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Paulo Santos
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I've been trading professionally for about 16 years and also launched www.thinkfn.com in 2004. Thinkfn (Think Finance) carries... More
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  • Yes, I Got Apple Wrong 36 comments
    Apr 24, 2012 5:41 PM | about stocks: AAPL

    I really believe my readers, especially those long Apple (AAPL) deserve a mea culpa. I believed, based on the data available at the time (right before earnings), with close to 1/3rd of Apple's Q1 sales base having reported, that iPhone sales were tracking well below Street estimates.

    And yet, Apple delivered another incredible blowout. Certainly, helped by a monstrous quarter out of China, where demand for Apple's products, even at pretty high prices, is still enormous. Granted, there is now a vast Chinese middle to upper class that really has the means to buy Apple, but it's still surprising that they all got out running at the drop of a hat.

    Again, I missed this call. Badly. But would I do it the same again if presented with the same information? Yes, I'd have to. One has to play the market logically, even if some calls will be wrong some times. For me, I must say, it could have been worse. I was contemplating taking the short trade. I only avoided a loss on the trade because I couldn't locate any OTM puts that were cheap enough to compensate for the risk. This is a lesson, even a trade that seems rather safe needs not only the odds, but also the pricing to match it. I didn't have the pricing though I thought I had the odds. So I didn't take the trade. Of course, in hindsight maybe the odds weren't great either. Maybe I should have known that China's middle/upper class was chomping at the bit to buy every iPhone they could gather (even though they didn't do the same for the iPad).

    Finally, Apple was the iPhone before this quarter. That's even truer today, after this earnings report.

    And again, yes, I got this one wrong. Mea culpa.

    (I am posting this as an Instablog, since I really shouldn't be earning the pageviews on this one. I expect to do better - and mostly will do better - in my calls)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: AAPL
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This post has 36 comments:

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  •  
    Still Kudos to you....you have the balls to admit you were wrong!
    If that matters among many here on SA you already earned my respect with your insights but after this you stand even higher!
    Paco
    24 Apr 2012, 05:48 PM Reply Like
  •  
    Meanwhile, reports say that sales of the iPhone in China went up 5x over the period.
    24 Apr 2012, 05:51 PM Reply Like
  •  
    Paulo, whether through an article or instablog...you still are entertaining.

    Sincerely,
    J. A.
    24 Apr 2012, 06:15 PM Reply Like
  •  
    China got to be around 20% of the entire Apple's revenues in the quarter, impressive.
    24 Apr 2012, 06:18 PM Reply Like
  •  
    Well, I mean its great that you write about this, but I think the point is that it is clear you are writing these articles to get clicks... I understand that, but you must know that it frustrates people when you write about stuff that you have no knowledge or insight on. Everyone knew about the VZ and ATT numbers HOURS before you wrote the article. You then decided to jump on the bandwagon and write a profound article on why apple will miss 3 hours before the earnings. You knew two things would happen: They would miss and you would feel great, OR they will kill and you will look like an idiot,.... BUT either way you would get the clicks right...?? That is what is driving people crazy.... Please stop writing about apple.... You clearly have no idea what you are doing.....
    24 Apr 2012, 06:44 PM Reply Like
  •  
    If I was writing for the clicks, this one wouldn't be an instablog.
    24 Apr 2012, 06:49 PM Reply Like
  •  
    Apology is unimportant, but if it makes you feel better then great. The real problem with your analysis is that you felt comfortable taking a strong stand on incomplete data.

    It is understandable that you did not know how many phones AAPL sold in Asia. But the fact that you repeatedly stated that these sales would not contribute enough to beat estimates is striking. You demonstrated that your analytical skills are weak. Did you just want to have a buzzy post right before earnings?

    The fact is that even though no one had a clue what the Asian numbers would be. However you repeatedly dismissed the possibility that they would contribute to a meaningful upside in total sales. Why? You are a weak analyst.
    24 Apr 2012, 07:31 PM Reply Like
  •  
    I didn't dismiss them when a few million would matter, but when only 7 or more million would matter, it did seem to much for China.

    But in hindsight, it wasn't. China got gigantic for Apple, representing 20% of the entire Apple's revenues in the quarter.
    24 Apr 2012, 07:37 PM Reply Like
  •  
    His view on the earnings was a very good analysis. Sometimes things happen that you miss.
    24 Apr 2012, 09:31 PM Reply Like
  •  
    I agree totally with six-oh's comment; this was my major problem with almost all of the analysts that jumped on their soapbox and assured everyone that apple was going to fall short -- high confidence with no real data to back it up. I was long and held, even though the media hype was telling me, for no reason, that I was wrong.
    But kudos for owning up to the bad call.
    As far as I'm concerned, big money played this market to perfection, to get cheap shares right before earnings.
    24 Apr 2012, 10:54 PM Reply Like
  •  
    I doubt it, the reaction after the earnings were out showed big money falling over themselves to cover.
    25 Apr 2012, 07:22 AM Reply Like
  •  
    "But would I do it the same again if presented with the same information? Yes, I'd have to..."

    If you would make the same call then you learned nothing. Introspection is essential when we make a wrong call. Try to examine what you did wrong, what you overlooked , etc..
    Did hubris contribute?

    If you can't discover anything that would have corrected your error, then certainly don't use the same methodology again. If analysis gives faulty results the analysis itself is faulty.

    "The fault, ... is not in our stars,
    But in ourselves, that we are underlings."
    24 Apr 2012, 08:58 PM Reply Like
  •  
    The error came from not expecting China to grow into such an important outlet so fast.It will always be hard to get such unknowns right. There was simply not enough info on China - and the bits of info that there were, were misleading.
    24 Apr 2012, 09:02 PM Reply Like
  •  
    Trying to exculpate yourself with the defense that you didn't have "enough info on China" doesn't work.

    You took a very strong position that AAPL would not meet expectations because Asian sales would not be significant. You reiterated this sentiment over and over in your comments.

    Never let ignorance stand in the way of forming your analysis eh?

    By the way, a mea culpa only works if you don't follow it with excuses.
    24 Apr 2012, 09:23 PM Reply Like
  •  
    You make informed picks baised on the data avaliable. I agree with the call he made given the data he had. It was a very good insight.

    Who saw this kind of china growth comming this soon. I mean if you say you saw this comming you have to be working in china for apple.
    24 Apr 2012, 09:33 PM Reply Like
  •  
    Success needs no excuses.

    Plenty of people had the right call, were they just wrong and lucky and you were right and unlucky?

    Tell me not that you were wrong, but what steps you are taking to improve your analysis, then I'll be impressed. Maybe if you had allowed for China's data to be so sketchy, you wold not have been so sure.

    For now, you're just someone who got it wrong.
    24 Apr 2012, 09:45 PM Reply Like
  •  
    It was not about the sales not being significant, as much as them not being enough to cover 7 million additional units ... which they were, some 10 million or so additional units, in fact.
    25 Apr 2012, 07:23 AM Reply Like
  •  
    I allowed for China to sell up to 7 million additional iPhones, which seemed right when there were news of 200k at launch in one of the operators, which isn't much. But they did sell in excess of that, some 10 million or so - still haven't seen the final number, but Apple sold $7.9 billion in wares in China, in this single Q.
    25 Apr 2012, 07:24 AM Reply Like
  •  
    You weren't alone in making that mistake. Many others made the same mistake. For a great insight into the growth prospects of The iPhone in China read the following:

    http://seekingalpha.co...
    24 Apr 2012, 09:56 PM Reply Like
  •  
    Yes, I know, I was actually fortunate not to have found any acceptable way to play it - because if I had played it, It would have meant a loss. But the puts were too expensive given the risk (notice that there WAS risk, or the puts would have been acceptable at their high prices).

    I wrote about how the puts didn't compensate the risk BEFORE the earnings were out (in the comments).
    25 Apr 2012, 07:26 AM Reply Like
  •  
    I didn't agree with your call. And went into AAPL in a big way.

    My thesis was that VZ and T data was because of supply constraint. And that most of the supply was being sucked up elsewhere (China).
    Not sure if my thesis is correct, but it's comforting to know that China is picking up slack.

    Regardless of AAPL, I monitor your insights closely as I think they are top notch.
    24 Apr 2012, 11:12 PM Reply Like
  •  
    zzen, I saw no indication of supply constraints in the iPhone at VZ and T. T was actually very surprising given how much smartphones in general suffered - there will be a lot of misses in the sector and it confirmed the smartphone glut I've been talking about, though Apple seems impervious to it.
    25 Apr 2012, 07:27 AM Reply Like
  •  
    Well Paulo you can't be accused of having inside information. That's the same reason analysts are usually wrong. The information fed to them is controlled by the company. Steve Jobs has taken that art to a new level and Cook has learned well. That said AAPL earnings announcement whether good or bad will drive the market. The sales disappointments from T and VZ of iphones made me believe that the number was going to be a miss. I underestimated the Asian sales.
    I expected a market sell off on a AAPL miss and had plans to sell covered puts into a correction. Now its time to consider selling covered calls into a rally. Always need a plan A and plan B. As always more will be revealed.
    24 Apr 2012, 11:41 PM Reply Like
  •  
    seth, it was damn near impossible to guess China would grow 500%, I think even Apple never saw THAT coming.
    25 Apr 2012, 07:28 AM Reply Like
  •  
    For an example of an excellent AAPL pre-earnings analysis, please see this one by Bill Maurer:

    http://seekingalpha.co...
    24 Apr 2012, 11:54 PM Reply Like
  •  
    Yes, he nailed it, but any truly predictive analysis of Apple would have to single out China's expected performance. Other than that, almost every one was expecting Apple to beat because Apple, well, beats.

    But China made the difference. You'd have to say "Apple will beat because of China", to really predict what happened.
    25 Apr 2012, 07:31 AM Reply Like
  •  
    Paulo, you are doing your readers a disservice by misleading them with bombastic statements. It's not just your financial analysis, but your technical analysis, too. For everyone's sake, please take a break and do some soul searching. When you feel you're ready to start again, test yourself with your own predictions. If they come out wrong, you've more work to do. If they're I would love to hear what you have to say.
    25 Apr 2012, 12:37 AM Reply Like
  •  
    The article included the rationale - one would have to dispute the rationale, not the conclusion. The rationale was valid, China made the difference. I expected China to grow a lot and eat up part of the gap, I simply did NOT expect it to produce the gigantic numbers it did. And I saw no one, before earnings, predicting it would grow 500% or so in the iPhone, like it did.
    25 Apr 2012, 07:32 AM Reply Like
  •  
    Thanks for not hearing me.
    25 Apr 2012, 10:48 AM Reply Like
  •  
    I did hear you, you somehow seem to think that predictions will be 100% right, which isn't realistic. And if you don't believe they'll be 100% right, then there's no business in criticizing the moments when they're wrong as long as there's a reason.

    And there WAS a reason. China came in WAY above what anyone could reasonably expect, China was 20% of Apple's revenues in the quarter, grew iPhone sales to 5x what they were before and represented 77.8% of Apple's Asia revenues. Far above what could be expected rationally with the information that was available at the time.
    25 Apr 2012, 11:07 AM Reply Like
  •  
    Paulo Santos is not different from all those analysts amateurs or pros that did their 1+1 equal 2. You rarely have all the data points and only in hindsight you realize how easy it was to see the picture.

    Remember last September Earning miss for Apple. How many articles I read cautious about the earning because of iPhone 5(4s) delay. Analysts missed the point of connecting the dots that everybody was waiting the new iPhone instead of buying the iPhone 4 which then caused the miss.
    25 Apr 2012, 02:26 AM Reply Like
  •  
    To predict, you have to use the data you have, and have some kind of rationale. And you can't expect to get them all right, either. That's the reason why I didn't trade it - because I had no instrument offering the right risk/reward given the certainties that existed at that point.
    25 Apr 2012, 07:33 AM Reply Like
  •  
    WISH I OWNED MORE AAPL !
    25 Apr 2012, 10:03 AM Reply Like
  •  
    I wish I could go back and buy some at $10, myself.
    25 Apr 2012, 10:05 AM Reply Like
  •  
    Paulo, congrats to you for manning up with your mea culpa. I really have enjoyed your articles on Amazon and agree with your sentiment regarding that company but was discouraged to see the Apple article. You weren't alone for sure, there seemed to be a lot of analysts writing negative pieces on Apple over the last couple of weeks. It surprises me that so many analysts fail to understand the Apple story, the stickiness of its ecosystem, the significance of China and the cultural influences there that benefit Apple. We all miss the boat now and then. I still enjoy your writing, may not always agree with you, but I look forward to reading more of your SA articles. Regards.
    25 Apr 2012, 10:17 AM Reply Like
  •  
    The negativism wasn't really about not believing Apple, as much as seeing factual numbers from the present quarter that were coming in weak and implied a miss.

    The true wild card ended up being China. China pulled a monster quarter and dragged Apple into the blowout. It would be nice to see the iPhone sales numbers from China - if you find them, please post them here (we already know China represented a little more than 20% of Apple's entire revenues, and that the iPhone sales there grew 5x, but still no exact numbers for the iPhone, which seemingly could have been as many as 10 million).
    25 Apr 2012, 10:21 AM Reply Like
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