.
As Apple will receive $500 to $600 from T on each iPhone sold beginning 7/11, and on DAY ONE, the full amount of each sale will have to be recorded as of that accounting period. There is no way around that!
Apple, by choosing the subscription method before, seems to have liked the idea of spreading its revenues on the iPhone out over the 2-year period of the contract. That is what is called "revenue smoothing," a trick a lot of companies like to do whenever they can, so that their revenues and profits are more predictable, and not as much subject to booms and busts in the economic cycle, like most companies are seeing today. (Apple, so far, an exception.)
A much clearer picture of Apple's true, financial performance would be seen without this accounting method being used, and I for one am extremely happy to see it go!
The implications are great for Apple's upside! If the author of this article was excited by what subscription accounting was doing for Apple's finances on sales of 10 iPhones per quarter (the highest estimate from the most accurate analyst), just think what the implications are of having all that revenue and profit recorded in the quarter the products are sold, not spread out over 8 quarters!
Apple has never been a company that has tried to manipulate its stock price higher. Just the opposite! It is a conservatively run operation on the financial side. Using subscription accounting for taking revenue on the iPhone itself was proper, but unnecessary, and overly conservative. Now Apple will record that revenue when earned. And that revenue, in its totality, is earned at the TIME OF SALE!
There are several analysts that realize this and have properly calculated a target price on the CORRECT projected EPS. Gene Munster is one of them, and his $250 price target, set many months ago, is looking more and more reachable within the next 6 months.