Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?

Courtesy of Reggie Middleton, posted at Zero Hedge and originally posted at Reggie’s BoomBustBlog

Goldman has recently issued a strong buy recommendation on Apple, offering a $430 price target. I have been on record many times stating that Apples will be facing the toughest competition of its existence since Microsoft nearly put them out of business. This, of course, appears to be in direct contravention to the Goldman Sachs call which just happened to come out the day Apple hits its all time high. Being that Apple has more than its fair share of fans who ignore common sense, this is enough to set the stock on fire. The question still remains though, “Is Goldman right?” Goldman very well could be right, but not for the reasons most retail investors believe. Despite overwhelming evidence plus plain old history to the contrary, many investors and mainstream media outlets still take the sell side of Wall Street at their word. Sell side analysts are marketing arms for the brokerage sales force, the investment banking sales force and the traders who move inventory in and out of their respective banks. What they are not are wealth and strategy advisers for retail and institutional investors. Their historical performance clearly illustrates this, thus their is not need to take this entrepreneurial investor and blogger’s word for it. Well, for those of you who either don’t know of me or don’t know of Goldman, here’s a quick recap of Reggie Middleton vs. Goldman Sachs:

Who was more accurate concerning Google? Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!! Monday, November 8th, 2010

Who was more accurate concerning Lehman Brothers, the Ivy league, ivory tower boys doing God’s work or that blogger with the smart ass mouth from Brooklyn?

Please click the graph to enlarge to print quality size.

As a matter of fact, who was more accurate during the ENTIRE Asset Securitization and Credit Crisis of the last three years?  We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street’s sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

From the October 28th, 2008 post “Blog vs. Broker: Whom do you trust?”

Reggie vs Wall Street

As many may have surmised, my team and I have blown out the results of Wall Street’s biggest and most reknown name brand brokers. It wasn’t even close enough to fit in a small graph. JP Morgan failed to beat the S&P over the period that the blog has been in existence (since 9/07). The blog’s research returns are 132% above the BEST performing Wall Street Broker’s analyst recommendations. For the supporting data that goes behind this study, see Blog vs. Broker, whom do you trust!. Please click the graph to enlarge to print quality size.

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Reggie vs Goldman Sachs

Why didn’t Wall Street read my post on Lehman being a yellow lying lemon? See “Is Lehman really a lemming in disguise?” and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a “buy” at about $130 per share. See Is this the Breaking of the Bear?. ⁷ We all know how both of these stories ended.

Now that we have have that out of the way, let’s return to the topic at hand. Goldman’s Apple call is rather late if you ask me. Apple has been on a tear as of late and has obliterated much of its competition. That was then, this is now. Apple has a new level of competition in the revamped Microsoft phone OS (again, rather late, but a phenomenal effort that should tie in well with other products, more of a threat to RIMM than to Apple, though), and more so from Google’s Android OS and related offerings. Apple must battle Google on the OS front and top hardware manufacturers on the equipment front (ex. LG, Motorola, HTC and Samsung), many of which Apple must actually source parts for the single product from which it derived 70% of its profits! That sounds awfully risky to me, you know relying on your staunchest competitors to keep the vast majority of your profits rolling in. See “A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!” for detailed analysis of this Apple conundrum. Apple also has to battle literally tens of thousands of individual open source programmers who contribute mightily to the Google platform. For those of you who don’t think this makes a big, and I mean very big, difference I suggest you mozy on over to the XDA Developers site to see what they have going on. They have solved much of the major (and practically every minor) issue(s) with the Android platform in near real time an made the fix available to the public. There is no way in hell Apple can code and develop at this pace, and it is showing in the rate of development of Android (3 major releases in the time span that Apple has released 1).

In Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space, I outlined a preliminary strategy that Google is using to monetize Android at the expense of Apple. What wasn’t mentioned in that article is probably the most serious threat, not just to Apple but to any company that attempts to offer software through app stores. Let’s walk through the logic behind this wise man’s thinking by looking at the phenomenal growth that is Android.

1. Android Sales Overtake iPhone in the U.S.: Tech News
2. Google: Android now shipping on 60000 handsets per day Feb 16, 2010 …
3. 160000 Android Phones Sold Per Day Jun 23, 2010 ..
4. Google: 200000 Android Phones Sold Every Day | Gadget Lab | Wired.com Aug 5, 2010
5. @ARubin: 300000 Activations Per Day December 2010

Android now outsells iOS in the US and worldwide. This is not lost on developers who wish to monetize their efforts. The most ubiquitous platform will get the most developer attention. It’s as simple as that. We have modeled and predicted this occurrence in detail for paying subscribers (click here to subscribe) with our our Smartphone Market Model – Blog Download Version; which granularly breaks down the market share of various handset manufacturers with data as recent as last quarter, catching the launch of the iPhone 4 and the HTC Evo, two of the most important product launches of the year. We have also included the Mobile Operating System Market Share Model which compares OS shipments across device and hardware type.

So, what does this all mean? Google was able to commoditize, and then cannibalize several other industry’s revenues by offering their products for free or at a highly discounted price while still profiting by subsidizing the offering with ad revenues. Google takes the advertising model to the next level – just ask those in print media! In order to do this, Google needs volume and mass. They need to be the leader in client software. They have actually achieved this in an phenomenally short period of time and their rate of growth is actually increasing dramatically. If Google succeeds in transforming the software delivery model to that of an ad-based model, the current Apple App Store model and all of its competitors (Ex. Microsoft and Research in Motion) who are trying to emulate it are going to have their business models totally up ended. The kicker is, even they recognize this risk, the only way to do anything about is to have both the advertising infrastructure (ex. Google’s Acquisition of AdMob) and the sales mass and volume (ex. 300,000+ activations per day) to be able to monetize such aspirations.

This is why those who proclaim that Google only makes the OS, not the hardware and Apple profits from both are absolutely missing the forest because of all of that brown bark stuck in their eyes! Some of the best apps available for smart phones ring now are ad supported and free to the end user, save certain premium upgrades. Guess who those apps come from? Google Voice, Google Earth, Google Apps, GMail, Google Analytics, Google Voice Search, etc. Then there are other apps that are simply phenomenal which don’t come from Google but still look to take advantage of the ad model. Long story short (that is if it isn’t already too late in this lengthy missive:-)), the probability of Google succeeding in making mobile and even desktop software (Google has added an app store to its Chrome OS as well) ad supported is simply too great to ignore. If it succeeds, significant disruption will ensue to the benefit of the consumer and to the detriment of Google’s competitors.

As excerpted from Even Steve Wozniak, the Co-Founder of Apple, Made a Freudian Slip Extolling the Virtues and Inevitable Dominance of Android! Friday, November 19th, 2010:

The Mac OS actually had the first mover advantage and blew it doing the same thing that they are doing now, which was trying to fight the commodization of their cash cow platform by maintaining a totally vertical manufacturing and distribution channel – controlling software, hardware and firmware while refusing to license any portion out. The result was the proliferation of PC clones that drove the costs of computers considerably below $1000 per unit while Apple was charging up to $3000+ while having an inferior selection of 3^rd party applications. Does this sound familiar??? Think of the growth of the Android platform to date.

It is absolutely amazing to hear the founder of Apple iterate such, even though he did attempt to backtrack some. Even with the back tracking, he still assets that Android will probably takeover the market as did Windows. Apple investors should take note, and look at MSFT’s revenues and profits as compared to Apple’s over that same time period. Even Steve Wozniack is implicitly endorsing Google as an investment! He also refers to voice commands, which is absolutely phenomenal and has no comparison in iOS.

Keep in mind this feature came out 2 entire revisions ago (a 3rd, major upgrade – Gingerbread – is due out any day now). In addition, stating that “almost every app I have is better on iOS” is not a glowing endorsement from the guy who literally started and owns the company makes iOS. Parsed semantically, it is an admittance that the  apps he doesn’t have, and cannot get are superior than what is available on the iPhone. Before anyone jumps on me for that analysis, take a look at the apps that are unique to Android and let me know if I have a point:

For the record, I use this app regularly on my HTC Evo, and it is not only quite multi-linguistic conversation starter, but literally amazing. I have muddled through conversations in Taiwanese, Mandarain, Hatian, Dutch, etc.

This is also a revolutionary product that is unique to Android in terms of full integration. It can be used indirectly on other platforms, but the Android implementation/integrations is far superior.

I invite all to take a look at the power and capability of Google Voice via their Youtube Channel.

Those of you who can’t see the potential in this will probably never be convinced, so I won’t even bother elaborating…

While the effects and templates are uber cool in this app, the reviewer failed to elaborate on what is by far the most notable feature of this Android camera replacement app, and that is the ability to set Android to record images nearly uncompressed in JPEG and at max resolution. On my HTC Evo, that is 3264×2448 pixels using the 8 MP camera. The highest settings create 5 to 7 mb files, but the pictures are absolutely phenomenal when taken in adequate lighting. I have had several professional photographers (as in more than 2) say that their next phone will definitely be an Android after seeing how this app combines with the Evo’s 4.3 inch screen and 8 mp camera. The range of real time processing settings and templates are very, very extensive as well.

So, does all of this Android stuff really make a difference? Let’s excerpt Empirical Evidence of Android Eating Apple!

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Below is a graph showing the longer term trend of Apple market share in the smart phone space. It illustrates the explosive growth Apple has had through its iPhone series, and it also shows some seasonality (ex. lull before hardware upgrade season, etc.). As you can see, the growth trend, viewed either directly or as a moving average, shows marked downward momentum. Of course, it is highly unreasonable to expect a company to continue to grow at the pace that Apple has, but that is exactly what many Apple valuation models that I have come across have – literally hard-coded in. This is folly, in my opinion – particularly considering the effect of the Android competition that is already showing up. If you look closely, Apple’s smart phone market share is already showing NEGATIVE growth!

Since I know that the chart may be a little difficult to read at the tail end encompassing several years of data, I have taken the liberty to drill down to the past year to get a closer look. Remember, Android sales didn’t really get started until 8 months ago, and the big surge didn’t occur until the Evo/Droid X/Samsung Galaxy series were launched in June, July and August – most of which is not captured here. The same is to be said for Apple and the iPhone 4.

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Despite increases in both the overall mobile market and more importantly, the smart phone contingent’s penetration of said market:

1. Apple’s smart phone shipments are showing a negative growth trend
2. and more importantly, Apple’s smart phone market share is experiencing a very sharp downward trend as shown by both direct observation and that of the 2 period moving average.

The game has been changed ever since HTC released the Evo, which is essentially a networked pocket supercomputer. We outlined the technically superior features of HTC’s flagship phones in “A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone” as well as supplying a graphical comparison of the major Android handset releases compared to their most potent competition – Research in Motion Blackberries and the Apple iPhone:

Note to Subscribers, this chart takes precedent over the one included in the Apple business strategy document, Apple business model note. This also ties in with Apple iPhone Profit Margin Scenario Analysis Model.

This has not been lost on the market either, reference Big Money Starts to Dump Apple After I Warned of Margin Compression on CNBC Hours Before Apple Announced Compression Friday, November 12th, 2010 and Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!! Monday, November 8th, 2010 and most importantly A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!Tuesday, October 19th, 2010

You see, I thought it was rather prescient to call margin compression, live on CNBC (3:40 into the video), just hours before Apple announced… Margin Compression… At a time when just about everyone who could spell Apple shouted Buy! Buy! Buy! Buy! Buy!!!

So, following up on the piece that I did just a few hours ago – Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He? along with this cute chart…

Relevant links and articles:

1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
4. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
5. Android is gaining preference as the long-term choice of application developers
6. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
7. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
8. Apple on the Margin
9. RIM Smart Phone Market Share, RIP?
10. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
11. How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
12. Empirical Evidence of Android Eating Apple!
13. More of the Android Onslaught: Increasing Handset Revenues and Growth
14. Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
15. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
16. The Complete, 63 pg Google Forensic Valuation is Available for Download
17. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
18. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
19. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
20. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
21. A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!