Category Archives: e-readers

AAPL’s 2Q11: more records, another big positive earnings surprise

April 22, 2011 By in Current Market Thoughts, e-readers, earnings conference calls, emerging markets, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , , , , 4 Comments

the results

After the market close on April 19th, AAPL announced earnings results for its 2Q11 (AAPL’s fiscal year ends in September).  The company made $5.99 billion, or $6.40 per share, over the three months, on revenue of $24.7 billion.  These figures were up 95% and 83% year on year, respectively.   Wall Street analysts had expected eps of $5.37.

the details

AAPL sold an eye-popping 18.6 million iPhones, 113% more than in the comparable period of 2010.

It sold 3.76 million Macs during the quarter, up 28% year on year.

In a transition quarter, the company sold 4.7 million iPads. There’s no year-ago comparison, but sales were down by about a third from the December period’s 7.3 million.

The iPod, which in its heyday was around half the company, sold 9.0 million units, down 17% year on year.  iPod now represents only 6.5% of APPL’s revenue.  I see this as less a comment about MP3 players than one about how incredibly the rest of APPL has been growing.

Geographically, Asia-Pacific, up 151% year on year, was the star; Europe, “only” up 49%, was the caboose on the AAPL train.

items to note

Greater China (the mainland + Hong Kong and Taiwan) are now accounting for 10% of AAPL’s sales, up from less than 2% a few years ago.

AAPL is now guiding to a lower full-year tax rate, meaning it’s expectations for the share of revenues coming from lower-tax foreign areas have risen.

Of the 18.6 million iPhones sold, 1.7 million went to build telecom carriers’ inventories rather than into the hands of consumers.  Part of this probably represents the rollout of the iPhone to VZ in the US.  But I think it also likely indicates that carriers sense strong demand for AAPL phones and want extra insurance they won’t be out of stock.  …more problems for Nokia?

Although AAPL made around 7 million iPad1s in 1Q11, it produced only two-thirds of that number of iPad1s + iPad2s during 2Q11.  This comes despite AAPL’s assertions that it has had no supply problems from the earthquake/tsunamis in Japan, and its comments about “staggering” demand for iPad2 and the “mother of all” backlogs for the device.  This may simply be the way that the inventory rundown of the older model and the rampup of the new are playing out.  It may also be that AAPL isn’t able to get all the resins or components or other raw materials it needs company-wide and is allocating them to higher-margin smartphones.  Or it may be that AAPL wants to cultivate an it’s-hard-to-get mentality to heighten interest in the device, since consumers have as yet no effective alternative.  This isn’t a bad thing, just something to note–and watch.

the stock

Investors bid the stock up–but not by a lot–in trading on Wednesday and Thursday.

There may be a technical reason for the tepid response.  Early this month, NASDAQ announced that it is rebalancing its NASDAQ 100 index.  The weighting of AAPL, the largest index constituent, is being reduced from about 20% of the index to around 12%.  This has generated short-term selling pressure from index-tracking investment pools.

Why do this?  When NASDAQ 100 ETFs were launched a decade or so ago, these vehicles had difficulty meeting SEC-mandated rules on maintaining a diversified portfolio, since then-giants like MSFT or CSCO were so large a part of the index.   In order to be sure of adhering to SEC guidelines, NASDAQ slashed the relative weights of MSFT et al  and beefed up those of then-minnows like AAPL.  Now it has the same problem again, only with different names.  So it’s applying the same process to today’s titans.

Yes, AAPL is scarcely an undiscovered gem.  And, yes, reversion to the mean does happen.  But at 14x fiscal 2011 earnings, AAPL’s stock is trading at right around the market multiple.  That looks way too low to me.

.

No one wants to buy Barnes and Noble?

March 25, 2011 By in Books, e-readers, Industry Analysis, Publishing, Retail Tags: , , , , , Leave a comment

That’s what the Bloomberg news service said the other day, citing interviews with five (count ‘em, five) unnamed sources knowledgeable about the auction of the company that’s now underway.  It appears potential buyers–at least seven, according to Bloomberg–have all lost interest as they have had an opportunity to study the company and its financials more deeply.

What could be their concerns?

Well, for one thing, BKS is a big-box retailer with a lot of real estate under lease that it has to pay for.  And big-box retailers are all trying to shed floor space as fast as they can.   They are suddenly realizing that this floor space has been rendered much less valuable by the rapid growth of online sales.

For another, BKS sells books, a merchandise category that is showing little, if any, growth.  In fact, the company most similar to BKS, Borders, has just gone into bankruptcy, illustrating the parlous state of the industry.  Potentially more relevant, Chapter 11 will likely allow Borders to free itself of many financial burdens and to streamline operations very quickly, presumably turning it into a much more formidable competitor as it reemerges from bankruptcy.

Finally, BKS is a force in internet sales, both of physical books and of e-volumes readable on the firm’s proprietary e-reader, the Nook.  While this puts BKS in a strong competitive position vs. Borders (which has neither kind of online presence), it also puts the company directly into the sights of two larger, much better capitalized, aggressive digital competitors in AMZN and AAPL.

That’s not good.

For one thing, a recent survey by the Boston Consulting Group suggests that, although digital is the future of publishing, most people want to buy tablets, not e-readers.  Score one for AAPL.  For another, the accord that the publishing industry forced on AMZN about a year ago compelled the e-tailing giant to stop competing on price in the digital book industry.  That didn’t mean competition in digital books ceased, as I think the publishers thought.  It just meant AMZN had to shift the focue of competition to another arena, namely, the price/performance of the e-reader.  At the moment, BKS’ color Nook may be in the lead.  But AMZN has much more R&D money to toss around than BKS.  Score one for AMZN.

Given my description, why would anyone even consider bidding for BKS?  A growth investor like me wouldn’t, even though I was a very big holder of BKS fifteen years or so ago.  But deep value investors are another breed entirely, with a very different–and somewhat counterintuitive–investment philosophy.

I look for healthy companies where I think the consensus has seriously underestimated their growth rate.  Deep value investors, on the other hand, look for mediocre companies, or worse, where they think the consensus has seriously overreacted to the bad news that’s in plain sight.  They hope to find assets worth 100 that they can buy for 30 and sell for, say, 60.  This is a tough business, where you’ve got to be very sharp to survive.  But it’s also one where the chance to acquire a company fitting my description above would have such investors rubbing their hands in anticipation.

To my mind, the surprise isn’t that value investors have started to investigate.  It’s that they’ve apparently all lost interest.  This implies they’ve found something in doing their due diligence that wouldn’t be obvious from the SEC filings and that makes them think the situation is riskier than they had imagined it would be.

What would such a risk be?  In my experience, deep value investors are most comfortable with mature businesses.  They tend to like basic industries (like cement or pulp and paper) and simple manufacturing, where the world changes slowly.  They also tend not to like, or to do well with, technology.

So I think their new-found worries come in the digital side of BKS …that once they peeked under the hood they concluded that BKS is in a more fragile condition there than they had estimated.  My guess is that the bone of contention is the cost/market position of the Nook, not the state of actual e-book sales.  The auction is supposed to be over in a couple of weeks.  We may learn more then.

iPad 2 is likely to be a big success: Boston Consulting Group survey

March 9, 2011 By in Current Market Thoughts, e-readers, Industry Analysis, Publishing, Recent Market Action, Surveying, Technology Tags: , , , , , , , , Leave a comment

the Boston Consulting Group survey

The iPad 2 goes on sale this Friday.  It’s faster than the original iPad–as well as sleeker and lighter.  It comes equipped cameras and is available in two colors.  A recently-released internet survey of over 14,000 respondents done by the Boston Consulting Group last December suggests that iPad 2 will be a much bigger success than its predecessor.  This survey follows up on a previous one done in March 2010, just before the launch of the first iPad.

its conclusions

The main conclusions of the December 2010 survey, with is actually about both tablets and e-readers, are:

1.  Awareness of this category of devices is growing.  In the US, for example, 67% of respondents to the survey knew about tablets and e-readers.  That’s up from 54% in the December poll (I wonder where the other 33% live).

2.  Lots more people intend to buy one. Globally, 69% of respondents who are familiar with tablets and e-readers intend to buy one in the next three years.  That’s slightly smaller percentage than the 73% of people from the March survey.  Given that awareness has increased so much, though, the pool of potential buyers is still much deeper than it was a year ago.  Applying the figures to the US, for example, suggests that 17% more Americans want to buy a device now than a year ago.  Half plan to pull the trigger in the next 12 months.

3.  Consumers want tablets, not e-readers.  The margin is 3.5/1 in favor of tablets.

4.  The market understands what these devices do. Respondents said they wanted to use the devices to browse online (85%), read email (84%) and view videos (69%).

5.  People are willing to pay for content…

(Note:  my experience is that people aren’t crazy.  They flat-out lie to surveyors about the prices they’d be willing to pay for stuff.  They regard money questions as part of a price negotiation and give low-ball numbers.  Wouldn’t you?  So I regard the content responses as very encouraging.)

US respondents said they’d pay $5-$10 for a digital book, $3-$6 per month for a digital magazine subscription and $5-$10 a month for a daily newspaper.  These are roughly the same numbers people gave last March.  The figure that jumps out to me as especially high is the magazine one.

6. …but not for the device itself. Respondents from the US say they’d pay $130 for an e-reader (which they don’t particularly want), but  only about $200 for a tablet (which they do).  See my note to point 5.

All in all, the picture looks very good for AAPL.

methodology

BCG had 14,314 respondents from 16 countries:  Australia, Austria, China, Finland, France, Germany, Hong Kong, Italy, Japan, Norway, South Korea, Spain, Switzerland, Taiwan, the UK and the US.  Each provided at least 700 respondents, split equally between male and female.  All were internet users (duh!), and read print books or periodicals.  In Australia, South Korea and China, respondents tended to be clustered around cities; elsewhere they were distributed proportionally in urban and rural areas.

The big advantages of internet surveys is that they’re fast, cheap and can reach lots of people.  The main worry is that the techniques used in traditional surveying to figure out whether respondents really mirror the population you want to find out about don’t work.  See my post on internet surveying for more details.

 

bankruptcy of Borders Group: implications for Barnes & Noble (BKS)

February 21, 2011 By in Books, Current Market Thoughts, e-readers, Industry Analysis, Publishing, Retail Tags: , , , , , , , , , Leave a comment

Borders’ bankruptcy

Last week BGP filed for a reorganization under Chapter 11 of the Bankruptcy Code and announced it had subsequently received new financing from GE Capital.

This wasn’t a big surprise, given that BGP had been reported for some time to be withholding payments to book publishers and to its landlords in order to conserve cash.  What would it be “conserving” this cash for?   –to pay salaries and keep the lights on in the bookstores and warehouses, for one thing  It’s also possible that some of its suppliers had noted Borders’ deteriorating financial condition and were asking for cash payment before shipping new merchandise.

Chapter 7 vs. Chapter 11

Bankruptcy in the US generally comes in two flavors:

–Chapter 7, or liquidation, where the debtor is considered defunct.  In this case, the bankruptcy action consists in selling the assets and distributing proceeds to creditors.

–Chapter 11, or reorganization with the debtor remaining in control. The main thrust is to put the enterprise into position to have a second chance at success.  The firm continues to operate while it restructures.  It may terminate or renegotiate contracts, including leases, under the supervision/assistance of the bankruptcy judge.  Typically, common shareholders and trade creditors are wiped out completely.   Debtholders exchange their obligations for stock in the revamped company that emerges from from the bankruptcy proceeding.

To some extent, bankruptcy can become a self-fulfilling prophecy.  Suppliers typically study the finances of their customers carefully.  They may reduce–or even stop completely–shipments at the first whiff of trouble.  Or they may ask for cash upfront instead of extending credit.  And why not, since their receivables are most likely a total loss once a customer files for bankruptcy.  The result, however, is that the store in question may no longer have the best merchandise, or the former large variety, in stock  …which means more customers stop coming.

reports of the Borders plan

Reports in the blogosphere and in newspapers suggest that book publishers want Borders to shrink its floorspace by about a third in its reorganization.

positive news for BKS?

The stock did go up about 10% last week, as the rumors of an imminent Chapter 11 filing by Borders swirled. So someone must think this is a big plus for BKS..

My guess, however, is that the demise of the current Borders will do little good for BKS.  Three reasons:

1.  Borders will continue to operate, although in about a one-third smaller form.

2.  In a case that I think is very similar to Borders/Barnes&Noble today, in 2009 consumer electronics retailer Circuit City went into liquidation.  How fast are the revenues of rival Best Buy growing today, without competition from Circuit City?  In the US, they’re not growing much  at all.  In fact, on a comparable store basis, they’re actually declining.

How so?  Circuit City’s customers didn’t all flock to Best Buy.  As I see it, the chain’s demise accelerated the trend of consumer electronics sales to a newer technology, the internet, and to the big discounters like Wal-Mart.

In the bookstore instance, the biggest effect of Borders’ shrinkage in size may well be a speeding up in the adoption rate for e-readers.   My feeling is that most of the new business will go to Amazon, not Barnes and Noble, although thee may be some shifting of Barnes and Noble’s bricks-and-mortar customers to the Nook.

3.  Another, somewhat older–but still pertinent, I think–pattern of industry development comes from toy retailing.  As I interpret the data, every year in the first half of the Nineties big discounters like WMT and TGT took market share from Toys R Us.  But every year, Toys R Us took market share away from small independent toy retailers, so it was relatively unaffected by the loss of customers was experiencing.  But then, sometime in the mid-Nineties, there were no more small independents left for Toys R Us to take market share from.  Toys had killed all the ones who were going to die.  The competitive situation had therefore been reduced to Toys R Us vs. the big discounters.  From that point on, TRU was in trouble.

I think that we may be seeing the same mid-Nineties situation emerging in the book industry, with BKS playing the role of Toys R Us, Borders and small independent bookstores the part of the small toy retailers, and Amazon and WMT being the equivalent of WMT/TGT.  If Borders and the small booksellers (who appear to be enjoying a resurgence, by the way) have no more market share to give up, then the new competitive dynamic is between BKS and AMZN.  Of course, AAPL may take some market share as well.

Given that different e-reader systems are mutually incompatible, would you feel more comfortable buying one from a company with a market cap of $84 billion (AMZN) or $1 billion (BKS); with $8 billion in net cash (i.e., after repaying all debt) on the balance sheet (AMZN) or a comparable number we won’t know for sure until reporting time, but which is probably going to be only mildly positive (BKS).  In this case, I think size will count for a lot.


AAPL’s 2Q10 earnings: a raft of records, followed by an aftermarket fall

October 19, 2010 By in Current Market Thoughts, e-readers, earnings conference calls, emerging markets, Industry Analysis, Recent Market Action, Stock ideas, Technology Tags: , , , , , , , Leave a comment

the report

After the close last night on Wall Street, AAPL reported its 4Q10 (the fiscal year for AAPL ends on September 30) results.  At $20.4 billion, quarterly revenue was a record high, as were net profit, at $4.31 billion, and eps, at $4.64.  The company also had record unit sales of Macs, iPhones and iPads.  AAPL guided to December quarter eps of $4.80.

Despite the stellar numbers, AAPL’s stock fell by about 6% in aftermarket trading.   This same fate befell the shares of IBM and VMW, both of which also reported above consensus results after the bell.  So this weakness may simply be the reaction of short-term traders whose plan has been to “sell on the news”–no matter what the news was.  In AAPL’s case, there are one, maybe two, sore points with investors, though–iPad sales and the tax rate.

details

AAPL sold 3.9 million Macs during the quarter.  That was 440,000 more than in the previous record quarter (3Q10) and a 27% gain vs. the year-ago period.  This compares favorably with the overall PC industry, which grew by 11% vs. 2009.

iPod units fell by about 11% year over year, to 9.1 million.  Hardware revenue fell by only 5.5%, however, as consumers continued to gravitate toward higher-priced models.  Throw in the iTunes store and sales of accessories, and revenues in this very mature segment and revenues were up 5% vs. the comparable quarter of 2009.

With iPhone4 available for the full quarter, iPhone units were up a stunning 91% year over year, compared with a 64% global advance by the smartphone category.  Despite the huge gain, AAPL was capacity-constrained during the quarter and thinks it could have sold more iPhones if it could have manufactured them.

In its second quarter of existence, iPad sold 4.188 million units vs. 3.27 million in its inaugural three months.  Manufacturing capacity, now reportedly at 2 million+ units monthly, appears to have caught up with demand in the major markets where the tablet was launched.  AAPL ended the quarter with an extra 500,000 units in channel inventory.  My guess is that AAPL has about 1.2 million iPad units in stock.  The company’s only comments are that supply and demand are in balance in the markets where iPad is available so far; and that inventories are 3-4 weeks supply, below the 4-6 weeks it would prefer.

The Apple Stores continue to expand rapidly.  At $3.57 billion, up 75% year over year, store revenues were a record.  Sales of Macs totaled 874,000 (another record), half of which went to customers who had never owned a Mac before.

AAPL ended the quarter with no debt and $51 billion in cash.

The fourth-quarter tax rate was 21%, about 5 percentage points below company guidance and about 3.5 percentage points below the full-year rate.  This is partly because sales were stronger than expected in low tax-rate jurisdictions outside the US, partly due to year-end adjustments between what the company estimated (and recorded in its quarterly income statements) its tax liability would be and what it actually turned out to owe.

why is the market upset?

After all, sales of the iPhone4 were at least a couple of million units better than the consensus had expected.  Macs were strong, as well.

The main issue is the iPad, I think.  After all the hype about the device and recent stories by industry experts attributing at least a portion (maybe even most) of the current weakness in consumer PC sales in the US and Europe to cannibalization from the AAPL tablet, expectations were very high.   Investors thought they’d hear that the company was still struggling to meet demand and it had sold about 5 million units in the quarter.  What they heard instead was that inventories were starting to accumulate and that sales were a bit under 4.2 million.

Yes, the “shortfall” in units sold was more than made up for by iPhone strength.  But the iPad market has been transformed in analysts’ minds from one where they can imagine boundless growth for a long time to one where available information forces them to think demand is 1.5-2 million units a month.  To some degree, the “dream” is punctured.

The tax rate is also a potential issue, for me anyway.   The actual 21% meant after-tax income was about 7% higher than it would have been under the 26% rate AAPL had guided to.  But operations were very strong on a pre-tax basis.  And I don’t think today’s Wall Street pays more than fleeting attention to the tax rate in any event.

should it be?

I don’t think so.

Before the earnings announcement, analysts were estimating that AAPL could earn a bit over $18 in the 2011 fiscal year.  That number will probably rise to $19 as the factor the strength of Macs and the iPhone into their numbers.  At $300 a share, that would mean AAPL is trading at under 16x prospective earnings, with over 30% earnings growth in prospect.

Yes, maybe the iPad and iPod results, plus the increasing importance of foreign markets, mean that AAPL products don’t all have immunity from economic weakness in the US and Europe.  Yes, maybe thinking about AAPL’s earnings has lost some of the element of boundless upside.  But, as I’ve pointed out elsewhere, AAPL sports nothing like the 35x-50x PE multiple that a growth stock usually carries.  In anything other than the panic conditions of late 2008 and early 2009, the very low multiple limits any downside, I think.

Follow

Get every new post delivered to your Inbox.

Join 97 other followers