Seeking Alpha

Marc Gerstein

 
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  • Apple's Annual Earnings Estimates Are The Ultimate Sandbag And The Ultimate Opportunity [View article]
    "That seems bizarre to me. "

    Everything about the guidance game is bizarre.

    "I wonder how well this would apply if some company were consistently too optimistic?"

    Don't bother wondering. The guidance game is not a symmetrical event. Nobody gets fired and nobody gets sued when surprises are positive. That same can't be said when surprises are negative, which is why companies long ago stopped trying to give rosy guidance (as they often did 25-30 years ago before the guidance game got going).

    "Does she really get to keep her job making ridiculous assessments like this just because she wasn't over? "

    See above.

    Look, every profession, and I mean EVERY profession, has its politics, etc. If you want to work with analyst info, you need to learn the way it is. A decade ago, many investors saw how financially devastating it was to ignore that. If you don't want to deal with it, then just do your own estimates and don't bother to look at what analysts are doing.
    Oct 18 01:52 PM | Likes Like |Link to Comment
  • Apple's Annual Earnings Estimates Are The Ultimate Sandbag And The Ultimate Opportunity [View article]
    "Why do you think the pros are consistently so wrong on the biggest name in the stock market?"

    Are you familiar with the guidance game?

    Analysts are human; they don't have crystal balls. More importantly, it's a felony to work with "inside information" if it can be obtained. So much of the input from companies comes from guidance publicly issued by the companies. We hope companies make good-faith efforts to guide as accurately as they can (they, too, can't predict the future, but at least they do have a bigger stock of information from which to draw). Most do and deviations typically occur because companies, too, are staffed by humans, and companies subscribe to the same econometric forecasting services as those used by Wall Street firms.

    Analysts are free to reject company guidance, but doing so is rarely a good idea. Absent unusual conditions, companies are presumed closer to the situation and to know better, to the point where it would be reckless for analysts to diverge too far. Occasionally, analysts will find reasons to diverge, but that's the exception, not the rule.

    So most of the "blame" for consistently lowball estimates lies, not with the analysts, but with Apple, a company that has habitually guided low. While it's fine for the amateur to say "Apple always lowballs, so I'm going to estimate X% above the guidance." It's a lot tougher for a professional, who is legally and ethically accountable for what he or she does and and why he or she does it, and hence needs a bona fide reason to estimate above guidance (the amateur argument -- because they always beat the numbers -- won't cut it for a pro).

    Hopefully, Apple is doing the best they can in formulating guidance and are finding themselves favorably surprised by outcomes. If, however, they are deliberately lowballing in order to generate the excitement surrounding favorable surprises, that could get incredibly ugly at some point in the future.
    Oct 18 09:34 AM | Likes Like |Link to Comment
  • How The Steve Jobs News Impacts Apple In The Long-Term [View article]
    "Steve Jobs has no more than a negligible impact on Apple's current innovation, earnings and future. When I say he has no more than a negligible impact, I'm being generous. The fact of the matter is, once a company reaches the size of Apple, there are so many moving parts that make the company what it is that one person can no longer have such a massive impact on any aspect of the company."

    I don't know; I'm not an Apple insider.

    Yes, there are countless moving parts, but others writing about Apple talk about Jobs as something of a control freak who took a very active hand in details and was very quick to buck the organization and mandate things, or veto things, which can be good (as we've seen lately) or bad (the old days when apple was sliding into oblivion). Even though a leader is only one person, we can't underestimate the impact of a great one. And none of us can really know the impact of his departure until some time passes. We can express opinions, but we can't know.

    Speaking of opinions, I can just as easily envision Apple winding up better or worse down the road.

    The worse scenario, the one many envision, would involve Apple turning into just another company, devoid of the vision that drove it in the past decade. If that's so, there's good reason to assume competitors will have a much easier time making inroads and that Apple will have a much harder time coming up with spectacular new-product hits.

    The better scenario might suggest that vision was great but that inadequate attention to business was threatening the company. We've seen how, in effect, Apple launched Android by stubbornly confining iPhone to AT&T for so long giving rivals an opportunity and a motive to come up with an alternative. And without jobs, might iPad finally incorporate Flash. iPad may be hot among certain fashionable crowds who have money to buy what they like right now, but as soon as I mention it to me teenage son, he says "No way. They don't have flash." I know other teenagers who flat-out turn down parental offers of iPad and others discussing Galaxy and Zoom. Even if Flash is overrated in terms of actual need, don't underestimate the impact its omission can have on iPad's image among some consumers (especially those not yet impacting market share #s in a significant way because aside from what they can squeeze from parents, they don't have money -- yet) . And speaking for myself, I wonder if a new less-visionary Apple might soften a bit on the firm marriage between hardware and iTunes, something that might make me a heck of a lot more interested in buying. I had seen in Jobs' vision something of a circa-1990s AOL-type we'll-rule-the-world attitude diminution of which might actually open it up to customers who have been otherwise leery.

    I don't know what will be better down the road: vision or business sensibilities. Time will tell.

    I don't know how much money can be made in Apple stock, but i suspect the real money will come from writing books about Apple. :-)
    Aug 25 08:09 AM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    Presumably, "Zaky" (how cute!) is adding long-term investments to cash and equivalents. That's not usually done, but if he wants to, OK. That still leaves AAPL at 21% vs. CSCO's 51% just on cash and ST inv. MSFT is 25% on just on cash and ST inv. If you want to add their LT investments, you'd have to raise them to 30.1%. So it remains that just among these three big-names, APPL is the weakest Cash play (again, remember that CSCO and MSFT are already paying dividends).

    And by the way, when I said I don't like APPL (in another comment here), I was referring to the stock. I still enjoy my iPOD and am 50-50 as to whether my next phone will be Droid or iPhone. Also, by the way, Zaky and possibly others clicked on my Forbes link and saw that I went cold on Apple valuation on 3/23/11 when it closed at 339.19. Since then, the stock has done a whole lot of nothing, having closed today at 332.24. But I wasn't always cold toward the stock. If you followed the link in the Forbes article, you'd have seen my earlier one from 6/25/10, when I defended APPL valuation; the stock was then priced at 245.22. Were they good calls? That's for you all to decide. But if you think bullish ahead of a 38% gain followed by a thumbs down ahead of a sideways drift makes me a loser, then so be it.

    Those are my only full-fledged articles on Apple's valuation. There was also an April 2010 instablog discussing some disturbing (in my opinion) analogies between Apple and AOL when it ruled the world and was revered by a legion of investors. (Those factors are why it's 50-50 I'll go Droid.) Note, too, that I did not take that occasion to go sour on the stock which I assumed, correctly it turned out, would ignore such issues in the relevant time horizon.

    So anyway, I'm really not sure what's left for me to say on this topic, at least unless/until there's a meaningful change in the status of Apple stock or the company. You know how I feel about Zaky's analysis. You know how I feel about Apple's valuation and you can trace it back to 6/10. You also can also look up a much more comprehensive explanation of why I, despite being a customer, have reservations about how the company is approaching its business. Read up if you wish. Ignore if you wish. Like it if you wish. Hate it if you wish. nobody here gets to say who wins or loses; only the market can do that, and we're all going to have to just sit back and wait until it's good and ready to tell us. So I'm going to un-check the follow-comments box now. If anybody feels a need to further discuss Apple with me, use the Seeking Alpha messaging capability.
    Jun 8 11:47 PM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    No, I actually used sec.gov.
    Jun 8 11:02 PM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    "I agree with you that higher price to sales ratios will eventually have to contract in the same way P/E ratios eventually contract."

    Good, now we're making some progress.

    "The stock probably does have limitations in how high it can go."

    No kidding!

    "We're not going to get these 100% moves in the stock anymore. But at the same time, I think you take an overly bearish stance in your article and haven't considered the cash. "


    As of today, AAPL's cash amounts to about $31.60 per share, which is about 9.5% of the stock price. That's OK, but not worth such a big fuss. (MSFT, for one, has a lot more -- cash per share at 25% of the stock price, and a 2,7% yield to boot.) Cisco only has a 1-and change yield, but cash per share there amounts to 51.6% of the current stock price.

    As to future cash flows for Apple, that will, as with other companies, depend on the fortunes of sales growth, margin, spending needs, etc.etc. etc. It's a factor, but to carp about it as you do ("you haven't considered the cash" etc.) is, in my opinion, way out of proportion. I think readers need to remember that they are not restricted to Apple or nothing. There are plenty of other stocks out there, even cash plays.
    Jun 8 03:59 PM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    "And price to sales is not obvious?"

    You don't seem to get it. :-)
    Jun 8 10:30 AM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    "What it does is remind people that using some valuation metric that the market really isn't focusing on is highly counterproductive. Like Marc Gerstein's article on P/S. If no one is really focusing on Apple's P/S, then how does it really help anyone to make this the central focal point for determining future value? "

    I know the self-proclaimed author of the most important thing you will read on Apple's valuation will vehemently disagree, but for the rest of you . . . Value is about looking for ways to exploit that which market doesn't know or chooses to ignore. Value is not about obsessing on the obvious.
    Jun 8 09:39 AM | 1 Like Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    "Two variables that matter most:

    1. What will Apple's EPS be a year from now?
    2. What will Apple's P/E ratio will be a year from now?

    Those two variables determine Apple's future price. "

    Ah would that life were so simple. You need to focus on a lot of things to be able to estimate EPS a year from now, and you need to focus on what the EPS will be like in the future beyond a year (and all the things that help you make such assumptions), etc. because that will have a lot do do with what the P/E ratio will be a year from now.

    "Really try to focus more closely on these two questions. That's all that should matter. "

    Thank you for the advice. Actually, though, I think I've been in this business long enough to know what to focus on.
    Jun 7 12:57 PM | 2 Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    Oops... good typo catch. The last line of the next to last paragraph should refer to PS instead of P/E.

    As to elaborating on the impact of P/S, I wrote about this a few months ago on Forbes.com. You can see the article here:
    blogs.forbes.com/inves.../
    Jun 7 12:27 PM | Likes Like |Link to Comment
  • Apple's Valuation: The One Article Every Investor Should Read [View article]
    What a preamble!

    "This will be one of the most important articles I'll ever write on Apple's (AAPL) valuation, and it's the one piece that every individual investor should read. . . . "

    It's a shame an article so boldly introduced fails to address one of the most interesting aspects of AAPL's valuation, the stark divergence between AAPL's P/E ratio (and others in the P/E family) and its P/S ratio, which is quite high relative to Apple's traditional hardware business and its newer specialty retail business (iTunes).

    While P/S is not the default metric of choice for valuation (as many learned the hard way a decade ago), it remains very valuable for the insights it can sometimes provide in odd cases, such as this, where pretty-much anyone who can spell PE knows Apple's PE ratios are low, yet an obviously huge contingent among those who invest real money persistently refuses to move them higher. (I seriously doubt there;s an investor out there who will read this article and say "Holy cow, I thought AAPL was trading at 30-50 times earnings. Now that Andy Zaky tells me the P/E is only in the teens, I've really got to back up the truck and buy a ****load of AAPL shares!"

    You correctly observe, in the article, that you "have repeatedly stated that the only valuation metric that matters is the one the collection of fund managers care about." Yes. Now you need to actually do that by addressing the P/E - P/S relationship and discuss why you think fund managers are wrong when they refuse, as they are obviously doing, to push the stock higher; a move that would raise the P/E (which would, in a surface-level analysis) seem OK, but which would also push the already-very-high P/E up to even greater heights.

    I think you owe it to your readers to go beyond the surface when you describe your article as "the one piece that every individual investor should read."
    Jun 7 11:57 AM | 11 Likes Like |Link to Comment
  • Apple: The Most Undervalued Equity in Techdom [View article]
    Oh, I forgot to mention . . . just for you . . . the P/S ratio isn't high. It's actually low. Now you can really exhale.
    Jun 3 04:05 PM | Likes Like |Link to Comment
  • Apple: The Most Undervalued Equity in Techdom [View article]
    Would you be happy if I said I was bullish on Apple. OK. Just for you. Assume I'm bullish. now you can relax and enjoy your weekend.
    Jun 3 03:55 PM | Likes Like |Link to Comment
  • Apple: The Most Undervalued Equity in Techdom [View article]
    I've already said what I said re: P/S above and elsewhere and see no point in repeating myself. Beyond that, hero worship and homage to past performance are, actually, major sentiment-based factors driving the stock. Given all that's out there, including a ton on Seeking Alpha, I don't find it necessary to catalog everything although here's one example of homage to past performance that just so happens to be in my field of vision right now: "I care that this company is minting money, growing earnings, and making a great deal of money for its long term investors." (Actually, present tense is not terribly useful for this sort of thing; you'd really have to edit it to: "I care that this company has been minting money, growing earnings, and making a great deal of money for its long term investors.")

    Look, you like the stock. I don't. That's life.
    Jun 2 09:45 AM | Likes Like |Link to Comment
  • Apple: The Most Undervalued Equity in Techdom [View article]
    That's fine. Personally, I hate situations distorted by hero worship such as we're seeing with AAPL. But if you're into situations like this, what the heck. To each his own. hero worship and past performance satisfies you, then by all means put your money to work in AAPL.

    By the way, I'm not at all scared off by cries of overvaluation. For example, I rode GMCR up for year believing the Street to have drastically underestimated the company's growth potential. I had confidence in my GMCR story and rode it, although many disagreed (although I like to think I made a more sold business case than I'm seeing people make nowadays with AAPL, but that's just my opinion.)

    Remember, too, what I'm carping about here . . . the labeling of Apple as the most undervalued stock in techdom, a claim that is shockingly superficial. If you like Apple based on some other theory, then go for it. But I really hope nobody who owns AAPL is there because of the belief it's a value play.
    Jun 1 02:16 PM | Likes Like |Link to Comment
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