This week’s Apple trading strategies (9/16-9/20)

A place for Apple traders and investors to share their best ideas.

To get things rolling, here are CNBC’s finest Friday trying to make sense of Rod Hall’s head-snapping Apple note in a segment they called “Apple Turning Sour?“:

Apple down today after Goldman Sachs cuts price target from CNBC.

Disclaimer: Having never owned or traded Apple, I have nothing to add. Don’t blame me if you drain your IRA doing something you read about here.

See also: Last week’s Apple trading strategies. 

7 Comments

  1. Gregg Thurman said:

    This is an accounting issue PERIOD. Margins may decline for Hardware, but will go up in Services.

    The sale occurred, the Revenue was booked, it matters little where it is allocated, overall margins will be minimally impacted if at all.

    Additionally, nobody discussed Apple TV+, Apple Arcade subscription sales outside the freebie promotion, of which I think there will be a lot.

    It is obvious to me that the “forum” had not thought this through before commenting, therefore should be ignored.

    A thought: Apple should do a series a la The Morning Show inspired by CNBC talking heads. Make it a comedy along the lines of Dumb and Dumber.

    1
    September 15, 2019
  2. Robert Paul Leitao said:

    I’m not a trader. But over the years I’ve done a lot of accounting. Apple’s share price took a hit last week from the Goldman Sachs downgrade and what I consider to be some provocative conjecture on how Apple might account for the free trial of Apple TV+.

    Apple has and will defer revenue recognition on certain services that are offered at no additional cost to purchasers of the company’s hardware products. This includes iCould services, etc. For Apple Care, for which consumers pay for the extended and expanded service contract, revenue recognition is deferred over the 2-year or 3-year contract period. The thing about deferred revenue is it is recognized over time. In other words, there is no loss of revenue and there’s no impact on cash flow.

    Looking at it in this simple example: Deferred revenue is received when a product is purchased and an implied service contract begins. Apple has the cash. There’s an offsetting liability established. Apple still has the cash. Over the life of the service contract, the liability is reduced and the revenue and associated margin are recognized. Throughout the deferred revenue recognition process, Apple has and keeps the cash.

    So what’s the worry?

    1. Apple has the cash.
    2. The revenue is recognized over time as net sales along with an associated gross margin.
    3. Apple has the cash.
    4. Apple has the cash.
    5. Apple has the cash and can do with the cash what management desires.
    6. Over time, all of the revenue is recognized and Apple has the cash.
    7. There’s no loss of revenue and Apple has the cash.
    8. It doesn’t matter to which revenue segment Apple assigns the revenue. Apple has the cash.

    I seriously doubt Apple will assign $60 of revenue from every Apple TV, Mac, iPad and iPhone sold to Services on a deferred revenue basis. Let’s say I purchase an iPhone and a Mac and maybe another Apple TV this year. I don’t get three free trials. I get one free trial and that will be shared with everyone on my family sharing plan no matter how may of the aforementioned Apple products they might buy over the next 12 months.

    I’m not a trader. But if the shares sell off over something as silly as the Goldman Sachs approach to analyzing Apple’s purported revenue recognition, I might be a buyer.

    I like Goldman Sachs because of the Apple Card. The Apple Card works for me because I get the cash and not “points” to redeem is some convoluted process to get the cash. That’s the way it was explained to me.

    Why can’t Goldman Sachs explain how Apple gets the cash as easily as the firm explained how I get the cash from using my Apple Card?

    3
    September 15, 2019
  3. Fred Stein said:

    It’s hard to take a panel seriously that comment on Rod Hall’s note.

    0
    September 15, 2019
  4. Gregg Thurman said:

    from your great clarification I’m thinking Calls (I am a trader) bought just before earnings, with an expiry a week or two after earnings, as investors will be positively surprised by Apple’s 4th quarter results and positive guidance for the December quarter.

    0
    September 15, 2019
    • Robert Paul Leitao said:

      Gregg:

      You may remember the days Apple had to defer all revenue on iPhone sales. The earnings multiple rose because the market anticipated the impact of deferred revenue over time and the market focused on cash flow while Apple provide both GAAP and non-GAAP results so investors and analysts could better understand the company’s results.

      Even if in some weird alternate accounting universe Mr. Hall’s accounting method was used, the market would adjust the company’s earnings multiple in anticipation of the positive impact of deferred revenue on future earnings. For the following reasons, the impact is likely to be small, not large.

      1. Any deferred revenue allocation from the free trial of Apple TV+ is exhausted 12 months after the purchase of the applicable product and activation of the free trial.

      2. The free trial must be activated within 3 months of the purchase of the associated device.

      3. Only one free trial is allowed per family sharing plan.

      4. This is a means for Apple to promote Apple TV+. It’s not a means to defer revenue and create investor confusion.

      In other words, if a customer does not activate the free trial within 3 months of the purchase of the device, there is no cause to defer the revenue. If a deferral is created upon purchase of an applicable device and the consumer does not activate the free trial, that deferral must be exhausted not after 12 months but immediately upon the expiration of the 3-month period to activate the free trial.

      I don’t know if I mentioned it before, but these points are important.

      1. Apple keeps the cash from the device purchase.

      2. Apple keeps the cash even if the company defers some of the revenue from some of the device purchases.

      3. If some revenue is assigned to Services from device purchases due to the free trial, it doesn’t matter because:

      4. Apple has all of the cash from the device purchase no matter when all of the revenue is recognized or where the revenue is assigned.

      1
      September 15, 2019
      • Gregg Thurman said:

        Robert, your points are well taken.

        Going further back in time I remember WS describing Apple as the Pod company, completely ignoring (even denigrating) the Mac business.

        My point is that Apple reinvented itself with the iPod, and again with the iPhone, and again with the iPad, and again with the Apple Watch, and is now reinventing itself with Services.

        During each reinvention WS failed to see the potential for success, instead focused on the negative.

        The negative this time around is WS’s failure to see that the freebie promotion is just that, a promotion, and like all promotions it will come to an end. Ergo, concerns about the accounting, during the promotion, is much like rearranging the deck chairs on the Titanic. Their focus today is a meaningless intellectual exercise. As I pointed out in a previous post we don’t know how long Apple will maintain this promotion, and if Apple does extend it beyond the December quarter, under what terms it will be extended. I really think this promo will not survive the March quarter. By then Apple will have a library of 18 – 20 titles (most recurring series) generating, at minimum, 40 new episodes per month – for $4.99 per month.

        The amount revenue deferred from November through March will be small in comparison to full year sign ups. I think this last point is the one WS is most egregiously missing.

        I really like your repeated statement, “Apple keeps the cash” (how right you are), a point you would think a competent financial analyst would be making vs the mealy mouthed responses on CNBC. The responders either didn’t know any better, or they were being professionally polite to one of their own. Either way they proved themselves as unworthy of public trust.

        0
        September 15, 2019
  5. Fred Stein said:

    Rod Hall and the panel missed the point.

    On Tuesday, Apple launched an aggressive pricing strategy.

    The price of the iPhone 11 drives not only dives upgrade revenue but upgrades to a device that improve the user experience of Apple’s media and gaming services, which are also priced aggressive for multi-year revenue streams. As Robert, above, notes, they have the cash and cash flow to support this… even in a downturn.

    0
    September 15, 2019

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