Apple: Accounting rule vote today
[UPDATE: The FASB voted 5-0 Wednesday to approve the rule change. See here.]
The Financial Accounting Standards Board (FASB), the organization empowered by the SEC to set accounting standards in the United States, is set to vote Wednesday, Sept. 23, on rule changes that could significantly affect Apple's (AAPL) reported earnings and stock price, according to a report to clients issued Tuesday by Morgan Stanley's Kathryn Huberty.
The new rules — for which Apple lobbied heavily — would put an end to iPhone subscription accounting, a balance-sheet sleight of hand that has confused analysts and investors from the day the iPhone hit the market.
Although the changes won't affect Apple's cash flow, Huberty sees short-term benefits "from a technical and sentiment perspective" including (in her words):
- Inflows from quant driven strategies and retail investors as AAPL shares will screen cheaper on “New” GAAP consensus estimates vs. “Current” GAAP (19x vs. 23x);
- Likelihood of larger earnings surprises given analysts have consistently underestimated iPhone gross margins which have ranged between 50-60% over the last year.
The bottom line, she writes, is that the new rules allow Apple to recognize the majority of the revenue and direct costs of an iPhone upfront (she estimates 95%), shifting value from the balance sheet to the income statement.
Although the rule change will affect many technology companies, Huberty points out, it is particularly relevant for Apple since the iPhone, which is subject to current subscription accounting rules, represents approximately 33% of its revenue.
The rule changes, if ratified, wouldn't become mandatory until Dec. 2011. But Huberty believes that Apple will begin implementing them in their first fiscal quarter of 2010, which begins next week.
A Mad Money report on the proposed rule changes last Tuesday sparked a rally that sent Apple shares up nearly 10.8 points (6.1%) to a 15-month high of $186.79 before it ran out of steam. The stock closed Monday at 184.02.
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But Huberty downgraded Apple at $100 last Dec. I believe so you've got to take that into consideration.
Change:
Inflows from quant driven strategies and retail investors as AAPL shares will screen cheaper
To:
Inflows from quant driven strategies and retail investors as AAPL shares will seem cheaper
ex ped: The original quote was accurate as I had it. Huberty writes in analyst-speak.
Oh, good! I expect to wake up some particularly sunny day in a week from now and see my Apple shares with a 50% premium added. I'm practicing my best victory dance and added chant. Go Apple, go. As an Apple worshipping fanboy, I have faith that all wrongs will be righted in one day.
FASB, don't fail me now.
I love that Huberty's first point implies that while retail investors didn't 'get it,' analysts knew all along what was happening.
Yeah, sure.
I think I saw perhaps one or two of the analyst bunch have that 'Wait! What?' moment as Apple grew its cash horde by $1 billion a month. I'm fairly sure that Huberty wasn't among that group. Pitiful…
Last chance to buy Apple cheap, barring a "W" recession.
IMHO.
Of course, I'm just an Apple "fanboy", so what would I know….
Hilarious. I would wager all my AAPL shares (which, admittedly, aren't many) that most retail investors have known about the actual value of Apple's iPhone business while most analysts haven't! Retail investors, especially the stock picker types tend to do their homework, while analysts and institutional investors look at the numbers on quarterly statements….well, those numbers are about to change bigtime and I bet many analysts won't come within 20% of estimating what those numbers actually are when AAPL reports earnings in January.