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Apple's Guidance Deficits

Every quarter Apple’s management issues a “guidance” or forecast of their own earnings in the following quarter. Over the years, this figure has been nearly useless because not only is it not accurate, the error itself has been wildly variable. I plotted what I call the Earnings Guidance Deficit for Apple based on the formula (Actual EPS diluted – Guidance)/Guidance.

The higher the value in the bars above, the more the company underestimated (or under forecast) its performance. Note that during the recession the company routinely offered guidance at half the level they actually delivered. After the recession they returned to a more reasonable ~30% under-reporting.

The problem with this analysis is that there is such a high volatility in this factor that we can’t count on it to predict where earnings will fall. Even if we saw a range bounded at 30% to 60% the usefulness of this would be very low as that is far worse than the range that analysts can get through other means (Deagol’s accounting of analyst error). The best thing we can say is that the range seems to be bounded by 30% and 150%.

Rather than using this history for precision, perhaps it makes more sense to assume that the lower bound offers at least some limit to the possible value of next quarter’s earnings. Maybe it can give us a “sanity check” for our own estimates.

For the next quarter Apple guided $9.30 per share. If we assume a 27% “deficit” which is at the lower end of the range above then the earnings are likely to be about $11.8.

That’s equivalent to an 84% growth in earnings year/year. It would also imply $33 for the 2011 calendar year. At the current share price of $384 that implies a P/E of 11. That happens to also be the P/E for Apple at the trough of the recession in January 2009.

In other words, if the stock price does not rise (or falls) from the current level by the time earnings are reported in late January, then the P/E for Apple may drop to less than 11 on growth of 83%. That’s a sanity check all of its own.

 

  • Anonymous

    I’ve been long on AAPL for a few years. I recently sold most of my shares (at about $400) due to the global issues affecting the markets. 75% of my retirement fund is in cash right now.

    About a year ago, I started using a P/E of 10 for my 5 year forecasts. That seemed like a reasonable compression level for a company growing at a rate that might well lead to saturation in the next 5 or 6 years.

    AAPL could reach 1 billion iOS devices per year by the end of 2016. How do they grow earnings beyond that point? Without a new market, they will have little chance of seeing more than incremental growth.

    New markets exist for AAPL. They could get into online retail, and compete with Amazon, they could do TV sets, they could do low cost, siri based phones to increase mobile market share, they could get into content creation. All of these might allow the current rate of growth to continue for an extra year, maybe two.

    If the global economy sours even more, they could actually see declines in earnings.

    I’m beginning to think I should change my 5 year P/E to 7.

    Even if the P/E drops to 7 in 5 years, I see AAPL as a good investment. Their huge cash pile will hold them through a major depression, and allow for growth by acquisition. Unfortunately that will make AAPL a boring, but safe mega company.

    • Canucker

      The same could have been said about Apple a year, two, three or four years ago. This is a focused company with few products that are joined at the hip to a growing retail operation (on-line and bricks and mortar). They have grown by either breaking into or redefining markets (and creating at least one new one). They could sit back and rest on their laurels with their cash hoard as insurance but I doubt that. The spaceship campus being planned indicates a forward looking company that isn’t self-limiting (unlike Microsoft, for example). It has a virtual monopoly on ease of use and making technology approachable to the masses. There are certainly lower margin companies that follow in their wake (like seagulls behind a trawler), but Apple has an arrogance born of confidence in their vision. That is why they’ve found sustainable growth despite the economy and odds.

      BTW, congratulations on your stock vision. Too many people are in and out of stocks. Pick long term companies and stick with them.

      • Anonymous

        I agree with everything you have said, but I still believe that at some point, they run into the rule of large numbers.

        Consider, If they introduced a product equivalent to the iPod (in terms of revenue and growth) today, it would barely be a blip in their revenues or earnings.

        I truly hope that 5 years from now, they are still able to find markets ripe for disruption, but, given their current growth, no new markets will be sufficient to continue to increase like they have been.

        The market seems to believe that AAPL has a few quarters of huge growth left. I believe that they have a few more years, but when your annual revenue is over $100,000,000,000, doubling it in 18 months becomes almost unthinkable.

      • Div4

        There is no rule of large #’s

      • Davel

        Yes at some point the music stops. If Apple is as big in China as the west should that not add a few years and give it the capacity to double?

        If Apple puts out a mandarin and Cantonese Siri they will be huge in China.

      • Westechm

        Apple will hit $100,000,000,000 in revenue this fiscal year, and will generate an unimaginable amount of cash. There is no precedent for this. At some point growth will slow to 50% per year, then to 40%, and even 30%. This is still excellent growth. When Apple has $200 billion in cash it might even start paying a dividend.

        BTW, so you don’t look foolish in the future, according to Wikipedia:

        …the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed.

        It has nothing to do with the size of a company.

      • Anonymous

        A quote from Posts at Eventide (I would hope that you consider Robert Paul Leitao to be a good source):

        “There’s been much talk about the perceived limits to Apple’s continuing growth due to what’s called the Law of Large Numbers. This axiom or financial rule suggests as Apple’s revenue grows the chance of sustaining current rates of growth diminishes as more growth is required to maintain the same percentage of growth.”

        http://www.postsateventide.com/2010/07/apple-and-law-of-large-numbers.html

        Wikipedia is a great source, but sometimes falls short on alternative meanings to phrases.

        I absolutely believe that AAPL is undervalued. I was simply trying to explain some of the reasoning behind WallStreet’s error. As a companies earnings grow to vast sums, it becomes increasingly difficult to maintain growth as a percentage YOY.

        APPL is approaching this point. If global economic factors do not grossly impact sales, I expect that AAPL will double earnings over the next 18 months, and again over the following 24 months (perhaps even sooner).

        At that point, they will have effectively taken all of the low hanging fruit from the mobile industry and the tablet line.

        They will continue to grow incrementally by taking market share with PCs, and perhaps phones and tablets.

        If they can disrupt another industry or two, they could see one more cycle of doubling earnings. Keep in mind , at that point, doubling revenues will require increasing sales by $433B, and earnings by $103B.

        Think about those numbers.

        By the way, AAPL hit $108.25 B for the just ended fiscal year.

      • Anonymous

        Don’t be afraid to think bigger….

        Consumer technology is what apple excels at, and there is plenty left in the future for them to conquer that can see revenue head into vastly bigger amounts.

        Tv is obvious – but actually small. Think about cars & home automation. Think about future Markets, particularly consumer robotics….

      • Westechm

        Oops! I goofed. I meant to write $175 billion.

        As far as large numbers are concerned, clearly there comes a point where growth must slow down. I remember being at a meeting 45 years ago when a product manager put up a chart purporting to show the growth in the carpet industry. His number were in pounds of fiber. The chart showed that enough fiber would be produced to carpet the USA in less than 10 years. He obviously didn’t realize it.

        Apple has a lot of growth ahead of it, and it will slow. When? The limits to growth of a corporation have never been quantitatively defined as far as I know. Apple’s future growth may just do that.

        BTW, I expect Apple’s revenue this quarter to be between $42 and $45 this quarter, and EPS to be between $13.50 and $14.50.

      • GeorgeS

        People don’t replace carpets every year or two, but many do replace their phones that quickly. (One guy I know has been through 5 phones in under 2 years. His kids got the old phones.)

      • Kizedek

        Sure, that is one reason often given. It’s just that it is getting pretty hollow and nonsensical when looked at more closely…

        Apple wasn’t always big. MS, Amazon, Google, Samsung, etc. have always been big guys.

        Yet Amazon and Google enjoy large P/E values. Why? Because they make mistakes? Because they are “open”? Surely it is not on proven growth track record like Apple.

        Why does some form of large number theorem not apply to them, just because they are now smaller than Apple? They actually have less room for growth. As noted, Apple has 4% phone share, and similar in PCs etc. Google and Amazon are far further along the path to saturation in their respective markets and services. And, arguably, as seen, and as will be seen, they are far more susceptible to disruptions (notably by Apple).

        So, they are apparently deemed to have more room for growth because they are smaller… yet, why are they smaller, since they have larger market shares in their businesses? They are smaller because they can’t innovate and achieve the efficiencies and margins that Apple achieves. Apple isn’t merely “too big for its own good”, Apple is big because it is executing in a superior manner, consistently. But of course, all that doesn’t get a look in.

        Further, the diversification, true diversification, f Apple is proven. They did indeed “walk into the phone industry”. The music industry. The software industry. Publishing and Media industries. Tablet industry. PC industry. Cloud. Personal assistants. ….what’s next? (whatever it is, it’ll be good)

        The “legs of the stool” are real solid legs in the case of Apple. For everyone else, “diversification” is a sham, it’s a diversion, it’s a hobby like the AppleTV has so far been. In most cases, these companies cannot execute, innovate or hold their heads up in areas outside their core competencies: MS with internet, retail, hardware, social, etc.; Google with all its forays into beta project after beta project, etc.

        So, seriously, Wall Street expects us to think that the sky is the limit and the world is an oyster for these other guys?

      • berult

        Self disruptive institutions, I shouldn’t use the plural here from what I know, are salmon-like in their behavioral patterns …hence well known potential feasts for upstream bear markets. Spawning grounds, in due end-of-cycle time, dress circumstantially up as killing fields, …end-of-cycle bear dung as ecosystem firmware…

        To a Bear, be it Wall Street or Yogi, the life cycle of a salmon spans the time of a meal…

      • Anonymous

        You will get no argument from me that Amazon is not insanely overpriced. The only explanation that I have heard is that they have little competition. I don’t find that argument to hold any water.

        Google currently has a P/E of just over 20, MS is at about 9.5. Both have seen a steady decline in P/E ratios for the last couple of years.

        The markets are not wise, nor are they predictive. They are what they are. All we can do is try to find some consistent patterns and try to make a more educated guess for the future.

        I firmly believe that AAPL is, by far, the safest investment out there with very good long term growth potential.

        I also firmly believe that the P/E ratio will continue to decline.

        I think that the reasoning behind much of the downward pressure is Wall Street’s belief that they cannot continue to grow at high rates. I also think that they are wrong.

        Unfortunately, we have no sway on Wall Street idiocy.

      • Vic Castroll

        PE doesn’t always have to contract. It can expand too. If not, then eventually, all stocks are going to zero.

      • Anonymous

        True, P/E doesn’t always contract, but I am pretty sure that it will continue to contract for AAPL.

        I would love to be wrong, I sold most of my shares in AAPL, but still have a few dozen. I also plan to reinvest a big chunk of my retirement savings once I feel more confident in the global economy.

      • kevin

        Even ignoring the TV possibility, here are a few thoughts:
        1. At about 7%, Apple has lots of room for growth in the PC market, even if it is saturated. People will still replace computers every 4-5 years, possibly even with tablets, for the foreseeable future.

        2. Apple is at about 5% in the cellphone market, so it has lots of room for growth, especially if we believe that eventually all cellphones will be smartphones. The ASP might go down some, but notice that Apple released a $399 64GB iPhone 4S ($799 to carriers) to balance out the 3GS (presumbly selling to carriers for about $400) And even when the market is saturated, people will be replacing cellphones about every 2-2.5 years, during the next 5 years, as smartphones add many more hardware capabilities, and get faster to enable many more software-driven capabilities.

        3. Apple could move beyond device sales to incredibly high-volume “transaction” fees. Read this interview with a former Siri VC. http://techcrunch.com/2011/11/09/gary-morgenthaler-siri-will-eat-google
        Also, the recently upgraded Apple Store app (self-checkout) shows another possibility, though I don’t think Apple would monetize its use by other retailers. And Apple has recently gotten several patents on shopping (google Patently Apple), showing that they’re actively exploring this space beyond NFC.

        I haven’t yet done the math, but at the simplest level, a tripling of iPhone sales at a declining ASP should at least double revenues.

      • Anonymous

        As I said in my first comment, I wouldn’t be surprised to see AAPL reach 1 billion iOS devices annually.
        My thought was that, beyond that point, can they continue to grow at these phenomenal rates.
        I don’t believe it is likely to happen, simply because of the size they will have achieved. Growing earnings at $100 billion in a year is a staggering thought. If any company can achieve this, it is APPLE, which is why I’ve retained a few dozen shares, and don’t plan to sell them.

        Many of the replies I’ve had to my comments seem to be saying that, because AAPL is undervalued, it makes it a great investment. I disagree.

        I believe that it’s P/E will drop below 10 in the next two years.

        AAPL will still be a great investment.

      • GeorgeS

        “I agree with everything you have said, but I still believe that at some point, they run into the rule of large numbers.”

        What rule of large numbers? What I’ve seen doesn’t make sense, as it doesn’t take the growth of the world population and economy into account. It also ignores the fact that Apple today has a considerably SMALLER market cap than Microsoft did at its peak–and that was in more valuable dollars.

        It’s also important to realize that Apple has only about 5% share of the worldwide phone market and maybe about the same of the worldwide PC market. The growth of iOS and Android phone sales has been (as Horace as shown) primarily from converting people to smartphones from other phones. (Don’t confuse marekt share with sales: RIM’s market share has dropped, but its sales actually increased.)

      • http://www.asymco.com Horace Dediu

        Apple has less than 4% of phone market as of Q3.

      • Kizedek

        You would think so, BUT…
        They have proved they are getting on top of supply chain, production and ramp up. This is where people consistently and continually underestimate Apple.

        Consider that the last few launches of a product (each iPhone model, each iPad, MacBook Airs, etc.) are breaking records each subsequent launch quarter.

        Apple stock price gets dinged partly because Apple can’t make products fast enough! Go figure. But each launch just gets better and better: more factories and suppliers on line, smoother roll outs, more efficiencies of scale, more countries at launch, etc.

        So, let’s take your statement, “Consider, If they introduced a product equivalent to the iPod (in terms of revenue and growth)”, and apply it, not to entirely “new” products like TVs or something we can’t yet imagine, but just to new models of iPhones or iPads…

        Apple quite happily sells, what 8-12 million iPhones per quarter one year, continues to sell them the second year with perhaps predictable and modest growth, and then finally releases the next model… and smashes records: 4 million in launch weekend! — While continuing to sell previous two models to achieve numbers 1, 2, and 3 best selling phone models on the planet! How is that not amazing product growth right there! Same with iPad, same with MacBook Air, etc.

        Apple will produce more and more of its products with more and more efficiency, and still be able to sell them! This is all without introducing a “new” product.

    • Anonymous

      Have you figured out why Apple’s stock was averaging a P/E of 30 before the Great Recession, was down to 20 two years ago (after the big recession selloff), and now trades at 13? Do you know why Apple looks to hit ten sometime next year?

      Most people think it’s a reflection on Apple. They’re wrong. It’s a reflection on the inability of the market to think different.

      Apple’s P/E is being compressed because investors are consistently betting wrong about its chances for continued revenue and earnings growth. This last quarter was the first in a long, long while where the professional analysts got it right – and that was a fluke! Everybody downplayed the natural tendency of the customer for iPhones to hold off buying during the quarter an upgrade comes out. Everybody. Professionals and non-professionals alike.

      So this quarter, we’re back to “business as usual”. If I wasn’t retired, I’d lay money on the professional analysts making the mother of all lowball estimates come January. And yes, that makes an absurdity like a P/E of 11 possible.

      But why? What’s the driver here? I’ve been saying for years that the investor is falling behind the curve of Apple’s growth, and not linearly but exponentially. The next few years is going to prove me out, in spades!

      And yet how can you NOT own a stock that is going up in value even as its P/E shrinks? It’s just too good an opportunity to pass up.

      I just thank the Maker that Apple’s business is totally unaffected by the silly way its stock is being treated.

      • Chicagobob

        +1

      • http://twitter.com/ChrisRedpath Chris Redpath

        Does it matter what the real position is if the market continues to ‘fail to think different’? Apple stock will continue to run in line with the market, as will everyone else’s.

        I’m not sure what it means for Apple stock, but I don’t think the markets will be making an exception for one company which is outside the regular scope. I read these arguments about how undervalued Apple are for this that and the other reasons, and they do make sense but I’m left with an overwhelming feeling that you’re (not you specifically, the arguments about undervaluation) railing against the machine.

        After all, aren’t most of these buy/sell decisions driving the valuation based on trades from massive (very conservative) funds?

      • http://www.facebook.com/profile.php?id=523652480 Pedro Andrade

        I think you are right as long as this stock is a paper currency with no actual cash flow stream to its holder. At this size, there’s no viable strategic buyer for Apple, so you buy on a belief that other investors will eventually bid up the stock to better reflect the (inaccessible) economic value created. Since Apple pays no dividend, it can hypothetically create and destroy astronomical amounts of value without a direct connection to the shareholder’s pocket. If Steve’s dead and long term leadership is a concern, the conservatives may say “better not touch it”. But could they refuse if Apple started paying dividends or repurchasing stock? What if Apple starts distributing the net cash it generates (keeping its U$80B+ war chest). Would even the conservatives refuse a ~8% dividend yield growing at a 50%+ clip in a land of 2% treasury yields?

      • Anonymous

        Apple’s cash horde is what might be considered the “real value” of the company on a quarter-by-quarter basis. And if you look at the growth in cash and equivalents, you see it increasing exponentially. Apple doesn’t need to buy back stock or pay a dividend for that cash to loom increasingly larger as a measurement of its value. A year from now, two years from now, or maybe even three years from now, that cash will TOTALLY drive Apple’s stock value. As I said to Chris, I think it’s inevitable that Apple stock will eventually explode.

      • Anonymous

        I tink we have to go back to Horace’s earlier study on the performance factors that actually DO correlate with the stock’s movement pattern over the last 20 to 25 quarters.
        The market has grown ultra-conservative in its assessment of Apple’s changing value. They will happily set aside the traditional benchmarks and fall back to core values.

      • Anonymous

        Except that the market for Apple stock is not in fact falling back to “core values”. They are reacting with classic herd instinct right now. They’ve lost track of true value, and they’re milling about. And therefore, even when true value is staring them right in the face, they don’t see it!

        Horace’s premise that stock price is tracking cash is, at the present time, not functioning. That isn’t to say that it won’t begin functioning again, and perhaps very soon.

      • Anonymous

        Yes, it matters, if you are betting that the market will eventually come to its senses. I think that’s inevitable, and I think Apple stock will explode when it does.

      • Anonymous

        It needs a significant split to press the right psychological buttons with the only people who can change the game – the smaller investor.
        An 8:1 split would get us shares at below $50. That is a good place to attract the wee fishes from.

      • Anonymous

        I don’t agree. A split might give some short term relief, but it doesn’t address the real issue. And stock splitting will also add considerable volatility to the stock.

        The pressure of Apple’s burgeoning cash will eventually force the issue and propel Apple’s stock value upwards.

        On that Horace and I agree – I think!

      • Anonymous

        Or not.

  • http://michaelkdawson.com/ TrendRida

    Apple is the most manipulated stock on the planet. Jim Cramer at the 6:30 mark in this video discusses how the hedge funds starts rumors to move AAPL’s stock price. http://stks.co/15VA Last week was a perfect example. IMO, weekly options have exasperated the manipulation. Travis Lewis has a blog dedicated to capitalizing on the manipulation by selling options. http://www.aaplpain.com

    Until the spotlight is shining on the manipulators, AAPL’s stock price will never makes sense by any valuation metric. That all being said, AAPL stock price is up 19% vs. 0.5% for the S&P. If AAPL can continue to outperform the market at that level investors should be pleased. AAPL is the world’s largest technology company by market capitalization – it’s years of 50% returns are mostly likely behind it.

    • Walt French

      To the extent that these fantastic claims are true, the manipulators are handing you an INCREDIBLE gift.

      Hear somebody starting false rumors about Apple? Wait for the stock to dip, and BUY like mad. Because if the “rumors” are simply lies, that will be found out in good time, and then the stock will pop.

      Alas, we all have reason to doubt the claims: the SEC actually enforces anti-manipulation laws, and short-sellers are ALWAYS subject to heavy scrutiny. Other investors, as my modest proposal directs, can assess the source and/or veracity of the rumors, and jump in; professional investors can move many millions of dollars into stocks that panicked investors want to sell. And specifically Cramer, whatever his merits as an entertainer, has no special insights into Apple that allow you to judge his calls as being any better than those of thousands of others who follow the most watched stock in the country.

      • http://michaelkdawson.com/ TrendRida

        Cramer stated how the process works in the video. He also stated that the SEC is to busy doing who knows what to stop it. Just look at how long Madoff got away with his ponzi scheme.

        I read articles every day where people are stumped by the divergence between AAPL’s stock price & its intrinsic value. Personally, I believe that there are other forces moving prices other than the free market. Today, Mark Cuban said on CNBC : “the stock market is no longer a platform to raise capital, it’s a platform for hackers to make money.” Go to 2:30 mark in video http://bit.ly/vhXfds

        That all being said, I own AAPL stock – but have no expectations that the intrinsic value and stock price will converge…

  • Davel

    In other words, if the stock price does not rise (or falls) from the current level by the time earnings are reported in late January, then the P/E for Apple may drop to less than 11 on growth of 83%. That’s a sanity check all of its own.

    What are your thoughts on a large, liquid company like Apple with the growth it sustains and the relatively low PE?

    • Anonymous

      Horace is hinting AAPL is highly under-valued.

    • http://twitter.com/asymco Horace Dediu

      I think there is significant asymmetry of information with respect to Apple. There are times when the world changes fast enough or far enough that understanding of what is happening lags far behind the actual event.

      • MOD

        If there is asymmetry in the stock market and we can identify it, then we should be able to take advantage it, of having superior information, and to make money off of it.

        So instead of bemoaning our fate as Apple investors, that Apple is undervalued, etc, we should look for ways to profit.

      • Anonymous

        You’re right. We should stop bemoaning our fate and look for ways to profit. And one way is very simple; hold long.

      • MOD

        Yes, holding long is one way. But I have an additional idea. Since the stock moves up and down, why not make money off of that motion. Just off of the upward motion.

        Since there is no risk in holding the stock, one could buy on the dips and sell after it rises. Then repeat the process.

      • Anonymous

        Have you checked out Bullish Cross?

        http://bullishcross.com/

      • MOD

        $900 for a 6 month subscription? Sounds like they are selling something really complicated involving option strategies.

        I have a simpler idea not involving options. Every trader is using options and they are part of the reasons the stock is volatile.

        But the fact that everyone uses options also makes the options high-priced.

        And unlike the stock itself, options “depreciate”, they lose their premium over time, so you have to sell them fast, which results in even more volatility.

        I have a better idea. But it will cost you to find out. Only $500 though, much cheaper then them.

      • russell

        Agreed. In the particular world of technology (platforms, category killers, winner-take-all outcomes, etc) everything gets more amplified over other industry dynamics. These events don’t fit very well into the anyalst’s spreadsheets in the early innings. Only once the dust has began to settle can they begin to make the numbers work and project them out with some skill.

        Each successive tech cycle has created far more value for the key players. i suspect this one will continue the trend for the fact it is so much more global in nature and eventually everyone who wants/can afford a piece of this trend will have a piece of it in their front pocket. Since many of the participants were already larger companies ( Amazon, Google) from previous outcomes, it make for curious speculation as to how they will reflect all the future value they’re about to capture.

      • Anonymous

        What do you mean by a significant asymmetry of information about AAPL? I think we have THE most asymmetry of information for AAPL because it is the most followed/analyzed stock in the market (right or wrong.) And we have people like you and Andy Zacky (not any more unless you are paying) to do excellent analysis on the company and the stock. I don’t think such level of analysis is available for retail investors for any other stocks.

      • http://www.asymco.com Horace Dediu

        There is a lot of attention being paid to Apple but that does not mean there is a lot of insight into it. Conversely there are many companies which are bereft of attention but are perfectly well understood.

  • Ron

    Hasn’t Apple’s actual earnings tended to beat their own guidance in fairly consistent 6% range between 12%-18%?

    http://tech.fortune.cnn.com/2011/10/19/why-apples-big-miss-doesn’t-matter/

    While EPS contains more information than the total earnings number, if you are looking for a better way to predict, 12%-18% over Apple’s earnings guidance has worked and give your more than just the lower boundary floor that the 30% EPS beat give you.

    Better yet, I’ll be combining both predictors.

    • Ron

      Meant to say “Hasn’t Apple’s actual REVENUE tended to beat their own guidance in fairly consistent 6% range between 12%-18%?”

      • http://www.asymco.com Horace Dediu

        The time frame in my post goes back a bit further than the table on Zaky’s post.

  • Kristian

    Apple’s guidance is the lowest point that they can achieve.

  • Davel

    I think a lot of it is the analysts or money managers do not understand the company. They look at other things and rationalize why Apple can’t.

    Apple is too big
    Apple can’t grow
    Apple has competition
    It’s the HTC tablet
    The RIMM tablet
    Now it is the Amazon tablet.
    Can’t do flash
    Steve’s health
    No iPhone 5
    Etc.

    There is always a litany of what Apple cannot do. Rather than what Apple does and continues to do.

    Apple does have real issues. The iPad did not grow as fast as some expected. Perhaps it has hit its ceiling. The Amazon threat is real. It is competing on price not features.

    Samsung has a good platform. It may not be as slick as Apple, but it may be close enough.

    Etc.

    • Davel

      Hmm

      I gives flipping screens made this post lose its place.

    • Kristian

      There is no threat from Amazon. Fire will be huge dissaster for the Amazon because Amazon loses money with every single Fire that they sell. Amazons margins are razor thin and they can’t handle high return rates. It will also take too long time to recover the losses with media sales. I really wouldn’t bet that horse.

      • http://twitter.com/Marcos_El_Malo Marcos_El_Malo

        What makes you think the Amazon tablet strategy relies primarily on media sales? What about all the other stuff Amazon sells?

      • Kristian

        E-books, videos, music and magazines are media. What else do they sell that can be used with Fire?

      • kevin

        It doesn’t have to be used with Fire. If the Kindle Fire makes it more likely you will pick it up and use it for online purchasing instead of doing nothing, using an iPad or computer, then Amazon wins. Why?

        Because the Fire is so well-integrated with Amazon.com, if you use it, you’ll be at Amazon.com for online purchases of TVs, electronics, video games, groceries, paper goods, office supplies, etc.

      • Kristian

        If it works poorly you will return it or never pick it up. If you return it (as many will) then Amazon must refurbish it and try to sell it again. If you buy it and never use it then Amazon has lost money with your Fire. Margins are so tight with Amazon that even if they double their revenue they still wont make much money out of it.

        They are also trying to compete with Apple’s online stores that can provide much better experience even though you can’t buy your paper goods from there.

        With this rate they have to sell 5000 dollars worth of goods to every person and for every 100 dollars spend subsidising Fire sales. That is VERY roughly, but you get the idea. It is higly unlikely that people will buy that amount of goods. If they can afford it they have already bought the iPad.

      • GeorgeS

        To add to what Kristian wrote, those sales would have to be in addition to what they otherwise would have sold. Amazon has done this before. Not long ago, they essentially gave away a popular album online. Given that they probably had to pay the publisher the usual rate, they would have had to sell another 50+ songs for each album sold–that’s 50+ that they otherwise would not have sold. With the Fire, as Kristian wrote, it’s not 50+ songs but thousands of dollars because of their low margins.

      • kevin

        Continuing my previous post, one reviewer likens the Fire to an ecommerce kiosk in your hands; a kiosk specifically tuned to Amazon.com (which is far more than media sales).

      • Anonymous

        Well the kindle has been selling fine for several years now, so amazon is obviously doing something right.

      • Kristian

        That is propably why the Amazon is doing so well. ;)
        Last quater revenue 10,876 Billion dollars and net Income 63,00 Million dollars. Razor thin margins as I said.

      • Kristian

        We already got the answer how the Fire is going to sell from now on..

        “When stacked up against other popular tablets, the Fire can’t compete. Its performance is a occasionally sluggish, its interface often clunky, its storage too slight, its functionality a bit restricted and its 7-inch screen too limiting if you were hoping to convert all your paper magazine subscriptions into the digital ones. Other, bigger tablets do it better… “

        http://www.engadget.com/2011/11/14/amazon-kindle-fire-review/

        Return rate will be very high and that will hurt Amazon.

      • Anonymous

        Dont trust tech sites – these are the same people that derided the iPad as nothing more than a big ipod touch, with limited power, no customisation options, inability to use Mac OS apps, no camera, no multitasking….Their opinions sure didnt harm the iPad.

      • Davel

        I have read this and others. The new York times had one that is essentially the same. We will soon know as it comes out tomorrow. It makes sense that the fire doesn’t perform like an iPad since it is cheaper and cannot possibly have the same quality build. Apparently it is not.

        Other criticisms are that the browser is sluggish.

        Every review I read today says the amazon portal works smoothly, it plays music and the movie function is not bad. Everything else is an issue. If this is true the Fire is not a threat to the iPad as there won’t be much overlap.

    • Walt French

      Yup, all these, and more.

      But the list is not structurally different than anybody could gin up for ANY company in the country. Investors MUST be skeptical; skepticism is perhaps even MORE valuable than the terribly important structural insights that Horace provides.

  • http://profiles.google.com/mcmaster.patrick Patrick McMaster

    At a PE of 10 you would be earning 10% on your money in a company that has the cash to defend its market share for the next 5 or 10 years. Given the lack of income from bonds it seems to be the best place for my money. My concerns about Apple are not based on the money side. If the products continue to produce applause from the market place everything will work out. My question is more about the added complexity in Apple products because of the conflict between the cloud and home based back up. Apples real selling point has been ease of use. Trying to compete against so many fronts is breaking down this simplicity. My iPhone 4s was the most complicated upgrade so far. I am a long time Apple user. Can the focus of Apples new products continue to produce the quality experience that we have come to expect?

    • Anonymous

      You seem confused about the P/E ratio. A P/E ratio of 10 doesn’t mean your stock only went up 10%. It’s a ratio of the price divided by the Earnings Per Share (EPS), nothing more. If you have a stock that costs $100 and it has an EPS of $10, then 100/10= a P/E of 10. If the stock’s share price doubles to $200 and the company’s EPS also doubles to $20, then the P/E ratio stays the same, i.e., 10. Your stock’s worth increased 100%, not 10%.

      In Apple’s case, in fiscal year 2011 the EPS grew 84%, but the stock value only increased about 30%. And this has been happening for two years now. Two years ago, Apple’s P/E was around 20. On Friday it was in the 13’s. Apple’s earnings are literally driving it’s P/E ratio into the toilet!

      Why is this happening? Obviously, it’s because investors are ignoring Apple’s fundamentals. What’s the ostensible reason for them doing that? Because they don’t believe that Apple can keep growing like it has been.

      And the sad thing is, this happens over, and over, and over. Every blinkin’ quarter. And Apple’s P/E ratio, instead of reflecting Apple’s true worth, is reflecting only the failure of investors to comprehend that worth.

      Now, that wouldn’t be so bad if investors had some hope of coming to their senses. But that is fast becoming a near impossibility. Why? Because of the numbers involved. If Apple has another year with 84% growth in EPS, then in order to maintain it’s present P/E ratio, the stock price would also have to grow 84%. In one year. That means that one year from now Apple stock would have to be worth its present stock value ($384) times 1.84, or $706/share. And if it has the same growth the in fiscal 2013, then we’d need to multiply 1.84 times $706, giving us a stock value two years from today of $1,300!

      Does anyone reasonably expect Apple to be worth $1,300 in two years, even if it has back to back years with 84% growth? Answer; no. Instead, the P/E ratio is much more likely to slip even further into the toilet – not because Apple is doing anything wrong, but because it is doing everything right!

      • Anonymous

        I think Patrick was referring to what % return he would get on his share investment if all eps was paid as a cash dividend if pe was 10.

      • Anonymous

        That’s a pretty big if, since Apple doesn’t pay dividends, and certainly wouldn’t pay 100% of EPS even if it did! The only value Apple gives its stockholders is appreciation in stock value.

      • Anonymous

        At some point in the near future Apple will be genreating $75 billion + per quarter in free cashflow – At some point that cash pile is going to become a threat to apples existance as a publicly listed company, as its huge multihundred billion cash pile & relativly low P/E will easily finance a takeover.

      • Anonymous

        whoops – I meant $75 billion per annum (not per quarter)

      • Gondare

        This estimate seems too high. Can you explain?

  • Anonymous

    I’m reading this on my iPhone and don’t want to dig thru old Apple financial announcements right now. I was just wondering looking at your chart if the under guidance during the recession of 2008 into 2009 wasn’t due to issuing GAAP guidance. And we are now looking at Apple’s numbers that have been restated to reflect the Non-GAAP adjustments?

    • Stefan Sidahmed

      I second this comment from ChKen. Looking at FY08 the actual vs guidance was:

      Q1 1.76 vs 1.42 (24% beat)
      Q2 1.16 vs 0.94 (23% beat)
      Q3 1.19 vs 1.00 (19% beat)
      Q4 1.25 vs 1.00 (25% beat)

      The guidance and results were based on subscription accounting. Did you perhaps compare the guidance (subscription accounting based) against actual restated earnings following the accounting rule change? If so, it explains the big hump in the middle through the end of 2009 when subscription accounting was eliminated in Q1 2010.

      Regards,
      Stefan

      • http://www.asymco.com Horace Dediu

        Yes, the comparison is between guidance and re-stated earnings. Thanks for pointing this out.

  • Anthony Finta

    One take is that any share of stock is just a piece of paper, and there is a market for that piece of paper. You can say psychology has just as much to do with the price of any company’s stock as any real technical factor or “fundamental” (earnings, growth, PE, etc).

    Sure Apple seems “cheap” as a stock looking at the PE, but the massive psychology/history of Apple the corporation must definitely be counted as part of the picture here. If Tim Cook where to announce a 4 for 1 split, who doubts those new shares wouldn’t run from around 100 to 130 or 150 in weeks? They easily could, for no fundamental reason at all.

    I think an interesting way to look at APPL is to think of how many “companies” they really are – the are the SONY of SONY’s prime (think Walkman – I am so old I still sometimes call my iPod a Walkman, and Sony Video Cameras, and stereos, etc.). They are MSFT when only 7% of people in the world had a computer (I still think the Mac OS on the laptop/desktop has decades of market share/growth behind it), they are RIMM and NOK at their height. They are the world’s greatest retailer. Etc. etc. Add the height of market caps of the companies mentioned, and APPL at $400 a share is a bargain. But that is just math :)

    • Anonymous

      It’s not just a piece of paper. It’s approximately 1 billionth of a share in a corporation, in Apple’s case a corporation that has nearly $90 billion in cash or equivalents and a nearly iron-clad certainty to grow that cash horde far larger. It’s psychology in that people’s appreciation of the value of a corporation can be affected by so-called professional analysts and various pundits and spin doctors. But real value can’t be discounted.

      BTW, Apple has about 10 times the cash Amazon has, and that ratio is going to be getting much, much larger due to Apple’s amazing margins versus Amazon’s pitiful margins. IMHO, that cash should be subtracted from the market capitalization of each company. Such an “adjusted market capitalization” would again show just how undervalued Apple stock is. The “adjusted market capitalization” is heading towards zero!

      • Davel

        Anthony has a point. The myth is that markets are rational and that these metrics that were invented have a causality that translates to the market.

        There is the efficient market thesis which is crap. The only thing efficient about the market is that it shows the price people are willing to buy and sell at the time.

        Why are there bubbles? And then the market wakes up and the market or stock collapses. Economics is full of psychology. If you convince people the future is bright they spend money. If they feel it is dark, they horde money.

        Something is at work in the way Apple is valued and it is not fundamental analysis and comparisons to ‘like’ tech companies.

      • Anonymous

        Like you say, the market eventually wakes up and the bubble collapses. With that point you’re saying that the market eventually comes to its senses, or rather improves its sense.

        If Apple is grossly undervalued then that inverted bubble should eventually pop. Even if it stays constantly undervalued the price will grow as cash continues to pour into the company at a “surprising” rate.

        Psychology tends to have a shorter term effect while reality eventually takes over. If you’re day-trading then psychology and news-bites may be the primary influence on price. But remember that you’re just in a betting game against other investors and the big players have better systems in place so, like in Las Vegas, you’re likely to loose in the long run.

        If you’re holding stock for years then the fundamentals will rule and your investment will follow real value creation.

      • Anonymous

        Exactly. Apple’s burgeoning cash is destined to become the counter to the falling P/E. From the “long” perspective, as it continues to grow its influence on the P/E will increase. Will its growth slow? Eventually. But it’s not slowing now, nor is it showing any signs of slowing.

        There are a lot of “bets” being placed that Apple’s growth will slow sooner rather than later. If it doesn’t do so, Apple’s stock will rebound strongly, as investors realize they’ve made the wrong bet. Personally, until I see some concrete signs of slowing, I’m perfectly willing to give Apple the benefit of any doubt.

      • http://www.asymco.com Horace Dediu

        I don’t think the stock will react to the increase in cash. It’s even possible for a great company to be valued below book value. What causes a stock to move is the dawning of a new perception–a realization there there is value where none was thought to exist. What causes a stock to stagnate is the absence of surprise.

      • Anonymous

        Last quarter notwithstanding, Apple continually surprises. As I said in an earlier post on this thread, investors are continually surprised by Apple’s growth. They’ve ben convinced that it can’t continue. And so Apple’s stock price grows by fits and starts, and its P/E ratio keeps dropping as the E part of the equation blows away the P part of the equation.

        Does Amazon continually surprise? I’m not of the opinion that it does. And yet Amazon’s stock growth matches or exceeds Apple’s stock growth. That suggests that there are other forces driving stock prices than surprise.

        You may be right that the stock won’t ever react to the increase in cash. I’m not so sure. Apple’s P/E is beginning to approach Microsoft’s P/E. What happens when it equals or drops below it? Perhaps the market will be forced to weigh the relative merits.

      • Gregg Thurman

        Dave, this is precisely why I do not use the term PE. I believe WS has corrupted what PE measures, and in doing so have come to believe that PE’s can be good (to low), or bad (to high). The reality is that “PE” is what it is, neither good, nor bad. That’s why I use the term ISM (Investor Sentiment Multiplier). I do this because the ratio Price/Earnings is measuring the market’s sentiment towards an equity.

      • Anonymous

        I agree that P/E’s can be a lousy barometer of “market sentiment”. But that doesn’t mean they can’t be useful in other ways. The P/E of Microsoft, for eample, clearly reflects a company in limbo. The P/E of Research in Motion clearly reflects a company in trouble.

        On the other hand, the P/E’s of Apple and Amazon don’t appear to fit the mold. Their respective P/E’s are being distorted, and have lost their usefulness as barometers. At the same time, they become extremely interesting by the simple fact of their distortion. They speak of larger forces at work, kind of like how light can be bent by a strong enough gravity field.

      • Secular Investor

        PE on its own is virtually meaningless. However forward PE related to growth (i.e. PEG) is a very useful tool for valuing many company’s shares and for making comparisons between different companies in similar industries.

        However, getting your growth estimates right is the key to making accurate PEG assessments which lead one to identify companies which are wrongly priced by the market, being either under valued or over valued.

        For example, taking two extremes Apple & Amazon, and using Yahoo consensus forecasts we can see that there is something very wrong about their respective share prices.

        Apple has a forward PE of 9.96 and 5 year EPS growth forecast of 19.19% pa which results in a PEG of 0.52.

        Amazon has a forward PE of 103.41a 5 year EPS growth forecast of 22.00% pa which results in a PEG of 4.70.

        Looking at the above two widely different PEGs tells me that there is something very wrong about the share price of either Apple or Amazon or both! Probably the analysts’ consensus forecasts are wrong by a very wide margin.

        Fair value for PEG is generally reckoned as 1.00 i.e. forward PE should equal EPS growth rate.

        If we reverse the process, to justify Amazon’s PEG of 4.7 requires an EPS growth rate of 103.4% pa for 5 years. This suggest that the market has valued Amazon EPS to grow over 34 fold in five year. – overly ambitious and highly unlikely.

        If we do the same calculation for Apple’s PEG rate of 0.52 it would only require Apple to grow at 9.98% pa for 5 years. This suggests the market has priced Apple as though it will grow its EPS by only 60% in 5 years, which appears obviously ridiculously conservative.

        As Horace Dediu rightly says, what tends to drive share prices up or down are positive or negative earnings surprises.

        These surprises have the effect of forcing analysts to raise or lower their earnings forecasts.

        In the case of Apple we can see that the company has repeatedly beaten Analysts’ forecasts, which has the effect of ratcheting up the share price time and time again.

        Even though Apple has suffered considerable PE compression for five years or more, its rate of growth has been so great and it has beaten analysts’ forecasts by such wide margins that the share price has grown very strongly.

        Unlike many investors I am not dismayed at the ridiculously low Apple share price compared to the company’s growth rate for a couple reasons.

        Firstly, it as near to a racing certainty as one is ever likely to find, that Apple will continue to exceed Analysts forecasts by significant margins for the foreseeable future. This will have the effect of watching the price up again and again and again.

        Secondly, the fact that it is so under valued means that the downside risk is considerably reduced, which allows me to be confident about leveraging my investment in Apple, thereby magnifying the gains.

        Thirdly. margin compression can only go so far, which means during the next few years Apple’s shareholder will enjoy a greater proportion of the EPS growth as growth of the share price.

      • Anthony Finta

        Joe I think you are not getting my point – -“It’s not just a piece of paper. It’s approximately 1 billionth of a share in a corporation” – I am definitely arguing that it is a piece of paper – if it really was “1 billionth of a share” (and I am assuming you got that number from shares outstanding?) it would have a near definite/real value based on earnings and cash. But it doesn’t! The stock market is a “market” – these pieces of paper are bought and sold for many more reasons than what they are “worth” – and of course they may “represent” a share of the company in name (and even legally as a proxy, etc.) but they are still… pieces of paper! :)

      • Anonymous

        Of course. And Amazon is a classic example of what you are contending writ large. But that’s precisely my point. This is a battle between a market psychology and a company’s fundamentals. It’s the irresistible force meeting the immovable object. And as such, its utterly fascinating.

    • Michael Corrado

      Any share of stock in ANY company is just an idea. Apple is as strong as a company can be, with phenomenal momentum. The conceptual stretch between what a company is supposed to look like, if it’s a winner, and the more forgiving perception of companies that are deemed winners while showing much worse fundamentals and being more amply rewarded by the market, is really clarified by this strange Apple phenomenon. There is definitely something psychological going on here in how the market doesn’t reward Apple share price with valuation commensurate with other stocks.

      It’s just freaky. This could be something new. I’ve never seen anything like this – has anyone else? Apple is just killing and killing every market it enters, and the equities trade yawns and goes ho hum.

      It’s this crazy disconnect that makes me wonder about the “max pain” phenomenon in puts and calls. Are there entities big enough in equities markets to do such gross manipulation of stock prices, when there are so many shares of Apple outstanding, such that one would think manipulation is impossible? If so, it’s collusive. Then, if the big hedge funds etc. are colluding, they have seriously gotten stuck on a low valuation, when the market could bear a much higher valuation.

      Or, it’s like the “iPad Death Watch,” and the market makers are just idiots.

      • Anthony Finta

        I don’t have a specific but in about 15 years of trading yes, I have seen companies with valuations that are way out of whack, in both directions. I will try to come up with one that compares –

  • Gregg Thurman

    Horace, did you use Apple’s restated earnings the period FQ3/2007 through FQ1/2010? If you did that would account for the huge guidance deficit you noted.

  • Anonymous

    I agree with you that Apple’s EPS guidance is less useful. But their revenue guidance has been more or less pretty consistent. In my post-earnings analysis, the reason I use only 2-years of data is to capture the most current trend by Apple’s management. I think there was a huge shift in how Apple’s management operates in terms of their guidance after the crisis and after the accounting change. It’s as if you can see the company as two different beasts in pre and post crisis.

    But revenue guidance is the more relevant issue right? Like plotting revenue guidance is key because if you have the revenue number, then you can probably accurately extrapolate the EPS number. That’s why the number I focus on in terms of Apple’s guidance is what they guide for in revenue.

    A big reason their EPS guidance tends to be psychotic is because it is built around a lot of conservative estimates by Apple. For example, Apple will guide for 37% in gross margins when it will actually report 41%. Then they will guide for a tax rate number that is far off the market. So all of these other issues play a role in causing a lot of volatility in the EPS guidance.

    Thus, revenue guidance is key here. Apple has been pretty consistent when it comes to revenue guidance as it tends to beat that number by 12-18% post-crisis and post-accounting change.

    • Anonymous

      Assuming a 15% difference between Apple’s revenue guidance and their actual fiscal 1st quarter performance, that would indicate revenues of about $38.3 billion. Last year same quarter, revenues were $26.7 billion, or a 43% increase in revenues yoy. It would also represent a 35.3% increase in revenue over the previous quarter (Apple’s fiscal 2011 4th quarter).

      Apple’s fiscal 2011 1st quarter recorded an increase in revenue of about 31% over its fiscal 2010 4th quarter, resulting in an increase in Apple’s stock price of about 10% (from $315 on 10/15/2010 to $348 on 1/14/2011). Assuming, as you suggest, an increase In revenue in the same general ballpark (i.e., 30-40%), then can we expect to see Apple’s stock price pop a similar 10%, as a minimum? Assuming we take the Apple high of $422, that would indicate a pop to at least $464/ share sometime in January, 2012.

      • Westechm

        Apple’s guidance for the current quarter is revenue $37 Billion, and EPS $9.30. If actual revenue is 15% above guidance it would be $42.55 billion. To achieve this they would have to sell about 50,000,000 iPhones and iPads combined. This should give Apple an EPS of about $11.30 which would be about 43% above EPS guidance.

      • Anonymous

        You’re correct. I think I grabbed the wrong quarter’s earnings. And that would mean Apple’s revenue growth this quarter over last quarter would be closer to 50%.

    • Anonymous

      Just a little caveat:

      One big difference between Apple’s 4th quarter this year and last year, however, is the “late” introduction of the new iPhone. That has moved the big iPhone sales quarter to this, Apple’s 1st quarter. It’s quite possible that this may make any active comparison of revenue growth yoy out of whack. Accordingly, that 30-40% ballpark figure for revenue growth this quarter is likely to be on the low side.