Saturday, April 17, 2010

Deagol vs. Market


Click to enlarge. Not sure if it needs any more explanation. It's kind of complicated, yet simple. Ask in comments if you have any question.

Update: A reader requested earlier forecasts. Here's a sloppy zoom-in showing those (click to enlarge).

18 comments:

Anonymous said...

Is that Dec 2003 thru April 2006?

deagol said...

Thanks for pointing it out anon, fixed it (stupid Excel bug).

S. Axelrod said...

Can you project where aapl will be in 12 mos?

deagol said...

Axel, that's the point of the little red diamonds.

Anonymous said...

Deag:

Did you do any pre-2008 forecasting?

Anonymous said...

So basically, according to your forecasting, AAPL's stock price is far below where it should be trading if your forecasts continue to remain accurate?

That's good news.. I'm selling Goldman Sachs and buying AAPL before the market close tomorrow. Then I'm probably going to sell AAPL after they report and short Amazon.com

Good luck and thank you for your professionalism.

deagol said...

@anon2 "any pre-2008 forecasting"

Yes. I've added another image zooming in on earlier forecasts. See above.

@anon3 "forecasts continue to remain accurate [...] buy tomorrow sell the next day"

My forecasts are only (relatively) accurate on a way longer timeframe than a couple of days. Good luck with your trading.

Al Velasco said...

"My forecasts are only (relatively) accurate on a way longer timeframe than a couple of days. Good luck with your trading".

I've been following you for a few months. What do you attribute to the steep increase in sales forecasting in 2010. Is this due to the i-Pad or do you believe that Apple will release the i-Phone on China Mobile and on Verizon or another major US mobile carrier?

Also, I'm curious how you feel about Apple's PE ratio. It is a growth stock so it is quite reasonable in my honest opinion but I know that some people think the stock price has outgrown it's performance because they look at $$$$ figures and not value. I think Apple could still have a long ways to go but I also know that when companies grow to the size of Apple, Microsoft and Exxon Mobil, that the steep growth tends to taper off. Then again, those companies were largely one trick ponies and Apple continues to revolutionize technology with each new product launch.

I'm just curious as to your thoughts.

deagol said...

Al, the big jump in my 2010 FV and targets is mostly a result of the accounting change, and a smaller but significant driver is the iPad which I was not modeling back in January.

About the accounting discrepancy, and why would I knowingly continue to project old GAAP EPS and base my FV and targets on it even into January when these measures would in fact be deprecated any time this year, the thing is last year I was assuming iPhone growth would moderate somewhat so there wasn't that much of a difference between my old GAAP and non-GAAP estimates. See this post from last year dealing with that assumption.

Well, turns out my iPhone assumptions were too conservative, and iPhone growth has remained around 100% for the last two quarters, or double my growth expectations at the time. The GAAP gap ended up being much bigger than I thought, and that's reflected in my EPS, FV, and targets getting such a dramatic boost, in combination with the iPad contribution.

I'll tackle your second question in the next comment.

deagol said...

About the PE, I have also thought about the dichotomous nature (or market perception) of a mega-cap company like Apple and its still huge potential for growth. In this regard I want to point out a couple of things: MSFT and XOM were once upon a time $200b companies, and still became $400b companies in a heartbeat (perhaps closer to $500b), with PE's still implying continued growth. What happened to them, that their PE's are now in commodity-stock territory?

Well, not sure if XOM ever enjoyed a growth-stock PE, but I'll comment in the case of MSFT transformation from growth to commodity. The biggest problem they faced IMO, is they commanded 95% share of their market, and obviously can't grow any more in that space. So, in order to find more growth and satisfy investors, despite the huge cash generation of its established market position, it had to enter new, uncharted territory but failed to achieve the growth implied by its once high PE. At first and for a while investors (convinced by Wall Street) would always assume that it would eventually dominate those markets simply through intimidation and clout, and thus valued MSFT as if such "Midas touch" was a given, but in almost every case it turned out a disappointment. The problem, in essence, was that their stuff was crap, and their monopolistic driven success in PCs would not transfer automatically (not even given away for free) to other domains.

What's the difference with AAPL? Apple's main drivers of its stock value, the Mac and the iPhone, only enjoy single-digit market share of the respective computer and mobile phone markets. Even if these are mature markets, Apple does not need to enter new, uncharted territory in order to keep growing. It just needs to keep building a better widget and steady market share gains will continue to guarantee the impressive growth rates it has enjoyed in the last few years. iPhone, iPad, even the old iPod, in a way, are not completely new markets that Apple jumped into as an inexperienced player. These are all natural extensions within their hardware/software vertical integration niche, at which they excel, and these widgets are of course just another kind of personal computation devices, the very same thing they were trailblazing from the get go with the Apple II. What has been quite a change for Apple in these new-found growth drivers is the mobility theme, at which Apple now has at least a decade experience as a leader since the very first iPod, but even going back to their first iMac designed with that sturdy handle right on top for one to lug the bulbous thing without much hassle. It's also been something in their minds all along.

So, to me it's not a big leap of faith that Apple will increase market share in these markets. We all agree they already build the better mouse trap, so they don't need to experiment through getting into the tastier cheese business, and extend from there into wine-making, and pretend they'll suddenly dominate the whole food industry, like Microsoft needed to. Microsoft could have never kept growing earnings at the same pace (and justify their $450b capitalization) by simply sticking to their Windows and Office cash cows, given their 95% market share and maturing PC growth. They tried to find growth or somehow monetize the internet boom and failed, mobile phones boom and failed, home entertainment and failed. And thus their stock fell and still has more to fall. Apple, instead, has plenty of room to grow.

Al said...

Deagol, Thank you for all your valuable insights. I to am aware that Apple commands a single digit percentage of each of the respective markets in which it competes. I am excited about the future of technology and hope that Apple is able to find a way to monetize and break into the enterprize markets as I feel this will present more unique channels for growth and profits. I firmly believe the i-Ad platform will help Apple legitimately break into the mobile advertising space and provide it with a unique model for generating profits while controlling the information it has about the users of Apple products.

On the mobility side, I feel that Google is ultimately the biggest threat to Apple (not because of a comprehensive strategy) but rather due to the war chest they have at their disposal in the form of billions of dollars in which to create competing products at lower profit margins. My greatest unrealized fear is that Google will help to perpetuate the status quo and that consumers will be happy to adopt inferior technology at lower price points and hence with lower margins forcing Apple to lower their pricing whereby it eats into Apple's hefty margins.

I used to work in advertising and I noticed that business owners were some of the least sophisticated consumers on the planet with regards to the execution of their business planning. They couldn't differentiate between a template based e-commerce website and one that was custom built toward communicating their business's corporate and consumer identity. They forced sophisticated advertising firms and professional graphic designers to compete on price against your typical homeowner who had a PC and a very basic knowledge of applications like Adobe Photoshop and Adobe Ilustrator which led to eroding profit margins and a less impressive portfolio of products.

If you wouldn't mind answering one last question. You stated in one of your most recent messages ghat you still approach your earnings estimates via the old accounting method deployed last year.. What are your Apple estimates for the quarter for which they report tomorrow after the bell tomorrow based on the new accounting model. Also, what do you feel or by how much do you think Apple must beat the whisper number in order to respond positively after the market closes tomorrow afternoon? I ask because GOOG and IBM both beat and provided good guidance and both fell lower in after hours trading. By the way, I'm 30 and was long over 1,000 shares of Apple as of Friday morning.

Thanks in advance,

Al

deagol said...

"you still approach your earnings estimates via the old accounting method deployed last year"

No that is definitely NOT the case. Sorry if I wasn't clear. What I said, in response to your question as to why such a "steep increase in sales forecasting in 2010," was that a big reason for the steep increase in my forecasts from Jan 2010 to Apr 2010 was the accounting change, which I of course fully adopted in late January. My recently posted estimates are under the new non-subscription basis.

Al said...

haha.. You were a little too conservative with your estimates for the quarter. CONGRATS :)

-AL

asymco said...

Congrats Deagol on your estimates. I came in at the bottom of the "amateur" analysts with a 2.60 EPS. I have to say that one of the big reasons for the hugeness of the beat was the tax rate drop from 30 to 24. (Without that windfall, they would have hit in the 2.80 to 2.90 range, imho).

Regardless of the reason, Apple is still getting beat up on valuation. I posted an update P/E history graph at http://blog.asymco.com/2010/04/21/apple-continues-to-trade-at-a-discount-to-growth/

Forward P/E is now looking at 14 (ex-cash, 15 EPS/yr assumed). My own heuristic buy/sell formula is a bright "buy" now on valuation and growth being so out of whack.

Any thoughts?

javajack said...

Some reports are saying that the leak of the new iphone is damaging to Apple's sales. http://money.cnn.com/2010/05/17/technology/apple_gizmodo_iphone/index.htm?source=yahoo_quote

Can't possibly be as damaging as the mess in Greece, etc.

FrugalGeek said...

Hello, Deagol, could you update the charts here? I am interested to see how your model goes if you can factor in the ipad and iAd effects.
Thanks a lot.

deagol said...

Frugal, I'll post my estimates and valuation by the end of June, but for now I can tell you that the market is currently diverging widely from my model, as I'm sure you can deduce from the recent stock price action and the above projected Fair Value (blue line).

Not only did AAPL fail to keep up with the line as shown above (as warned in the text box), but my current FV has moved even higher, as you correctly assume it would as I consider the new revenue drivers. As mentioned in the box, a 150-point rally in a couple of months is required to get in the vicinity of fair valuation.

As for the one-year targets (red line), well, we'll have to wait a year to see how those play out, but I'll tease by sharing that my internal version now has the scale on the left going up to $600.

Keep in mind my model uses a 25x multiple on forward-looking EPS, which right now seems unthinkable in this panic-driven market (tell that to AMZN investors). But even just keeping the 20x multiple on trailing EPS should provide some upside to AAPL by FY end.

FrugalGeek said...

Deagol, thanks a lot for sharing your thoughts. When I look at your chart, if you use 20X multiple for your fair value, it probably will fit the fwd 3mo high much better from now on. Given that Apple's growth is mainly from iphone growth (now also ipad), the growth rate will probably drop to 20-30% from Q4 10, because from Q4 09, apple sold at least 7.4M iphone each quarter.
If Apple sells another 8.75M iphone this quarter, together with 2M ipad, my single variable formula (chuckle) gives me a quarter earning of $3.79. 20XEPS will be $280.