It's been a while since I've written about Apple (AAPL). I haven't until now because I felt the stock had nowhere to go but down simply because it was too big (enormous market cap for too few earnings).
Think about it this way: When AAPL was trading at $182 it had a $156 billion dollar market cap but was slated to earn $5.22 for 2008. At that market cap, AAPL was the eight largest company in the world. Only Exon, EON, China Mobile, GE, Walmart, MSFT, and PG had market caps over $200 billion at the time.
In order to vault to a $200 billion dollar market cap, AAPL needed to demonstrate either big profits or growth in earnings. The $5.22 just didn't do it. By the law of mass, companies that become larger grow more slowly; hence, small companies can have startling growth while large firms begin to slow theirs.
Unfortunately, it appeared to me that AAPL had a heavy load to lift if it was to increase its share price to a level of a $200 billion dollar company, $240 a share. At the time, it seemed AAPL had no where to go but down.
The bar just got lowered substantially. AAPL is now a $99 billion market cap company, no longer a member of that tiny club of behemoths. It's a stock that has room to run.
So, now AAPL has a far easier path to go. Analysts have lowered expectations. However, there is one easy way for Mr. Jobs and company to vault this stock much higher, one that would take perhaps a flick of the pen to achieve, and one that no one is mentioning: AAPL could change how it accounts for its iPhone sales.
Currently iPhone sales are booked over a 24 month period resulting in only a trickle of realized profits appearing. Those deferred sales will become an avalanche of real earnings in 2 years.
Most investors are not patient. Who wants to wait? While AAPL has excellent drivers of earnings in its notebook and computer lines, the big story is the opening of huge world markets to their smart phones.
The booking of profits for these iPhones in the quarter sold would likely boost earnings 25%. What could be easier?
I would urge AAPL to no longer defer their iPhone sales so that investors would see the startling growth the company can deliver. Other companies such as RIMM (RIMM) and Nokia (NOK) book their sales in "real time". Why not AAPL? In the meantime, AAPL has a much lower bar now, a fabulous product line, and increasing iPhone profits coming under the current deferred revenue accounting.
Disclosure: Long AAPL
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This article has 22 comments:
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KenC
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151 Comments
Oct 01 03:41 PM-
TA
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345 Comments
Oct 01 04:09 PMIt's finally reasonably priced - I would take a 1/2 position here and slowly complete your position down to $80 if you can get it.
Hold a tight stop when it goes over $160 and the AAPL fanatic fools start piling in
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JW PhD
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17 Comments
Oct 01 04:19 PM-
Socialism cannot compete!
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503 Comments
Oct 01 04:21 PMI believe AAPL will surprise substantially in the next 2 Qs -- simply because of the global expansion of the iPhone.
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VSD
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51 Comments
Oct 01 04:33 PM-
foxxx333
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1 Comment
Oct 01 04:39 PM-
Shorting Should be Banned
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138 Comments
Oct 01 05:05 PMA true investor would understand and appreciate this, while a trader would not.
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Rawky
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5 Comments
My Website
Oct 01 07:46 PMimg247.imageshack.us/m...
Evidence is everywhere of continued growth and growing mindshare. 20% of US laptops and 35% of revenue was collected by Apple in back to school spending.
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turnkey
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13 Comments
Oct 02 12:04 AM-
turnkey
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13 Comments
Oct 02 12:06 AM-
decoflair
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20 Comments
My Website
Oct 02 05:42 AM-
swissmiss
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1 Comment
Oct 02 09:25 AM-
Apple at 60$
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61 Comments
Oct 02 10:56 AM-
chano
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30 Comments
Oct 02 11:21 AMApple is wise to adopt SOX, mandatory or otherwise imho. The reason is that by booking only 1/24th and feeding forward to the future, the remaining 23/24ths of each month's earnings on affected products, it hurts current revenue figures yes, agreed, but 24 months after July 2007, Apple will be reflecting 1/24th of revenues for each of the preceding 24 months. For Apple then, it will prove to be a happy, if unexpected consequence of adopting SOX that, this measure will have the effect of smoothing the bookable earnings EVERY quarter because, from July 2009, by recognising 1/24th of the current month and each of the preceding 23 months, the seasonal see-saw revenues pattern will be largely smoothed away. After the full two years, any single bad month will only have 1/24th of its impact on that month's booked earnings. Damn good. But wait, there's more. By June 2009, the picture will be full-on full throttle and each month thereafter, the effect of 1/24th slices of an ever-growing installed base will rapidly accelerate the recognisable revenue. Eeesh. NOW go figure this.
The economy is headed into serious trouble and it could take what?? 24 months or more to return to normalcy....maybe longer? Is Apple happy to have that accumulating backlog of unrecognised earnings just waiting to mature and hit the books, just when actual sales may be hurting a little. I damn well think so. Yes it hurts like hell right now to defer recognition of hugely significant earnings. But without adoptin SOX, Apple would have to downgrade forecasts for the next 8 or more quarters. So while all the Dells and Acers etc face devastating PC revenue declines (due to instant earnings recognition) Apple will have a SOX smoothed revenue stream that augments its reported earnings even though the relevant sales occurred up to 23 months earlier.
Sorry for the length of this post but even those who understand the phasing effect of SOX on reported earnings might benefit by seeing the marvellous effect of the deferrals over the full 24 months and the way the smoothing effect adds great buoyancy to reportable results in otherwise turbulent times. Put this into Numbers and see the graph. It's worth the effort and you will likely be borrowing to buy AAPL.
So I disagree that it would be advantageous to abandon SOX, even if possible. In these times of economic gloom and sales downturns, it will be a godsend to Apple's earnings reports.
Phew, I had better quit posting and write another report on Apple or on the inadvisability of drinking polluted water......
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Apple at 60$
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61 Comments
Oct 02 11:58 AM-
Palo
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2 Comments
Oct 02 02:57 PM-
anon99
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2 Comments
Oct 02 03:13 PM- Apple said margins will come down in this quarter. Seems like it did not register with most analysts when they said so. Not it is finally hitting them.
- In this economy how many people will buy a $1000+ Mac laptop versus a $600 Dell/HP laptop. Add to this the fact that Apple has only one laptop at $1000, everything else is more expensive!!! Also Dell/HP laptop's are getting hipper and Windows Vista is relatively decent.
My Advice: I would take half a position around $100'ish and then another half if drops to $80'ish. If it does not drop till $80'ish then wait till after earnings for stock direction to firm up. Too much risk right now becuase of the economy and possibility of earnings miss. Look at how GOOG and RIMM got punished.
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TA
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345 Comments
Oct 02 06:46 PMI only want to make money, I couldn't care less if this was AAPL or IBM
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H-Bomb
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40 Comments
Oct 02 08:10 PM-
Apple at 60$
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61 Comments
Oct 03 11:18 AM-
Apple at 60$
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61 Comments
Oct 03 11:20 AM-
fatalbert707
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1 Comment
Oct 04 05:09 PM