Markets are difficult to measure. Mainly because the information is not easy to obtain and that which is obtained is not made public. Collecting, analyzing and filling in the gaps is big business with many firms involved in selling it.
However, with all the analysts and companies selling and promoting their “numbers” it’s important to understand the difference between the methods used. There are for instance at least the following measurements:
- Units sold to end users. For example NPD or GfK data of retail transactions. Also Gartner’s estimates for phone units sold.
- Units sold to the channel. For example units recognized on income statements usually reported by companies. Also IDC’s estimates for phone units sold.
- Units in use. For example comScore and Nielsen survey data.
- Units “activated”. The measurement Google uses to describe Android performance.
- Intent to buy. For example ChangeWave surveys of early adopters.
- Utilization rate. For example browser statistics.
Each measurement tells a different story about the market but the best story is told when all data is analyzed in a combined integrated market review.
Before diving into that it’s important to understand the difference between the first and second measurements or the difference between shipped and sold.
What does “Sold” mean?
During my talk at the first Apple Investor Conference in January I said that I would pay very close attention to the Machinery, equipment and internal use software line item from its PP&E during the next quarterly report (it appears on Page 13 in the latest report).
The reason I consider this important is because capital spending has provided reliable foreshadowing of iOS device production. This is itself because Apple invests in the equipment used in the manufacturing processes for its devices. The more spending on equipment, the more production capacity is brought to bear and the more units are produced. Since iOS devices tend to be supply constrained, the more units are produced then the more are sold.
The first quarter of the fiscal year saw a very small increase in CapEx which caused me to “backload” spending later in the year. By watching this spending, we can assess approximately when and for which products is investment allocated. If the spending happens early then we can anticipate an early update to the iPhone. If it happens late then we can anticipate a late release. So has the ramp-up begun as of the second quarter (first calendar quarter)?
The following chart begins to give us the answer. It tells the story of spending by tracking the change in asset values:
Stripping out the Machinery and Equipment portion (in yellow above) and overlaying the following quarter’s iOS shipments yield the following composite graph:
I first noted a correlation between Apple’s share price and its balance sheet a year ago. In February, when I last checked, Apple’s share price was priced nearly at 4.6 times its cash value. The stock has had a brief rally but has returned to the trend line it’s had since late 2008.
I should emphasize that this correlation between cash and price is abnormal. It should not be happening. Share prices for growing companies should be tracking its future potential, not its assets. I’m only presenting this data to highlight this abnormality. There is no fundamental basis for this happening. In fact, there is a basis for this not happening.
The relationship above is a symptom of another pattern called multiple compression that can be seen in the following charts:
I analyze my performance every quarter to see if there is any pattern of error in my analysis. I devised a scoring method analogous to the grade point average system used in most US schools. You can read about the fourth quarter here.
This quarter I made one public release of data here and a semi-public update on the iPhone shipments here.
The resulting scores for both early and late estimates are shown in the table below:
The following charts show Google and Microsoft revenues and operating income:
Both companies showed healthy growth. Revenues: Microsoft 6%, Google 24%. Operating Income: Microsoft 12%, Google 48%. Google had a particularly weak margin Q1 2011 so its income growth appears very strong.
The surprise in Microsoft’s performance was
One of the arguments made for the cause of the increase in Apple’s share price of late has been that dividends would attract more institutional investors and provide more liquidity to Apple’s shares. Can we test this argument?
We’re not dealing with speculation. The decision to start paying dividends was made three weeks ago. It makes sense to assume that this new information has been absorbed by the markets and market participants have adjusted their positions. Funds that were previously restricted in their investment in Apple due to its lack of dividend policy, could now go ahead.
However, as the following chart shows, the share price climbed continuously before and after the dividend declaration of March 19th (shown in red). Trading patterns did not show unusual highs or lows. In fact, after March 19th the trading volume decreased on a weekly basis.
The other indicator is institutional holdings.
At the end of 2011 Apple’s net property, plant and equipment (PP&E) was $7.8 billion. This reflects $12.34 billion gross PP&E net accumulated depreciation and amortization of $4.5 billion. The depreciation and amortization increased by a total of $533 million and the gross PP&E increased by only $572 million. I say “only” because in the previous quarter PP&E increased by $1.42 billion. If we assume that this growth is equivalent to capital expenditures for the quarter, it’s also a very small amount given the company’s stated intentions to spend $7.1 billion during the fiscal year.
The gap is illustrated in the following chart:
Apple’s share price has increased rapidly in the last few weeks. The rise to $600 was swift and broke the pattern of slow growth the the stock was able to obtain over the past few years. The level, however, shouldn’t have been a complete surprise.
I think Apple is going to $600…It’s really not that complicated. Apple has a number of key drivers in its business model which have yet to be properly priced into the stock because I think it’s very cheap at this level.
-Stephen Coleman, chief investment officer at Daedalus Capital
This prediction was made October 26, 2007. On that date Apple’s share price closed at $184.7. It may have seemed like a bold bet, but as Coleman noted, the reason why it would reach $600 was easy to spot.
The real story on how I get to that valuation doesn’t even involve the sale of (the Leopard operating system) or the growth in the Mac business. How I get there is through the iPhone itself.
What was not easy to tell was when it would reach $600.
As the chart below shows, the last quarter (fourth calendar 2011, first fiscal 2012) was robust with 116% earnings growth and 73% net sales growth. I’ve heard many superlatives used to describe it. It is certainly exceptional but it was not as good as the second calendar quarter of 2011.
Sales grew faster both in CQ1 and CQ2 of 2011 and earnings grew faster in CQ2. It was in many ways a return to normality due to the iPhone returning to 133% revenue growth after the lull of the transitional third quarter.
Now it’s time to consider the current quarter.
In the recent event discussing Apple’s cash plans, Tim Cook stated that the primary objective of the stock repurchase program is to reduce dilution from the ongoing distribution of shares to Apple’s employees and executives as part of their future compensation.
The amount allocated to this is $10 billion over a three year period.
This sets up an interesting analysis. The company is saying that they will continue to pay employees with newly issued shares (in addition to wages) but that a portion of those shares will be purchased back from the market to reduce dilution.
To understand the impact, it would make sense to look back and observe how many shares were issued in this way historically and consider how much $10 billion buys.
The following chart shows the quarterly change in shares outstanding.