Apple Taxing Users Offering "More" than customers need...Microsoft Sez So

Ina Fried in an interview on cnet, speaks with Brad Brooks of Microsoft.  Who explains in repeated and excruciating detail how it is that Apple "Taxes" its users.  It is an interesting point of view that goes something like this.

You want a laptop.  So you and your PC Wanting self  you might walk in to PC store.   Say you spend $799 and left happy.  OR in Brads alternative universe you poor consumer you, instead you walked into the shiny Apple store and they (clearly unfairly) charged you $1099.  For a clearly superior product.  Now Brads contention is that Since you spent $300 bucks more for the computer that you were "Taxed" unfairly by Apple....  Now setting aside for a moment that the computer and operating system are VASTLY different Assume Brads logic is good.  (strain) 

Now.  Here we are in Brads World.  How much would the "Tax" be in Opportunity time spent clicking on security dialogs, hangs, crashes, lost productivity due to other system being underpowered  do not exist on OSX?   What is the value of your time Brad?  Hmmm?  What if the "comparably equipped" PC actually cost more than the Mac as it often does?  is that a Tax Cut?

It is a crap argument Brad, I like it though,  Its like arguing that the difference in price between "American Process Cheese Food" and a lovely organic imported goat cheese is also a "TAX"

Here is Brad on OSX Vs. Windows viruses...

You know, it's hard to get a direct comparison, Ina. I want to be very specific in any kind of the data or the information that I give you there is that you're running one system versus another. The best way to really look at it is based on the Internet services, and what's really going on out there in terms of things like phishing or other types of scams that can actually happen through your browser or Internet experience. That really is much more of a direct comparison.

Good thing there is not a "TAX" on the cost of rebuilding your system after a virus then.  I guess that fee would be called a "shoulda bought a Mac" fee?

Paying a Premium price for a premium product is not a Tax, it is called getting what you pay for.  

Apple Earnings Preview October 21st.

Last year, in the Fourth Quarter, Apple earned 904 million dollars on 6.2 billion in income with a Gross Margin of 33.6%. They are predicting 905 million in income on 7.8 billion in income with Gross Margins of less than 32%.  (and 30% for 2009)  It is arguable how much Apples Margins may be coming in  some but there is no question that Apple will be reporting some unbelievable numbers for this quarter.  Apple guided to 1.00 per share in the 4th quarter this year ( July-Sept 2008 ) 

Apple hit the cover off the ball this quarter.  iPhone sales are off the charts and even with the Kabuki accounting that delays recognition of income for the iPhone earnings.  This will be the first quarter iPhone sales contribute significantly to total earnings.  Macintosh sales continue to outpace the rest of the industry and laptop sales are now greater than desktops.  iPod sales growth had all but stopped last christmas but the introduction of the iPod Touch with all of the additional functionality that brings sales have continued to climb.

The Bear Case for Apple over the next 12 months:

The Dow is down 37% YTD and Apple is down over 50%.  Apple does not exist in a vacuum they sell expensive products to a broad market base.  If there is a recession (duh) Apple's Sales will be effected it is anyones guess as to how much.  iPhone (from the market perspective) is still an unknown quantity and sales and gross margins are still very much in question.  The Narrower margin guidance from Apple has the street thinking Apple will tank prices and begin to compete with price.  (eew)  Macintosh computers are growing but only in a segment of the market that is now saturated with Apple products.  In order to continue growing Apple will be forced to sell less expensive (sub $1,000) computers that will cannibalize sales of more expensive computers and  as a result narrow margins.

The Bull Case for Apple over the next 12 months

iPhone Sales are far beyond currently priced in expectations,  The Coolest Gizmo Ever will have 15-17 million in sales for 2008 and projections of 30 million (because they want to sell 50 million) for 2009  Perhaps as much as $4.00 per share in net income from iPhone ALONE!.  Mac mind share continues to grow and even if the economy dings the growth. It will continue to be faster than the industry.  iPod touch/iPhone app sales will continue to grow.  Traditional iPod sales will become a less important part of the business over the next year as the Touch takes over.

Apple will report close to 30 Billion in Current assets (approx $33 per share) is currently selling for ~$90 per share 17x trailing earnings and 15x forward earnings.

Links to Related financial analysis

iPhone Analysis

Forces narrowing Apple Margins

Touch Vs. Nintendo DS

Apple and the Economy

Writer is long Apple and will be watching the Red Sox tonight. Root for Tampa Bay or Dell, or IBM it is not up to me.  Capiche?!

Apple: a Berkshire Hathaway Company

Apple would be a great fit for Mr. Buffet.  And since he is on a buying spree...

Apple's stock closed Thursday at $100.10 a share a new 52 week low.  Their market cap is now less than 90 billion dollars soooo anyone wanna team up with Warren and  buy a computer company?  

You and your new business partner Warren Buffet can buy Apple Co. today for less than 100 Billion dollars.  Here is what you get... for the low low price of $90 billion dollars.  You get 4.5 billion in earnings (TT) growing at 25-35%. [maybe more!] and 27 Billion in current assets!

27 Billion!  

You and your buddy Warren will get Apple for 61 billion dollars (88-27)  which is effectively 13.5x trailing earnings.  Why?  you say are you and your partner Warren interested in this clearly suffering company (stock price down 50% YTD)?  

• Sustainable world wide growth (at a significant discount)
  
• Unsurpassed brand loyalty, 
  
• FAT margins (albeit narrower than historically)  
  
• Best in class products (Mobile computing, Computers, Music Players)
  

Apple has finance all of its amazing growth over the last 8 years from available cash flow, so has no debt and the best employees in silicon valley

Realistically a takeover of Apple would cost significantly more than the current stock price and it's not like the world is flush in takeover capital right now.  The point is that this is a crazy successful and strong company with huge prospects for the future.  What multiple would you pay for Dell's 3% margin, GM's millions in losses, the entire finance industry's mystery balance sheets?

Writer is long Apple and loves his mother.  You should love your mother but Apple is up to you.  Do not suppose that writer is suggesting other than loving your mother.  Your finance decisions are yours alone.

Apple and The Troubles

So I'm at the mall yesterday looking for a gift for my daughter who is turning 13. She wants an iPod capable speaker set up for her bedroom. (Madness I tell you).

Anyway, I wander into the Apple store and am greeted by 1 and then 2 and then a group of 3 helpful Apple employees, which leads me to look around and notice that I am one of maybe 3 customers in the store... AT LUNCHTIME. So my buddy and I stop at a local restaurant for lunch and overhear the waitresses talking... "This is even slower than yesterday".

Is it possible that all the shoppers went to Washington with John McCain yesterday?

Look we don't know where the economy is now, only after the fact to we have any clue what happend so I won't say recession or depression instead I will refer to our current economic situation as The Troubles. Cool huh, non committal but ominous.

Look, Apple is great, the iPhone is going to sell like hotcakes, maybe 40-50 million units next year alone. As of today (or by the end of year) The iPhone will be available in 72 countries!

Earnings will break records every quarter. Just not as fast as it would have been. Whatever was left of the US Economy has been ripped to shreds over the last couple of weeks. Apple does not exist in a vacuum sales will be negatively effected. How negatively effected is anyones guess but it is all but assured that sales will be off.

So, when Peter Openheimer stands up on October 21st (aprox) he will announce record earnings, unprecedented growth, and the stock will get killed on very conservative future earnings estimates (unless it doesn't). Mr. Oppenheimer will take several questions regarding the Troubles but will as he has in the past decline to comment on the economy or how much it plays into Apples earnings estimates going forward

Apple's earnings will be less that what they might have been but they are the best in class competitor in all the business segments they compete in (computers, handsets, music players) and will be the dominant player in these segments when the troubles are over in maybe 15 years (I know not funny)

Bet on the long term

Writer loves breakfast cereal and is long Apple. Eat whatever cereal you like but don't do it because this guy said so. Same with Apple.

I'm Earth Friend Jen and I'm a PC!

As most of you have likely seen, Microsoft is running a new batch of commercials extolling us that we should all want to be  PCs,  by showing us all the people that "Are" PC's that we might like to be like.  

Since as it turns out the commercials produced by Crispin, Porter + Bogusky were produced on Macintosh computers Microsoft should get Earthfriend Jen to do a cameo on their new I'm a PC commercial because as you may have already guessed EFJ (yea were tight) is produced on a Mac too.

Jen Moss is a woman who promotes the use of hemp as clothing and water as a healing force by parading nearly nude around Ojai, CA.

Try these!

I wear nothing... and I'm a PC

or I'm a PC and I'm an earth friend...

From her home page:

 “Treat the earth well:  It was not given to you by your parents, it was loaned to you by your children.  We do not inherit the Earth from our Ancestors.  We borrow it from our Children.”--Ancient Indian Proverb

The cool thing is that since EFJ (yea we are that close) produced her home page on a Mac just like the I'm A PC commercials.

All links from this blog should be safe for work.  link from the link at your own risk

Psystar Apple Anti-trust Update

Sometime this week there should be news about the Apple / Psystar / Hewdell Packovo Suit countersuit

Apple is due to "Answer" Psystar's counter suit filed on August 28th  Psystars answer PDF (Groklaw article)

In case your sane and don't read 200 Apple RSS feeds a day.  A brief rundown.  Psystar is the company (by company I mean a couple of guys in their early 20s that are learning a lot right now) that started producing "Open Computers" back in April that run Mac OSX.  Apple, not pleased filed suit asking for all profits and all sold computers to be retrieved since their brand could be irretrievably damaged.  And then most recently Psystar countersued claiming that Apple is damaging consumers and them acting as a monopoly and Psystar should be able to produce computers that run Mac OSX.

In past comments we examined Psystar's argument,  but more importantly their motive (likely just greenmail, I know boring funded perhaps by their lawyer but we know not by them, They do not want to win) and a cool albeit unlikely conspiracy theory involving some of the worlds largest PC manufacturers (Hewdell Packovo).  

It would not be hyperbole to say that the face of the computer industry would change as a result  of a Psystar win in this suit however infinitesimally small the chance of that happening are.  In the mean time it is fun to follow along.

Apple Vs. Dell: Bad Markets and growth prospects

So Holy crap is the world ending or what?

Fannie Mae, Freddie Mac,  Lehman Brothers, AIG, Bear Stearns.  All out of business.  Goldman Sachs, Morgan Stanley and Washington Mutual teeter on the brink.  

Does Wall Street think Apple is an investment bank?   (PS they have more cash)

Here is an interesting factoid.

YTD Dell and Apple stocks have performed identically (Down 30%), This is nearly meaningless but it makes a nearly meaningless point. (The irony is not lost on me)

Dell is the largest (sometimes second largest behind HP) manufacturer of personal computers in the world.  They are a formidable company that makes a lot of hardware.  But heres the thing.  They sell commodity boxes with a median price point between 6-700 bucks and despite a ridiculous 16.4 Billion in Sales last quarter made $746 Million   That sounds like a lot but here is the take home message.  Their margin is 17% and their Net per share 3.5%  

Apple on the other hand despite being only 4th and making a fraction of the unit and dollar sales of Dell maintained a margin literally DOUBLE 34.8% and net earnings more than 4x Dells. (14.3%).  Apple  Netted 1 billion dollars on 7.4 Billion in sales in the 2nd (their 3rd) quarter.  

Much of the price of a stock is the prospects for future earnings that investors believe the firm has  So what are the prospects of these two firms?  Maybe the sense is that people will buy a Dell instead of a Mac because of the impending foreclosure on the family home? After all Walmart's sales are up this year at the expense of more expensive retailers. Steve Jobs health (why do we say health when what we mean is death?) is a continuing issue, maybe investors are not convinced that the iPhone is the game changer we think it is?  

Dell

Dell has nowhere to go.  They are the price competitor the "low cost manufacturer" that can sell for less than you and still make money.  NO MORE.  Dell is not the low cost manufacturer as evidenced by the fact they are selling manufacturing facilities world wide.  So here is why that matters The price competitor has to be the low cost competitor or.... well you get the idea.  Dell's sales are growing at a pace with or slightly behind the industry as a whole.  Dell cannot and will not become a high margin competitor and by the very nature of the fact that they are at the commodity end of the business cannot grow faster than the industry.

Apple

Apple on the other hand is the innovator, they sell computers that sell for an average price of well over a thousand dollars.  In fact as recently as the second quarter Apple computers represented 66% of ALL computers sold for more than one thousand dollars.  The computer business represents about 45% of their total business and is growing at between 35-50% per year currently.  Their iPod business is flat but very profitable and the iphone business is growing exponentially (but will remain marginal for the next couple of quarters)

Now after having said all this if you had to buy ONE of these stocks which one do you think will have higher returns over the next 5 years?  One more Question... If you were the commodity manufacturer and were looking for a new market to grow into do you think you would want to build computers that could run the Mac OS? Like say Psystar? 

Author is long Apple, this is not advise but you really should call your mother.

When the "Rest of us" want more: a switchers parable

So here is a partial proprietary and perhaps even parsimonious LIST of things Apple has not made better for "Switchers"

These are things that, as a Mac User you know are there, and dread them coming back to haunt you.  You have seen the light and have carried much water for Jobs & Co. convincing the great unwashed that the thing they need to do, the ONE thing that will make their computing life more complete,  is to switch to a Macintosh.

Having done so, said unwashed person comes to you a couple of weeks after getting their Mac Pro/iMac and says agitatedly....

Where is the right click?  Well you say, if you just hold down the Control button when you click that will bring up the same menu functionality...  WHAT.  ADD  A RIGHT CLICK  the single mouse click thing was tired in 1994, now it's just stupid.

There is no Print Screen button on the keyboard.  How do I Make a screen print?  Your friend asks.  Well,  you can give them this list, but be careful,  because Macs support many different image types that are often not supported on the PC.  Nothing worse than Opening up a presentation on a PC and having none of the images you worked so hard to steal/find be there.  Damn you Tiff.

Why can't I play video?  Oh you can just not WMV video. without downloading.  Flip 4 Mac  ignore ALL the adds and get the FREE one.  This functionality should exist out of the box, really.

Why cant I Control-C/V/B/X/Z?  Oh you can you just have to scrunch up your pinky and use the command button instead.  WHAT?  The Mac is not Windows and this little penance will remind you how lucky you are to have such a wonderful machine.  

Here's an Idea, how about a Switchers panel on the Systems Preferences panel that will let you customize some of these "features" so that people can work in an environment that is comfortable for them.  That way the people that we convince that the Mac really is a better computing environment won't want to beat us unmercifully (as often, I really am a slacker) .

Apple Sucks less than Lehman and AIG

Apple was spanked yesterday (140.36 -8.58 (-5.76%) Sep 15 4:00pm ET) during a 500 point market sell off triggered by Lehman Brothers filing for Chapter 11 protection from creditors.   Fannie Mae and Freddie Mac two companies that together hold HALF of all home mortgages in the country were taken over by the government.  These are not good times.  And for those of you blissfully unaware of what is transpiring in financial markets know this.  If AIG, one of the worlds largest insurers, is forced out of business we will all be worse off.  Things are not good in the economy, this week has been one of the bleakest in the financial markets in the last hundred years (1929)

On the other hand

 

Apple has between 21-25 Billion dollars in the bank.  Mac sales growing 25-50%.   iPhone sales off the charts (as many as 12 million to date), and plans to buy a Mac hit an all time high.

 Apple is just fine selling overpriced, proprietary computers,  overpriced proprietary music players, and overpriced proprietary cell phones.  Be a believer in sustainable margins, sustainable market advantage, and remember cash is king.

Lost in the news today aside from half of Ohio not having electricity,  Citibank reiterated a buy on  Apple with a price target of $287!  You go Richard!  No one knows where stock prices are going but given Apples actual earnings and projected growth for the next year.  It would seem that the performance of Apple stock should suck less than the market at large for the next year.

If you buy this stock you must have money, can you share?  I make all this up.  Really.  If you take the word of anonymous, but deceivingly erudite bloggers including this one. You deserve what you get.  Do real research this is just fun.

Squishy Margins: Apple Lower Margins Explained

Apple announced a their last earnings conference call  that they expect Gross Margins to be lower at the company for this quarter and into next year.  Here is a list of Margin squeezing forces that may be squeezing Apples margins.  

No one release, product, or strategy is the culprit here.  Do the MATH  a 2% narrowing of Apples gross margin will translate into almost a billion dollars a year in lower earnings (thats why we care)  That is more money than many new products will do in sales.

iPhone Accounting.  

Apple is accruing the income from iPhones over 24 months.  The expense created to enable the development, manufacture and sale of that phone is written off in the quarter it occurred in.  Apples manufacturing partner is currently rumored to be manufacturing 800,000 phones a WEEK.  The expense for this will show up in the next 90 days.  The income will not be completely realized until September of 2010.

Retail Sales Mac/iPhone

Mac sales are growing like crazy, much faster than the industry.  In order to maintain that growth, Apple has partnered with additional retailers, most notably Best Buy to sell their products.  For recent history Apple products have been sold primarily directly by Apple. 

Broad market competition

The larger Apple gets, the more price sensitive their next marginal customer is... Apple will be lowering their prices on iPods, Macs, iPhones in order to get them into more peoples hands because as has been shown is that if you buy one Apple product you  are MUCH more likely to buy another.

Product X

Product exists as does product Y and Z .  These products will have narrow gross margins on release but I think it is a red herring hiding as the product BY IT SELF will not be large enough a force to lower the margins as Apple has indicated.  All of these forces together are conspiring to lower the margins.

More to come

Manic iPhone owners crave. . . Peace?

By virtue of the fact that Apple has recently added the ability to sort applications in the App Store by "Popularity" it is now possible to know the following ironic factoid.

The top two most popular applications that require more than zero dollars for purchase for the ADD addled owners of the, in touch all the time in all places and conditions iPhone, are ... Wait for it

Ambient Noise generators...

Namaste  Ambience #73 overall, and Asleep #93 overall  as Fake Steve would say we honor the place where your quiet and our manic gizmoness become one...

Apple Everywhere… Margins, Growth and Pervasive Appleness

In the 4th quarter last year Apple earned 904 million dollars on 6.2 billion in income with a Gross Margin of 33.6%. They are predicting 905 million in income on 7.8 billion in income with Gross Margins of less than 32%.  (and 30% for 2009)  Apples Margins may be coming in but they are going to earn more than a 1.00 per share in the 4th quarter this year ( July-Sept 2008 )

Apple has freaked out all the analysts by changing the “Code” they use for what their earnings predictions mean.  Apple is a large multinational company with a large range of products and  sales in 100 countries (yea I made that up) predicting how many for how much and at what cost is a crap shoot at best.  So the “Code” becomes a way for the analysts to come up with a nice safe prediction (safe because it will be close to all of the other predictions.  It is hard to get fired/sued if you have the same prediction as everyone else) that will also be safely leapfrogged by actual results.  

That said Apple has made it clear that they are changing the game in the coming quarters and Gross Margin is expected to suffer as a result.  I have written before Hereand Here about some of the forces at work narrowing margins for Apple.  Apple is not introducing A (meaning one) product that is going to narrow margins.  They have a long range plan to take over the world Grow their business. 

Apple everywhere is a strategic, systematic broadening of Apples scope while simultaneously increasing the barriers to entry for their competitors.

More and lower priced computers, more and higher priced computers more and lower priced phones, mobile computing devices …. Apple is going to meet the market where they are and spend a little less time enticing the market over to them.  How long until the retail price of an iPhone hits $50 bucks? (subsidy still FAT)

RBC today predicted sales of 3 million Macintosh computers in the quarter.  Why not.  The back to school market has shown huge growth (50% Plus over the last couple years) and Apple increased their annual back to school iPod offer to include not a $150 nano but a $300 iPod Touch.  Narrower margins…

Hard to say what comes in the short term but I suspect more computing options for less than $1,000.  Some very competitively priced portables, and more iPhone and iPod options.  The name of the game is Network externalities and Apple knows if you have any one of their products the chances of your taking a chance on another one go up exponentially (yea I made that up too but it goes up a lot)