lesson to independent analysts:  don’t believe your own press

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    Posted: 18 October 2011 07:55 PM

    As a relative newcomer to the board—and as a long-term investor who took a paper loss in the six figures after hours—i believe some self-reflection is in order.

    and here is a theory.  after beating WS quarter after quarter, the independent analysts got cocky.

    they believed their own press, esp. as P Elmer Dewitt lionized them again and again in his apple 2.0.

    we will be just fine in the longer term:  everything TC said on the call today (save some supplier worries on the mac side) was v. v. positive.

    this is not the secular downturn some here have feared.

    but it will be painted as such by sensational media and click seekers.  APPL has peaked, siri doesn’t work, iPhone is tanking, an droid is coming, tim cook is no steve jobs, etc etc etc.

    it will be a tough few weeks….wouldnt be surprised to see $350 or even $320…..but the long term direction remains decidedly up.

    or so i hope.

    [ Edited: 18 October 2011 08:28 PM by Xtra ]

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  • Posted: 18 October 2011 08:17 PM #1

    Xtra:

    I stand behind my numbers. My numbers were based on anticipated growth in the overall eco-system. Right or wrong I will recalibrate based on results. Clearly, the underlying eco-system is not as developed as I expected and product demand remains heavily dependent on new product introductions.

    There are a number of issues in Apple’s results that cause me concern. I will address those in a blog post tonight.

         
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    Posted: 18 October 2011 08:27 PM #2

    DT=


    Thanks for having the guts to answer my call for self-reflection..  At least you have the courage of your convictions—and, rare thing,  a sense of accountability.

    I look forward to hearing your concerns about Apple’s results.  Uncomfortable as it may be, I urge all who were so wrong to push themselves for answers.  My greatest lessons in life have come from my greatest mistakes.  (I hope I am not making another one by alienating the Independent Analyst community.)


    X

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    Posted: 18 October 2011 08:37 PM #3

    Well, then, don’t make it your intent to alienate communities.  Simple as that.

    My only really big problem, from my humble home game estimation alcove, was thinking iPhone sales wouldn’t fall.  They did sequentially, and significantly.  This hurt GM substantially.

    There are two items worth watching re: Apple senior management in the near/medium-term.  I’ll wait for the “what went wrong” topic to post them.

    Also, AAPL 350?  320?  I very highly doubt it.  The same way one shouldn’t get too cocky, one shouldn’t get too panicky either.

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    Posted: 18 October 2011 08:48 PM #4

    Thanks Mav.

    I too expected stronger iPhone numbers, esp. because TC made a point about the iPhone exceeding smart phone industry rate of growth at the 4S launch.

    But you guys correctly warned me not to try to glean anything about earnings from that event.

    Live, learn.

    As for 350 or $320, I fear that a lot of weak hands will head for the exits as the commentariat amplifies the “earnings miss” story line.  Hope I am wrong, and you are just as right to caution against panic/despair as I am about hubris.

    My point about believing your own press, though, was sincere: It is hard to resist when you are being lionized day after day.

    [ Edited: 18 October 2011 08:54 PM by Xtra ]

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  • Posted: 18 October 2011 08:53 PM #5

    Xtra - 18 October 2011 11:27 PM

    DT=


    Thanks for having the guts to answer my call for self-reflection..  At least you have the courage of your convictions—and, rare thing,  a sense of accountability.

    I look forward to hearing your concerns about Apple’s results.  Uncomfortable as it may be, I urge all who were so wrong to push themselves for answers.  My greatest lessons in life have come from my greatest mistakes.  (I hope I am not making another one by alienating the Independent Analyst community.)


    X

    Constructive criticism brings about better long term results. I will delineate a number of concerns in post I’ll publish in just a couple of hours. I standby my work and I will invest time in answering any and all questions.

    Tonight’s blog post is in the context of 39% revenue growth. But I will not attempt “to put lipstick on a chicken.”

         
  • Posted: 18 October 2011 08:56 PM #6

    DawnTreader - 18 October 2011 11:17 PM

    Xtra:

    I stand behind my numbers. My numbers were based on anticipated growth in the overall eco-system. Right or wrong I will recalibrate based on results. Clearly, the underlying eco-system is not as developed as I expected and product demand remains heavily dependent on new product introductions.

    There are a number of issues in Apple’s results that cause me concern. I will address those in a blog post tonight.

    I think you guys did well overall. However the models need to be re-calibrated because we are not familiar with the phone market. I believe there are two phone markets - postpaid and prepaid. In the developed whorl postpaid plans are most popular as there is subsidies from the telcos. In emerging markets like India and China most plans are prepaid because of collections and credit issues. Also in postpaid plans in different parts of the world are they all the same i.e. 24 months contract or are there 12 month contracts in certain countries. With postpaid plans there are significant penalties for early termination of contracts. This will have a major bearing on when consumers upgrade their phones. So maybe it is best to introduce new phones when the majority of plans are due to mature. This thus has an effect on the product cycle and introduction of new models. So would we need to have different roll out dates for different countries based on the tenure of their most popular plans?

    We also now need to remind ourselves that the consumer worldwide is a reasonably rational consumer. He is not going to buy a new phone (old model) when he knows that a new models is due out any time soon. I think this is where we went badly wrong - assuming the consumer in ROW would buy the iphone4 simply because it has recently been introduced in that country. Take for example China. Those who wanted the iphone4s were prepared to wait for it. They were also prepared to pay the premium to the resellers who got the phones from Canada, US, Europe and Australia. In other words I believe a fair portion of sales in US, Canada etc were on-sold immediately to the China market.

    To conclude the phone market is a very different market from the PC or other consumer market. Carrier subsidies and therefore early termination fees mean there will be a time lag before a new product is purchased. We may even need to know the characteristics of each major market rather than just simple extrapolation. Finally, and I have been beating this drum before, over 60% of Revenues come from ROW. As such exchange rate fluctuations do affect GMs.

         
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    Posted: 18 October 2011 09:07 PM #7

    MacOz,

    Excellent points all.  ForEx and contracts are indeed confounding variables, and make any kind of analysis tough.

    But if your suspicion about trans-shipment of US and Canadian sales to China is correct, that means North America was even weaker than it appears.  Glad the 4S is here to turn it around!

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  • Posted: 18 October 2011 09:18 PM #8

    Xtra - 19 October 2011 12:07 AM

    MacOz,

    Excellent points all.  ForEx and contracts are indeed confounding variables, and make any kind of analysis tough.

    But if your suspicion about trans-shipment of US and Canadian sales to China is correct, that means North America was even weaker than it appears.  Glad the 4S is here to turn it around!

    Not necessarily so. iPhones have always been sold on the black market in China. Check the reports ever since the introduction of the iPhone. As an anecdote, during the early part of 2011 it was almost impossible to get an iPhone4 in SE Asia i.e. Singapore, Malaysia and Hong Kong and even Australia as almost every phone meant for these markets made its way to China. This was due to the Chinese New Year period in Jan/Feb 2011.

    If 35 million people in China can post a condolence message for Steve Jobs, you can be assured that they know when new products will hit the market. If they can afford to pay over the top for a new phone why would they buy a soon to be old model.

    I believe it is going to be tough to make forecasts for the phone market but we have to be aware of all these variables. The modern day consumer is connected and reasonably rational with his purchases. Impulse buying will be there but the thought of paying an early termination fee aka penalty mean a delay in purchasing.

         
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    Posted: 18 October 2011 09:32 PM #9

    Let’s not forget that last quarter iPhone numbers were better than expected because of new carriers. They didn’t add ANY new carriers this quarter in order to help manage supplies of the 4S. There’s no way anyone outside of Apple would know that. Lesson learned, I was badly off thanks to the iPhone numbers and will be keeping my numbers to myself from now on (unless Mav asks me grin). Lesson learned.

         
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    Posted: 18 October 2011 09:36 PM #10

    GET UP, CHAD!

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  • Posted: 18 October 2011 09:38 PM #11

    DawnTreader - 18 October 2011 11:17 PM

    Xtra:

    I stand behind my numbers. My numbers were based on anticipated growth in the overall eco-system. Right or wrong I will recalibrate based on results. Clearly, the underlying eco-system is not as developed as I expected and product demand remains heavily dependent on new product introductions.

    There are a number of issues in Apple’s results that cause me concern. I will address those in a blog post tonight.

    I’m with you DT, excepting your thoughts on the need for new product introductions.  I’ve just spent the past couple hours going over Apple’s Income Statement.

    This is not about a supply failure.  It was a demand failure.  It is about weak worldwide economic conditions, especially in the US and Japan.  In markets that sold units well, ASPs dropped much more than usual, suggesting that even in those markets consumers were opting for lower cost models.

    Further, it appears that iPhone sales suffered because of the delay to Q1/12 launch.

    I think we are going to have a sharp sell off Wednesday, but nothing below $385, and then only for a relatively short time.

    Apple’s guidance is key to how long it will take for AAPL to recover.  It is extraordinarily high.  Makes me think management may not be discounting internal expectations as they have in the past.

    [ Edited: 18 October 2011 10:17 PM by Gregg Thurman ]

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  • Posted: 18 October 2011 09:43 PM #12

    Xtra - 18 October 2011 11:48 PM

    As for 350 or $320, I fear that a lot of weak hands will head for the exits as the commentariat amplifies the “earnings miss” story line.

    This latest run up was driven by the return of institutional cash flows.  Under $400 they will view AAPL as a fire sale.  They will wait for a bottom signal before jumping in, but jump in they will.

    You can be sure that TC is going to be spending a lot of time on the phone with major (institutional) investors over the next couple of weeks.  He won’t/can’t give them info not available to the public, but he can reassure them on the Company’s guidance.

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  • Posted: 18 October 2011 09:44 PM #13

    Please remember FQ1 includes a 14th week and that week is immediately following Christmas. Absent the 14th week (which occurs about every six years), guidance would most likely be a bit different.

         
  • Posted: 18 October 2011 09:51 PM #14

    I read this forum and the enthusiasm of people over here. That the independent analysts got it way wrong is worrisome. Every one assumed that IOS 5 introduction in July and its release in Fall will not affect iPhone 4 sales figures. That seems to be wrong. In fact, it points to some fundamental issues about Apple’s execution. It appears to me that Apple could not execute the IOS 5 release with all the bells and whistles in July itself. If they had been able to do so, they would have released iPhone 4S in July itself. iPhone 4S release waited for IOS 5 in October. Asymco made a pointed reference to the need for releasing iPhone 4S in July quarter. Synchronizing the platform with the software is an execution requirement. And Apple failed in this. Execution is the key here and it worries me that Apple which is known to execute phenomenally is lacking in some respects.

         
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    Posted: 18 October 2011 09:52 PM #15

    Xtra - 18 October 2011 11:48 PM

    Thanks Mav.

    I too expected stronger iPhone numbers, esp. because TC made a point about the iPhone exceeding smart phone industry rate of growth at the 4S launch.

    But you guys correctly warned me not to try to glean anything about earnings from that event.

    Live, learn.

    As for 350 or $320, I fear that a lot of weak hands will head for the exits as the commentariat amplifies the “earnings miss” story line.  Hope I am wrong, and you are just as right to caution against panic/despair as I am about hubris.

    My point about believing your own press, though, was sincere: It is hard to resist when you are being lionized day after day.

    I think you are way too quick to judge the independent analysis.  If you didn’t do your own due diligence then fool on you, especially if you risked your own money.  Did most of us get ahead of the numbers, yes but since Apple is a very secretive company, If we misread the trends bad on us, but on the iPhone numbers, Apple reversed a trend of beating the rate of growth of the smart-phone market.  One of the problems with this qtrs numbers was in the assumptions I made.  I assume Apple would continue to expand the addressable market, by adding carriers/countries, but they chose to delay expansion until the new iPhone was released couple that with the delay in the release into the next qtr and you have the makings of a miss in estimation, The other big unknown is the 4-6 weeks of inventory and what percentage is already bought and paid for by the carriers.

    On the iPad this is the first qtr we have a supply/demand balance so guessing what target Apple was aiming for at least in my case was based on build plan estimates, and color from TC at last CC about increasing production from last qtr.

    My GM and Tax estimates were pretty much on target