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Keeping the Faith With Apple

There's no better time to point out that {complink 379|Apple Inc.} is infallible than the day everyone else is queuing up to applaud the company's rollout of another great product.

Today, the world's most successful company by market value will unveil an update to its smartphone — that's the expectation, anyway. Orders for the iPhone 5 aren't being taken yet, but this hasn't stopped Apple fans from gearing up; reports indicate the inventory of pre-owned iPhones is on the rise as subscribers sell these so they can replace them with the iPhone 5.

Me? I dare to take a road less traveled, which is to follow up a blog that was mildly critical of the company with another one that asks the question many would simply like to ignore: Why does Apple's forecast always miss by such a wide margin, and why is the investment community ignoring this tendency when it obviously indicates a flaw somewhere in the company's demand forecasting mechanism. Or is the company purposely low-balling its projections? If the second reason is the case, I wouldn't want to say why Apple might be doing this; it would only get me into more trouble. (See: Inside the Apple Bubble.)

A reader's response to the above blog got me started on this line of reasoning. EBN reader @damme_jones's comment on my latest blog raises several valid points and I felt it necessary to follow up with additional clarification and to emphasize why shareholders and the entire industry need greater clarity from Apple.

I didn't criticize how or where Apple investors put their money; that's their prerogative, and I believe these are smart folks, many of whom have done very well as the company's sales and profits boomed. Neither did I say Apple isn't making money now, or that it won't make money in future. Obviously, it is, and will continue to be, profitable. Is Apple more efficient in its use of each investment dollar than many of its peers? Certainly. It has better margins, even in its PC business than {complink 2376|Hewlett-Packard Co.}, the biggest vendor of personal computers.

What I took issue with is the bubble surrounding the company wherein the analysts who should raise valid questions have simply abdicated this responsibility. You don't have to dislike Apple to know there's something wrong in a $7 billion spread between company sales forecast and analysts' predictions. The companies that build and supply parts and manage the logistics, after-market support, and services for the electronics industry can use a bit more clarity in sales expectations.

Here's another example: for 2011 fiscal third quarter, Apple announced it expected $23 billion in sales and earnings per share of $5.03. When the results came in, Apple had $28.6 billion in sales and $7.79 earnings per share. That's an impressive spread of almost $6 billion, or 24 percent, between forecast and actual sales. That's good for Apple and impressive for investors, but really bad for the supply chain.

Either Apple's supply chain was so supple that it could be stretched to supply the extra $6 billion in sales capacity, or the company was working to a different number internally. If it wasn't, and the quarter just exploded brilliantly with demand surging for its products, then the shareholders (and the analysts whose reputation should be on the line) deserved an update ahead of announcing the results.

In my next blog on Apple, I will be exploring how commoditization is affecting its market and whether the company can continue to deflect the erosion.

16 comments on “Keeping the Faith With Apple

  1. jpcarvalhinho
    October 4, 2011

    Competition…

    The answer to the disparity may come from the outside agent: Competition, or lack off.

    IPad was the main differentiator for this trimester, and in the initial projections, Apple was on the defensive about what the new honeycomb flavour for Android Tablets/others would bring.

    The competition is fierce and with a great replication capability, with broad availability of Android SW, and lot's of experience in building great quality gadgets, just see the response:

    Motorola with Xoom, Samsung made the 10.1(v2) with great quality and availability, HP launched TouchPAD (being the biggest blunder off the market thus far), and even RIM got it's playbook on the streets.

    … that didn't get things right.

    Demand works in strange ways because it's choices are biased by empathy. When you go to a Department store like El Corte Ingles here in Portugal, you see people asking the clerks for Ipads… just like in times past, people asked for ipods. Demand doesn't want a “tablet” just as it didn't want an Mp3 player.

    The “others” didn't help either (just like creative did then). They wanted to surf ipad's high price, and skim the market (logical on a new market)… but demand isn't in that place. HP proved it with the Touchpad blunder… There is demand for other pads… just don't price them inline with the ipad, even if technically better.

    When you place the price inline with the Ipad experience and fail to deliver the same “helás”, you are asking for backlash. People that buy these equipments based on empathy, and wishful thinking won't buy the tech specs. Apple products have an aura for high quality products and experiences with high prices. People Know it's expensive, because it's Apple. It's a given fact and are willing to pay for it… even if it is just to show off.

    Empathy shouldn't influentiate in a work tool. Even so last year nobody had the rational need for an ipad… how can that change in a year, taking the pad craziness the place of low end portable computers… a rational choice in price/performance/software availability?

    That lead to 2 weeks delivery times in USA for ipad on the closing of the trimester…

    Future

    Ipad owners have had their fix of apple gadget and probably won't upgrade, as they have a capable tool, and if that “ipod” effect doesn't wade off, Ipad will still sell, but will begin to slow (with Xmas exception…).

    But competition now faces a bigger problem:

    The low end pad market just got hit with Amazon's offer (the perfect Xmas gift to parents), and the others will soon be pressed to sell their flagships at a loss, and putting out smaller and cheaper solutions (check Samsung future products), so they will keep out of the ipad price line, appealing to the more conscious and practical buyer.

    But this low end market is plagued with low end android manufacturers that today use plain old Android 2.2 for simplifying licensing woes, that kill the experience with underpowered hardware (just like what happened with EEPCs and the likes). So Android is already being seen as an horrible pad-experience, and if Google doesn't change this from Ice Cream… the opportunity will be lost.

    Windows 8… well… that will be the biggest surprise. Full MS Office might do the trick to professional users, Windows Management tools might do the difference with IT managers and support infrastructure.

    Communication with the shareholders.

    Maybe… maybe not. It was all in plain sight. low sales of competitors, the sequence of blunders, and zero stock of ipads. Nobody could calculate this difference… but everyone who knows this business should have known better than did – Smaller specialized bloggers got the numbers closest. Don't just spend and hour in the Apple store, checking the money influx… check the competition… and listen to the buzzz… of flies.

    Disclosure:

    I have put all my eggs in Apple 🙂 since long ago, as It is the only company I can keep up with informationwise.

  2. Nemos
    October 4, 2011

    “In my next blog on Apple, I will be exploring how commoditization is affecting its market”

    I am very curious how an impressive spread like what Apple expected and what finally announced can hurt the supply chain.Of course the main question remains why to do that on purpose ?

  3. Nemos
    October 4, 2011

    After one year the presentation of the new phone from Apple the No 4S it wasn't the product that the geeks and fans were waiting for. So never keep all your eggs in the same basket,  The battle still exists…..

  4. jpcarvalhinho
    October 4, 2011

    Did you really expect an iphone5? I didn't

    I am all for a new Apple device because of the marvellous designs, but what I really really like is for apple to keep its product life cycle (just like iPhone 3 and 3gs) so it can keep high production volumes and widening margins (minimal impact to the production process).

    Let's get this out of the way… this one will still sell like hot cookies…

    As an investor… I am all for it!

     

  5. DataCrunch
    October 4, 2011

    Hi Bolaji: What are your thoughts on the deal Sprint made with Apple for a rumored $20 billion, in which Sprint will buy 30 million iPhones from Apple?  Seems like a good deal for Apple, but what are your thoughts about Sprint?  Seems like Sprint is betting the farm on Apple.

  6. Parser
    October 5, 2011

    Secrecy agains competition Apple is imposing on their own staff and external supplier makes it impossible to analyze adequately or at least not publicly. I am curious how much knowledge of a future product have large investors? Only the board has full knowledge. 

    Tuesday's announcement of iPhone 4s was a disappointment the first since iPhone 1. This reflects on Apple's managerial and engineering exhaustion, but it will result in lower sells. The race is not over as we will wait one more year for technological breakthroughs with model 5.

  7. Anand
    October 5, 2011

    So never keep all your eggs in the same basket,  The battle still exists…..

    @Nemos, I totally agree with you. Battle still exists. The new Apple iPhone has definitely failed to wow the investors. Asian smartphone makers have a chance to exploit a rare letdown from Apple. Infact investors now expect Android phones to give tough competition to Apple. That is why shares of Shares of Samsung Electronics , HTC and LG Electronics , who all make phones using Google Inc.'s Android operating system, jumped after the iPhone release.

  8. Anand
    October 5, 2011

    The race is not over as we will wait one more year for technological breakthroughs with model 5.

    @Parser, what technological breakthrough you are expecting ? Apple no longer has a leading edge, its cloud service is even behind (Google's mobile operating system) Android.  Moreover  google is already providing NFC enabled handsets. So it would be hard for Apple to maintain its technological edge over android phones.

  9. jbond
    October 5, 2011

    I'm not surprised that Apple came out with the Iphone 4S, instead of an Iphone 5. They did this with the Iphone 3. They make some minor improvements, lower the prices on their previous phones, and they have an instant sales increase. The Iphone 4S is not the phone people were expecting to be unveiled. I'm sure this has to do with continuing on their profit margin and buying time to develop a new model for the future.

    As for Apple's misses in their forecasting, there is definitely an issue at hand, though they might be low balling their own numbers. It seems like any analyst who questions Apple's business plan is afraid to announce it publicly for possible repercussions.

     

  10. Parser
    October 5, 2011

    @anandvy, Apple has been known for years to do known things in a completely different and better ways. They look from the user point of view and their implementation is always more user friendly, more wholesome. At the time of iPhone 1 global market was saturated with cell phones from Nokia, Motorola and RIM and look what happened. Now Android has all and look what it will happen. 

  11. bolaji ojo
    October 5, 2011

    @Nemos, The electronics supply chain operates as a high-velocity engine with everything carefully calibrated. Supplies must reach the manufacturer at specific times; any delays would result in some level of chaos. In this system, the ability to predict as closely as possible how much materials you need, where and when is critical to efficiency. Over the years, the components makers have also learned to produce just enough so as not to end up with inventory nobody wants to buy.

    When a company provides an inaccurate forecast most parts makers can usually bend their production system and raw material procurement to meet the new demand or cut back as necessary. This becomes extremely difficult if the anticipated forecast overshoots by billions of dollars. I can bet most suppliers don't rely on Apple's forecast completely, knowing it would probably miss on the upside. The question is by how much. Push this down the supply chain and you have vendors missing shipments, raw material pricing being impacted and contractors not knowing exactly how many assemblers to hire for the holiday season.

    That's the headache Apple is creating — so far nobody is complaining loudly because it's all on the upside. If one day Apple misses forecast by $1 billion but vendors were expecting it to miss by $6 billion, what should they do with the extra part, extra manufacturing space and wasted resources?

  12. DataCrunch
    October 5, 2011

    Steve Jobs, you will be missed, but not forgotten.

  13. Kunmi
    October 5, 2011

    Well! what effect do you think the passing away of Steve Jobs will have on the company and the sales? Would the sale of iphone 4S be impacted because of this?

  14. Kunmi
    October 5, 2011

    “Apple has been known for years to do known things in a completely different and better ways”. I think this is the spirit behind this company from its foundation. Ronald Wayne, who designed the logo for the company said, Steve Jobs and Steve Wozniak were like the “whirlwind” and he cannot really fly with them, so he bowed out of the business by selling his 10% share for a price of $1,500 which should have been equivalent to $35 billion dollars today. Apple is solidly established on quality, new approach and a stormy drive. That is why the company was able to invest the entire world.

  15. Anand
    October 6, 2011

    If one day Apple misses forecast by $1 billion but vendors were expecting it to miss by $6 billion, what should they do with the extra part, extra manufacturing space and wasted resources?

    @Bolaji, Just curious to know if these parts are specific to Apple.  How much flexibility these parts manufacturers have to supply the same parts to different phone manufacturers? For example can LCD supplies meant for Apple be reused by Samsung ?

  16. JADEN
    October 6, 2011

    @Kunmi

    Job's death will not affect the sales of Apple, Micheal Jackson last album and his songs sold faster after the pop singer died.  The vision and innovation with principles are there for the company to carry on.

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