The Game of Predicting Apple’s Earnings

This article also appeared at The Motley Fool

Every quarter there are hundreds if not thousands of articles and posts from amateurs and professionals alike predicting Apple’s (NASDAQ: AAPL) Earnings. Most of them are based on attempting to estimate how many iPhones, iPads, Macs, etc. Apple sells, and in the process attempting to predict component costs, and margins. Then these articles seem to make some kind of model to forecast Apple’s earnings based on a complex set of data that is hard to predict.

Sometimes analysts and bloggers have help from other sources like announcements from carriers about the number of iPhones sold. Sometimes rumors are the source of the predictions. However, for many quarters after the iPhone first launched, Apple managed to beat even the most optimistic numbers. This caused analysts and bloggers to set even loftier expectations on Apple, which Apple then proceeded to fail to meet partially causing the stock to drop. However Apple has been pretty consistent when it comes to beating their own numbers. For a previous article I made this chart and here will analyze it further to try to get a better view of predicting Apple’s earnings and join the prediction bandwagon.

So this shows that Apple is getting less conservative in their guidance, but still consistently beating their own estimates. Just based on this chart and using a 20% EPS beat and a 10% revenue beat we’d have predictions of $14.10 for EPS, and $57.2 billion for revenue.

Let’s look at another chart of their actual revenue and EPS:

The trendline numbers in this case are $46.5 billion in revenue and $14.20 EPS. Now the $46.5 billion in revenue is too low, so Apple will likely blow past this trendline just like last year where the Q4 number of $46.3 billion is way past the trendline number of $32 billion. However if you look at the EPS number of $13.87, that is also way past the trendline number of 8.75 in Q4 2011. If we assume $57 billion in revenue as above, keeping margins consistent we would have EPS of $17.

This implies some kind of change from Apple – a very low EPS for what is a very high revenue. That implies some kind of margin contraction. There are many theories about the problem amongst which the most prominent is “poor” iPhone5 sales. I put poor in quotes because poor is relative. Analysts expected Apple to sell 65 million iPhones in this quarter which have since been revised downwards to 43-63 million. Hence “poor.” Neither 43 million nor 63 million is in any way a poor number. But nobody has yet provided a convincing reason for the margin contraction. Initially my own reasoning for that was manufacturing difficulties of the iPhone 5. But now I believe that it is possibly a combination of factors the most important of which is the iPhone and iPad mix.

Apple severely overcharges for their middle model and slightly overcharges for the top end model. For example the 32GB model of the iPhone costs $100 more than the 16GB model. This $100 provides only an extra 16GB. However the 64GB model which provides an extra 32GB also costs another $100 more. Now as developing market sales become more responsible for Apple’s growth, the product mix will move towards the cheaper device that has comparatively lower margins.

However, knowing how conservative Apple is about numbers, we should assume that the numbers cover the possibility that the iPad mini was a dud. The iPad mini can be assumed to be a high margin device because it is made from older cheaper components and is far more expensive than the competition. The sales numbers are unknown and when the device was launched, Apple failed to separate iPad mini numbers from iPad numbers for initial sales. However based on current rumors the device was a success.

So I think the margin fears are overblown. So let’s say we stick with trendline numbers for EPS to be on the conservative side – $14. And if we are super conservative about the revenue, lets say Apple only beats their own estimate by 5%, we’d have $54.2 billion in revenue. Even these conservative numbers would imply great continued growth. Apple is of course likely to beat these numbers and my hope is for somewhere between $14-$17 EPS, and somewhere between $54 and $57 billion in revenue.

Looking beyond this quarter just based on the EPS and revenue trendlines, FY 2013 earnings would be $69/share on revenue of $214 billion. However, I feel that depends on Apple being able to produce devices that actually catch up and leap beyond the competition soon. The iPhone 5 and iPad mini were fairly poor specifications-wise, and newer larger phones from the competition and cheaper better specced tablets will provide significant competition. This is especially true because Apple product cycles are longer and Apple more often than not avoids newer technologies (like they are currently avoiding NFC, wireless charging and they previously avoided both 3G and 4G for a while). Also beyond the next year Apple’s continued growth depends on entering new markets.

Now the average analyst estimates for EPS is $13.41 ($11.97-$15.50) and revenues of $54.70 billion ($52.29-$59.55). If Apple misses, I think the stock would drop down to the $450 level. I find that event unlikely, but I have been wrong.

Disclosure: Own AAPL

Investing in the Future of Mobile Devices Part 1 – Hardware

This article also appears at The Motley Fool.

However, device makers are not the only beneficiaries of the ongoing smartphone and tablet boom. The companies that make the phone and tablet innards are worth looking at, and I’ve dug up the gems for you. Currently most mobile devices use processors based on technology licensed from ARM (NASDAQ: ARMH). Manufacturers like Apple and Samsung make their own ARM-based processors, like the Apple A series and the Samsung Exynos. However, most other device makers rely on processors from Qualcomm (NASDAQ: QCOM) and NVidia (NASDAQ: NVDA).

For 2013, Samsung expects to launch the first 8 core mobile processor called Exynos 5 Octa, based on ARM’s big.LITTLE technology, which pairs four low power cores with four performance cores to provide the best of both worlds–good battery life and performance–when required. Qualcomm announced their next generation of processors – Snapdragon 800 – which provide significantly better performance, including support for mind boggling image sizes like 55 megapixels, amongst other things, while consuming less power. NVidia also announced the Tegra 4, which also boasts significant performance boosts while consuming less power. So going forward we can expect more powerful phones with longer battery lives.

The CPU is not the only processor. Most of the mobile chips are systems on a chip where the GPU is also part of the same unit. The most common GPUs are based on PowerVR technology licensed from Imagination Technologies or ARM’s MALI Technology. The exceptions to this are Qualcomm, which makes their own GPUs called Adreno, based on technology acquired from AMD, and NVidia, which uses its own GeForce GPUs. They announced that the Tegra 4 has 72 GPU cores.

For now these are the big players, but there are up and coming Chinese processor manufacturers like MediaTek, who promises decent performance and cheap processors. In fact a ZTE-made phone with an 8 core processor made by MediaTek is rumored to be hitting the market in the second half of this year.

But there is one company that benefits disproportionately from the mobile boom, and that is Qualcomm, because you simply cannot make a phone without Qualcomm technologies. And with the proliferation of cellular communication into more devices like tablets, cellular hot spots, etc., it is all good for Qualcomm.

Another beneficiary of all this is TSMC (NYSE: TSM). TSMC is a contract chipmaker who actually produces processors for Qualcomm, NVidia, and potentially for Apple.

Here is a chart showing 5 year performance of the stocks mentioned in this article that are traded on the US markets. 

Other than NVidia, all of them performed admirably, especially ARM. Lets look at the income growth of these stocks.


ARM currently trades at a hefty P/E of 80, which may not be justified as the price has seriously outpaced income growth, especially when you compare it to Apple. Only Apple’s and Qualcomm’s profits grew faster than their stock prices, so I would recommend those two stocks. Samsung trades OTC as SSNLF, but is thinly traded. It also sports a low P/E in spite of spectacular income growth.

Stay tuned for Part 2 – software and more coverage on other device and component makers.

Disclosure: Own AAPL, INTC

A Techie’s Guide to the Future of Tech Stocks: Google

This is a part of a series of articles that covers the biggest names in technology from a dual perspective of an advanced consumer and an investor. So far I have covered Microsoft, Apple and Amazon. Next up is Google (NASDAQ: GOOG). This article also appears at The Motley Fool.

In my coverage of Amazon (NASDAQ: AMZN), I mentioned considering it a retail company as opposed to a tech company. On the opposite end, Google is a real technology company. Their primary business is selling eyeballs on the Internet. To do that, they provide you with the best in class free services on the Internet: the best free search, the best free email, the best free maps, and also the most widely used and, in many eyes, best mobile Operating System – Android.

On the plus side, unlike Amazon, Google makes lots of money doing this, and their income is growing steadily:

This is despite significant investments over the years in products and services that go nowhere and giving employees 20% time to work on whatever they wish. Maybe the growth comes thanks to, and not in spite of, those two factors. Just like a venture capital company throwing money at several promising companies in the hopes that one of them will make it big, Google throws it at several projects and employee ideas.

Google’s thought process is also fundamentally different from other large companies. Get the audience for a product first. Money will come later. Now that’s what I said about Amazon, but the difference lies in the fact that Google is not primarily in the business of shipping products to customers.

Looking at Google’s Financial Statements will clearly signify what I mean. They break down their financial statement by:, Partner Network, “Licensing and Other” and now Motorola. The Licensing and Other makes up a minor component of the business, and the Motorola business is further broken down into Mobile and Home segments. Essentially, other than the Motorola component, Google primarily makes money by either selling ads on its own sites or on partner websites. And it doesn’t break it down by site or service or product which, in my mind, means that it doesn’t matter; eyeballs are eyeballs after all. Google will keep on making its services better and offer more services so it gets more eyeballs and visitors and clicks. That is also the reason that it gives away Android. More services, more products, more eyeballs.

Looking forward, my expectation is for Google to keep growing steadily. The competition in online services like search (Bing), maps (Bing, Nokia, Mapquest), email (Hotmail, Yahoo) etc. might be competitive, but Google is still the king. Yahoo is slowly dying. Their lack of care even for their prime properties shows clearly. Microsoft is constantly playing catch up in online offerings and is yet to make any money on those. Apple is on the warpath with Android and Google, but the maps debacle shows that competing with Google is not easy in online and mobile service offerings. Android has been steadily improving faster than iOS and even though Google makes very little money on it presently, that is bound to improve. There are places where Google is playing catch up, like in social networking with Facebook. However, overall Google is the king of the Internet.

Google also invests in various tangential and unrelated products like making a self driving car, fiber to the home, potentially selling power etc. My hope is that eventually some of these wil be viable, money-making additions to Google’s portfolio of products. I’m sure none of these are money making operations yet, and under normal circumstances companies would have been penalized for non-core efforts like this. Investors do not like “wasting” money after all. But this is Google. Remember: customers first, money later.

I’d say the stock is fairly valued with a TTM P/E of 22, compared to Microsoft at 14.5 and the Vanguard Technology ETF at 15 because of comparatively faster earnings growth expectations. I would also like to issue one warning about Google: dropping margins. So far earnings have grown despite this, and my personal opinion is that the situation will improve once the dust settles on the Motorola acquisition and insane competition in the mobile and cloud space.

A Techie’s Guide to the Future of Tech Stocks: Microsoft

This is part of my series on Tech Stocks. So far I’ve covered Amazon and Apple. Next on the list – Microsoft (NASDAQ: MSFT). This article is also available at The Motley Fool.

Windows 8 has generally been positively reviewed on touchscreen devices (Windows Phones and the Surface Tablet). The new breed of Windows Phone devices, such as the Nokia Lumia and HTC 8X are top notch. However, as a desktop operating system, Windows 8 has been mostly panned and the biggest criticisms have been the lack of a start menu and a confusing mix of Modern UI (aka, the interface formerly known as Metro) and traditional Applications. My personal opinion about Windows 8 adoption being slow is that it was to be expected. Many enterprise customers are still just getting used to Windows 7. Nobody wants to switch to a new operating system so quickly, especially one that is more of a radical leap than usual. I have no doubts that eventually Windows 8 or maybe Windows 9 will be a major player across devices, but Microsoft is more than just the desktop.

Looking at the enterprise side, we use SQL Server at work, and with the newest versions from my personal experience, SQL Server is easier to use and manage than Oracle (NASDAQ: ORCL), while matching it in capabilities. Also, Windows is a very capable server Operating System, and Hyper-V seems to be very capable as a virtualization platform compared to VMWare (NYSE: VMW). From a developer standpoint, there is still nothing that beats Visual Studio.

Microsoft’s largest segment, the business division (which is Office and Outlook/Exchange) is doing just fine. There really is no alternative to that combo. The online alternatives to Office such as Google (NASDAQ: GOOG) Docs have some time to go before they can really replace Office/Exchange for the enterprise.

Microsoft’s online division is also gradually reducing losses. The entertainment and devices division still managed to eke out a slight profit in spite of the significant investments Microsoft is making in Windows Mobile devices.

Looking forward, I’d say it will be slower than expected growth for Microsoft on the mobile front. This is based on lower than expected Surface sales and high price of the Surface Pro. Windows Phone sales are a mystery. There is all kinds of conflicting information, with sales ranging from dismal to “strong.” Recently the CEO said the current sales are 4 times sales at launch, but with no real numbers. However, Windows phones are few in number and not so easy to find. Staff at retailers are not familiar with them and there are not enough demo units everywhere for customers to try them. That will change with time, and as Windows 8 propagates and people become more familiar with the Metro interface. Also, Nokia just got a head start on China’s largest carrier against the iPhone5. Windows Phone/RT will be like the XBox, and Microsoft will keep at it until eventually it turns a profit. The Xbox itself is doing spectacularly well, partly thanks to the Kinect.

As for Windows 8 adoption, it will improve as people see the new Ultrabooks. I know I was impressed when I saw the Ideapad Yoga, as were fellow geeks. The flexibility of Ultrabooks is something that Apple (NASDAQ: AAPL) doesn’t have yet.

On the Enterprise front, I believe Microsoft will gain market share. As an Enterprise Application Engineer, I know it is very difficult to switch out Enterprise Systems at any decently sized company, but Microsoft does offer a value proposition. It is not that hard, however, to switch from VMWare to Hyper-V. Also, new deployments might show a propensity to buy the most value for money system.

Microsoft’s online offerings are steadily improving. Maps, Skydrive (which I use regularly), Office 365, Bing,, etc. are all at a point where they are good enough in comparison to the competition.

So all this being said, where do I think the stock is heading? I like the 3.5% yield and I think long term the future is not as dim as analysts indicate. I might open a small position in Microsoft if the stock hits it’s 52 week low of around $25. As such, I see it as a slow growth but good dividend stock. Even though Microsoft’s income has risen, the stock has done nothing for 10 years:

I expect Microsoft to reach $35 in the near future (next three years), with a slow increase in income and consistent dividend growth.

Disclosure: Long AAPL, GOOG, NOK

A Techie’s Guide to the Future of Tech Stocks: Amazon

See my Apple coverage here. This article is also available at The Motley Fool.

There are very few companies that are as universally loved as Amazon (NASDAQ: AMZN) by both consumers and investors. The consumer love is much deserved – getting amongst the best, if not the best prices on everything you can think of and combined with great customer service. Adding Amazon Prime to that and getting free two day shipping, online streaming and more for only $80/year is a steal especially if you buy lots of stuff from Amazon.

And here is a chart that shows what I mean by Investor love:

Can you imagine any other company that has razor thin margins with almost no profits have a consistently high P/E. Currently, the TTM P/E is over 3000. The Forward P/E looks better at about 150, but Amazon is known to make huge investments in hopes of future payouts. How long can this go on?

As Amazon’s net income fails to impress can the stock keep on rising? Personally I wouldn’t take the risk. Maybe the current investors only look at revenue?

So it can be seen that the stock price rise sort of moves in tandem with revenue. I’m always more concerned with net income than just revenue. Price/Sales may be a good metric for startups, but Amazon is far from that. Amazon’s TTM revenue was $57 billion. That pales in comparison to Wal-Mart’s (NYSE: WMT) $464 billion, but at the decent growth rate puts Amazon within spitting distance of Target’s (NYSE: TGT) $72 billion. But both Wal-Mart and Target have better margins than Amazon.

Even though Amazon has technology offerings like cloud services, I primarily consider them to be a retail company and even though they directly compete with Google, Apple, Microsoft and other device manufacturers, Amazon’s primary goal is to move products. And Amazon is very good at it – so good that they are responsible for the death of the bookstore and eventually the electronics store.

In spite of the serious revenue growth, I feel the high P/E is unjustified. What would be a reasonable P/E for a company like Amazon which sits between the high tech and the retail segments? Something in between high-tech and retail? Or is there something special about Amazon? Will they have a massive boost in profits once they reach a certain size? It hasn’t happened yet and I’m not betting on it.

Let’s say for argument’s sake that Amazon deserves a forward P/E twice that of Wal-Mart. That would put Amazon’s price under $50/share. So what is propping Amazon up to 11x the P/E of Wal-Mart? One explanation is that Amazon’s 5 year revenue growth is 10 times that of Wal-Mart. Unfortunately, earnings is a different story. Maybe when Amazon gets to the scale of Wal-Mart, the earnings will catch up. Just maybe.

For now, this is one tech stock where I’m staying on the sidelines.

Disclosure: Own GOOG, AAPL, TGT