Thursday, July 29, 2010

It'll be OK

It's ok that Apple's selling all the iPhones and iPads that it can make.
It'll just make some more. Who wants to have made more than it can sell?

It's ok if there's more competition. Choice is good. And people will keep choosing Apple.

It's ok that some or most media outlets get a kick out of bashing Apple.
That's just how journalism works: "If it bleeds, it leads."
It's ok that Apple makes them look like idiots, time and again.

It's ok that Apple's the second largest and soon THE largest company by market cap. It deserves it.
It's ok if it sells just a tenth of what XOM sells. It sells "magic," while XOM sells nasty crap.
Out of every dollar worth of "magic" it sells, it gets to keep more than 3 times what XOM keeps
of its dollar's worth of shit. And the "magic" sales are growing while the other crap's in decline.

It's ok that Steve Jobs is mercurial, and snarky, and boastful. If anyone has earned that right, it's him.
And it's ok that he's getting older, and wiser. His asset is his mind, not his body.
And when he decides to retire, be that in 5 or 10 years or whenever, it'll be ok.
Whoever takes his place will surely have logged thousands of hours with a great mentor, and Apple will do fine.

It's ok that Apple keeps tight control over its platforms. Everyone does.
Ask "open-loving" Google if they'd be willing to share, not the free apps and services, no,
their search algorithms, which drive their ad platform, with competitors. It'd be the most idiotic thing.
Just like Microsoft's "industry standard" Windows and Office are closed games, and everyone pays to play.

It's ok that Apple hoards $46b in cash, and that it keeps adding to the tune of $500 per second.
I don't care for a dividend (it gets taxed, and Apple has much better ideas how to use it than I)
or a stock repurchase (its shares really don't need such an artificial prop, and cash is cash).

It's ok that AAPL is not part of the Dow Industrials. I see no benefit in that.
Why should it be? That's a bunch of established, mature, sometimes dying old farts.
Apple is quite the opposite: "the largest startup."

It's ok if everyone already has some AAPL. Everyone will soon wish they had more.
It's ok if it'll set them back $260 (or soon $400). It's more than worth it. I don't care for a split.

It's ok if yesterday and today AAPL fell 1% more than the market did.
It's UP a gazillion more than the market over the last 6 months, a year, 2, 5, 10 years,
or any other period longer than a few days. And it'll keep doing that for years to come.

It's ok if the sling-shot game is on. Otherwise we couldn't take advantage of it.

I'm not an Apple apologist. I'm a "fanboy" to the extent that the term implies admiration and satisfaction derived from the object of fandom, not of blind faith or sheep-like subservience. These are not by any means excuses made to justify or disregard any short-comings from Apple or AAPL. All of these, to me, are pluses.

Call me a contrarian if you want. It's worked out quite nicely for me.

Tuesday, July 20, 2010

Oh Oh, It's Magic

Oh, I got a hold on you
Got a hold on you
I've got a hold on you... tonight

The instant my forecasts are finally good enough to match or slightly exceed Apple's performance, Apple then goes and makes me eat dust in my guidance estimates.
This revenue guidance is just astounding, going by historical guidance patterns it suggests over $20b revenue for September. Analysts are at $17b. Would mean an upside adjustment for them of $4b for 3Q and 4Q combined, delivered in a single day by Apple. All of that well before Santa comes for 1Q. But I'm sure they'll drag their feet and cry all sorts of foul before updating their models to reflect this (just like a few analysts simply refused to consider iPad units above the 3m announced by SJ with 5 days remaining in the quarter).
Looks like bloggers kicked some pro analyst ass in that smack-down we all participate at Apple 2.0. And the winner is...
Thanks for the recognition PED. And thanks to Fortune/CNN/Money/TWX. There is no other mainstream media helping the small investor like this, for free. It's not that surprising, given Fortune's history (Forbes would never go with it), but it's quite refreshing to see this sort of thing these days.
Anyway, on with my take on the current competition. Last time I made a list of all analysts with the average error over all categories. PED did a similar thing this time (see article linked above) but only using the revenue and EPS categories, which put me on top. Woo! Haha ok that's cool, but I still went and did it for all categories as before, given that the unit forecasts are ignored in PED's ranking (although I agree that top and bottom line are the most important things to get right). Here's the ranking based on all forecasting categories:

Rank Err% Analyst, Affiliation
---- ---- ----------------------------------------
1 1.93 Horace Dediu, Asymco
2 2.84 Alexis Cabot, Apple Finance Board
3 2.85 Yair Reiner, Oppenheimer
4 3.32 Daniel Tello, Deagol's AAPL Model
5 3.67 Richard Gardner, Citigroup
6 3.94 Andy Zaky, Bullish Cross
7 4.17 Jeff Fosberg, Apple Finance Board
8 4.21 Robert Paul Leitao, Apple Finance Board
9 4.39 Scott Craig, Merrill Lynch
10 4.45 Turley Muller, Financial Alchemist
11 4.48 Mike Abramsky, RBC Capital
12 4.83 Doug Reid, Stifel Nicholaus
13 4.96 Nehal Chokshi, Technology Insights
14 5.23 William Fearnley, Janney Capital
15 5.28 Chris Whitmore, Deutsche Bank
16 5.48 Jeff Fidacaro, Susquehanna
17 5.67 Vijay Rakesh, Sterne Agee
18 5.97 Brian Marshall, Gleacher & Co.
19 6.27 Ralph Schackart, William Blair
20 6.40 Toni Sacconaghi, Bernstein Research
21 6.45 Keith Bachman, BMO Capital
22 6.57 Kathryn Huberty, Morgan Stanley
23 6.65 Gene Munster, Piper Jaffray
24 6.89 Dennis Hildebrand, Apple's Gold
25 7.19 Shaw Wu, Kauffman Bros.
26 7.36 Tavis McCourt, Morgan Keegan
27 7.37 Nicolae Mihalache, Trader's Neighborhood
28 7.57 Mathew Hoffman, Cowen & Co.
29 7.78 Ben Reitzes, Barclay's Capital
30 7.99 Rajesh Ghai, Think Equity
31 8.07 Ashok Kumar, Rodman & Renshaw
32 8.77 Mark Moskowitz, J.P. Morgan
---- ---- ----------------------------------------
9.9 4.35 Bloggers
19.1 6.08 Professionals
---- ---- ----------------------------------------
40% Pros error increase % on bloggers

Click on image to enlarge. Compared to last time (see link above), everyone improved in their forecasting, almost cutting the error in half on average. The best improvement comes from Gardner (moved from last to 5th), Reiner, and Cabot, all of them cutting their average error by more than 70%, with Craig (from bottom feeder to top-ten) close behind cutting it by two thirds. Kumar had the worst sequential change in performance (from 5th to penultimate), failing to improve his accuracy at all. Next worst improvements come from Moskowitz, Reitzes, and Muller, who only managed to shave off 1/4 off of their respective average forecasting errors.
I welcome the few pro analysts stepping up to the plate and competing more seriously; Rainer, Gardner, and Craig from the broader perspective of my ranking. Rakesh in my opinion is just a fluke. He figured in the top ten in PED's ranking (garnering him a mention) just because he got closest in EPS. This is accidental, since he underestimated revenue by more than $1b, but his red-flagged (worst), outrageously high gross margin ultimately lucked him out on the bottom line. I'll give him props for almost getting the Mac units right. The rest of the lot, come on, it's not hard. Just don't estimate less than 3m iPads when Jobs already told you they had sold more than that a week before the end of the quarter. Neither go crazy and estimate triple the run rate for those last 5 days (yes, that's you, last-ranked Moskowitz).
Moving on to the details on my own forecasts, I did great on the top and bottom lines despite being somewhat off in the unit forecasts.
Apple came in 644 thousand iPhone units short (downside of about $400m mostly compensated by higher iPhone ASP leaving a $122m net iPhone shortfall), 718 thousand iPod units short (about $110m), and soft peripherals and iTunes sales (another $113m), for a total revenue downside of about $345m. This was mostly compensated by Mac upside of 134 thousand units and higher Mac ASPs ($274m combined effect), as well as minimal iPad and SW upside ($21m), leaving a negligible $50m overall revenue shortfall (0.3%).
From there, I veered off a bit by underestimating costs (both COGS and opex) resulting in my operating income estimate swelling to $169m above what Apple reported. But then I lucked out (kind of like Rakesh but on much tighter range lol) by overestimating the tax rate, resulting in a net income "miss" by Apple of just $51m, keeping my EPS estimate within 2% of the actual number (6 cents). Here are all the details.

Products         Est       Act       Err      Err%
Units(K) ------ ------ ------ ------
Mac 3,338 3,472 - 134 - 3.9%
iPad 3,258 3,270 - 12 - 0.4%
iPhone 9,042 8,398 + 644 + 7.7%
iPod 10,124 9,406 + 718 + 7.6%

ASP($) ------ ------ ------ ------
Mac 1,236 1,267 - 31 - 2.5%
iPad 660 662 - 2 - 0.4%
iPhone 603 635 - 32 - 5.0%
iPod 163 164 - 1 - 0.5%

Revenue($M) ------ ------ ------ ------
Mac 4,125 4,399 - 274 - 6.2%
iPad 2,150 2,166 - 16 - 0.7%
iPhone 5,456 5,334 + 122 + 2.3%
iPod 1,655 1,545 + 110 + 7.1%
iTunes 1,258 1,214 + 44 + 3.6%
SW 641 646 - 5 - 0.8%
Periph 465 396 + 69 +17.4%

P&L($M) ------ ------ ------ ------
Revenue 15,750 15,700 + 50 + 0.3%
COGS 9,497 9,564 - 67 - 0.7%
GM 6,253 6,136 + 117 + 1.9%
OpEx 1,850 1,902 - 52 - 2.7%
OpInc 4,403 4,234 + 169 + 4.0%
OI&E 62 58 + 4 + 7.6%
Pre-tax 4,465 4,292 + 173 + 4.0%
Tax 1,161 1,039 + 122 +11.7%
NetInc 3,304 3,253 + 51 + 1.6%
Shrs. 925 927 - 2 - 0.3%
EPS($) 3.57 3.51 + 0.06 + 1.8%

Ratios ------ ------ ------ ------
GM% 39.7% 39.1% + 0.6% + 1.6%
OpInc% 28.0% 27.0% + 1.0% + 3.7%
Tax% 26.0% 24.2% + 1.8% + 7.4%
NetInc% 21.0% 20.7% + 0.3% + 1.3%

Guidance ------ ------ ------ ------
Rev($M) 16,450* 18,000 -1,550 - 8.6%
EPS($) 3.27* 3.44 - 0.17 - 4.9%

* These were my PO-LowBall™ guidance estimates for 4Q.
My real estimates were $18.3b in revenue and $4.46 in
EPS, obviously to get revised soon.

Great stuff, Apple. Best thing: that sweet guidance. This stock, at these levels, is the opportunity of a lifetime. It's now up to investors (big and small) to step up to the plate... Apple has already loaded the bases for you (and the pitcher is, like, drunk).

Bloggers vs. Pros Earnings Smack-down

Later this afternoon is Apple's earnings day. This is when all of us analysts earn our salary (haha sarcasm). To me, it's very important to keep track of my accuracy compared to other analysts not because I need to earn a salary, but because I simply need to get my modeling relatively right for my investment objectives to work.

So as I'm sure you know, PED does this earnings smack-down thing, pitting professional analysts against bloggers. Think of WWE, but better (without the predetermined outcomes). Lol ok, it's not nearly as exciting or entertaining, but it's as close as it will ever get in the investment analyst world. It's been a couple of years now, and it's been really fun. Thanks PED.

Go there and see the awesome table PED's meticulously crafted. I thought I'd try to get the revenue and EPS columns in some kind of visual form. So I went and calculated standard scores on everyone for revenue and EPS and ranked them all on the combined score. Then try to chart it, highlighting and contrasting the pro/blogger dimension. I came up with this (click to enlarge):

I decided to highlight the 3 most bullish and bearish professional analysts, and one of each extreme for the bloggers, as well as the mean for each group. I also highlighted Munster (because his EPS is so out of whack and I wanted to show that) since his combined score represents the median analyst (that is, if his revenue and EPS estimates actually cohered with the mid point of those two extremes). Oh, and myself, uh, because this is my blog.
If you ask me, this looks ugly. Ha. I don't know if I could've enlightened the data in a different way, but to me it's not a nice visualization of it. I couldn't think of anything else and the report is almost here, so there you have it.
Here's the raw data for the chart:

Analyst (ranked from most ----- z-scores ----
bearish to most bullish) Rev EPS Comb
-------------------------------------------- ----- ----- -----
1 Ben Reitzes, Barclay's Capital -1.31 -1.13 -1.22
2 Mathew Hoffman, Cowen & Co. -1.13 -1.09 -1.11
3 Tavis McCourt, Morgan Keegan -0.80 -1.28 -1.04
4 Keith Bachman, BMO Capital -1.31 -0.76 -1.04
5 Shaw Wu, Kauffman Bros. -1.31 -0.73 -1.02
6 Toni Sacconaghi, Bernstein Research -0.93 -0.91 -0.92
7 Doug Reid, Stifel Nicholaus -0.91 -0.80 -0.86
8 Kathryn Huberty, Morgan Stanley -0.58 -1.06 -0.82
9 Ralph Schackart, William Blair -0.64 -0.76 -0.70
10 Brian Marshall, Gleacher & Co. -1.13 -0.21 -0.67
11 Mark Moskowitz, J.P. Morgan -0.57 -0.69 -0.63
12 William Fearnley, Janney Capital -0.47 -0.54 -0.51
12.3 Professionals -0.42 -0.47 -0.45
13 Ashok Kumar, Rodman & Renshaw -0.04 -0.65 -0.35
14 Richard Gardner, Citigroup -0.04 -0.36 -0.20
15 Rajesh Ghai, Think Equity 0.29 -0.65 -0.18
16 Chris Whitmore, Deutsche Bank 0.07 -0.36 -0.15
17 Gene Munster, Piper Jaffray 0.87 -1.13 -0.13
18 Nehal Chokshi, Technology Insights 0.18 -0.43 -0.13
19 Mike Abramsky, RBC Capital 0.14 -0.36 -0.11
20 Vijay Rakesh, Sterne Agee -0.80 0.63 -0.08
21 Turley Muller, Financial Alchemist 0.05 0.19 0.12
22 Scott Craig, Merrill Lynch 0.00 0.45 0.22
23 Jeff Fidacaro, Susquehanna -0.24 1.26 0.51
24 Dennis Hildebrand, Apple's Gold -0.08 1.18 0.55
25 Yair Reiner, Oppenheimer 1.12 0.08 0.60
26 Andy Zaky, Bullish Cross 0.36 1.15 0.75
27 Alexis Cabot, Apple Finance Board 0.90 1.23 1.07
27.2 Bloggers 1.07 1.21 1.14
28 Daniel Tello, Deagol's AAPL Model 1.14 1.00 1.07
29 Horace Dediu, Asymco 0.73 1.55 1.14
30 Jeff Fosberg, Apple Finance Board 1.67 1.63 1.65
31 Robert Paul Leitao, Apple Finance Board 2.38 1.51 1.95
32 Nicolae Mihalache, Trader's Neighborhood 2.37 2.07 2.22

Good luck to everyone!