Sunday, October 30, 2011

Jeff Matthews Is Making it Up... on Apple

I like Jeff Matthews, he is an interesting guy and I followed him for awhile.

However, his recent post on Apple appears to be very poorly thought out and ignores fairly obvious facts. In the article "Apple: For What its Worth", Mr. Matthews suggests Apple is having a retail traffic problem based on his following observation:
"For example, from the December 2009 to the June 2010 quarter, retail visits rose from 51 million to 61 million.  This year, visits from December 2010 to June 2011 did not rise at all—from 76 million to 74 million."

Mr. Matthews willfully ignores the different release dates for key Apple products between 2010 and 2011, hopelessly undermining any possible point he was trying to make. Apple is driven by a few key products, with current best-sellers being the Ipad 2 and Iphone 4S (released Oct 4, 2011). In fact, the Iphone 4S has had one of the strongest levels of demand (at-launch-date) of any product Apple has ever released.

Apple products are big events that draw huge crows for opening-day release. The previous Iphone 4 version was released June 28, 2010, thus fell within the bounds of Q2 2010. The recent release did not occur until Q4 2011, so why would Jeff Matthews believe Apple investors should focus on Q1/Q2 foot traffic in Apple stores?  Perhaps Jeff Matthews believes investors visit Apple Stores simply to enjoy the aura and vibe of older Apple products (which they likely already own at home?)

The only relevant comparison is demand at-launch for relevant product releases. Jeff Matthews may be shocked to learn that consumers only wait in lines at Apple Stores for new Apple products, not old ones. Hence the difference in foot traffic. Ironically, Mr. Matthews post was reblogged by fairly prominent people from Josh Brown, to Barry Ritholtz and Herb Greenberg without making this fairly obvious observation.

A rare shortcoming for Mr. Matthews, but pretty silly one all the same.


Beating Analyst Estimates Means Very Little (Apparently)

Beating Analyst Estimates Means Very Little (Apparently)
An interesting chart was posted showing the number of S&P 500 companies "beating" analyst estimates.

As seen below, the number of "beats" has trended significantly higher over the past 20 years. So much so, that even in third-quarter of 2008 when the US market experienced one of the largest one-quarter shocks since the Great Depression, nearly 58% of companies still managed to "beat expectations".

Ironically, as more and more companies have beaten expectations, actual equity market performance has been abysmal (for more than a decade). Perhaps we can go back to the good old days of the mid 1990's when fewer companies met analyst estimates and their stocks performed strongly anyway.  

Conclusion- While various studies have shown that changes in earnings expectations generate abnormal returns, the charts below suggest there is little value in trying to predict whether companies will beat analyst expectations (since most of them do "beat" consistently and the long-term market impact is negligible.

20-year S&P Chart

Monday, October 24, 2011

Netflix's "coming to jesus" moment arrives...

My last blogpost noted that Netflix was in a bubble (at $165/share) in September 2010. In after-hours trade, the stock is down to $85/share, for a nearly 50% haircut.

As you might recall, the main reason for citing Netflix as being in a bubble was based only partly on valuation and the rising costs to procure content. The real catalyst was the utter hubris displayed by Netflix CEO Reed Hastings who deferred to his core subscriber base as "self absorbed" and ill-informed of anything going on the world. This hubris was evident in Netflix attempting to raise prices 60% and split their services, as if they were selling an inelastic product (i.e- milk, gasoline, etc).

I will defer to my prior post on Netflix, but needless to say the massive increases in content-acquisition cost have not filtered into the amortization on the income statement (Nor have they gotten Starz to agree to content deal yet).

Summary- I would say this, at an $87 price, Netflix is trading at a $5bln Market cap (<2x sales and 12x EBITDA). The company has a base of subscribers that have greater monetization and loyalty than any of the stupid coupon/groupon/deal sites that seem to be tickling investment banker's fancy. As such, Netflix has greater "network value" that is inherently more stable then a flash-in-pan like Groupon (who is wholly reliant upon retailers offering 50% discounts to Groupon for free on an ongoing basis).

 IF Groupon managed to IPO at a ridiculous valuation of $10Bln, it would be an interesting long/short to buy Netflix/short Groupon. Otherwise, have no position (no current short position in stock, currently short Netflix streaming following service cancellation)