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Applaud AAPL Management

AAPL delivered another great quarter after market closing yesterday (7/21) , beating both EPS and revenue street estimates ($1.19 and $7.46 billion vs. $1.08 and $7.37 billion.) The stock took a beating after AAPL failed the Wall Street's expectations in gross margin and EPS for the coming Q4 and concerning of Steve Jobs's health. It is well known and perceived for many on the street that AAPL has traditionally provided very conservative guidance for coming quarters so that the management have some insurances to delivery positive surprise when it is time reporting earning. I believe there is significant truth about the practice and it is common for some market participants to use the tactics to spin the lack luster business operation into positive light.

For long term (>1 year) investors, however, what AAPL did may prove to be a responsible management strategy. Considering the fact that AAPL has continuously developed some amazing new products distinguished them with "cool" factor with unparalleled fan loyalties, and constant superior financial performance for stake holders, the expectations for AAPL certainly have grown exponentially since the 1st IPod was introduced 7 years ago. Without AAPL management's lowball guidance in the last few years, AAPL might have been traded at much higher level and certainly at a much great risk level. If excess expectation is not tempered, it can feed on itself and on new product frenzy, investors can become irrational euphoria. Any minor miss or miscue in the operations and financial performance due to management or business/economic variables could have devastating impacts on equity performance and business operation. To maintain long term brand and business vitality, it would be important for the management to "immunize" the expectations to prevent euphoria and put too much risk into the stock.

Besides the headlines news that 1mm units 3G iPhone was sold over the 3 day weekend and had sold out in most Apple Stores since the release in the US, we may get some insights on IPhone phenomenon by examining the traffic on Google search using Google Trends. It is a surprise to find that even though IPhone is just entering overseas market, the #1 ranking for searching language is Russian and #1 region is Hong Kong for "IPhone" search traffic. If we use "3G IPhone" as search phrase in Google Trend to examine the traffic for last 12 months (see chart), the #1 searching language, ready for this, Vietnamese, the #1 region is Hong Kong and #2 is Vietnam. The US comes only at #4 after Russian! For comparison, "BlackBerry" or "BlackBerry Bold" search will give you no surprise results, that is English as #1 in language and Canada as #1 in the regions, US comes in the 2nd.


For what happened in last night and today, I can only assume what management did is to manage the expectations for the long term business health. If that is the case, I think it is a savior and responsible business strategy to anchor the market expectation. Is any truth that the guidance is in fact directly related to economic weakness and "product transition"? It probably have something to with it, but I would not surprise that for the sake of long-term benefits and health, the management would not want to see "frenzy" go too far. For investors, this provide a great opportunity to establish positions.


Disclosures: long AAPL calls
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