Annex Bulletin 2012-02                              February 9, 2012

A partially OPEN edition



Oracle Runs Out of Oracles (Analysis of latest quarterly results)



Updated 2/09/12, 10:30AM HST

Analysis of Market & Business Performances of Top Global IT Companies

Apple Leaves Everybody in Dust

Meet new king of IT; Microsoft leapfrogs over IBM, Google also behind

But is Apple "killing the goose that laid the golden egg?"

HAIKU, Maui, Feb 9, 2012 - Now that the year-end earnings season is over, we thought we'd try to take stock of the health of the industry leaders and see who is leading and who may be faltering.  And the verdict is - Apple is leaving everybody else in the dust.  It has now even squeezed out HP as the industry's largest company.  So Apple is now king in both revenues as well as profits.  Just think, both its market cap and profits are now more than twice as big as Big Blue's!

Steve Jobs would be proud.  

Meanwhile, Microsoft is also surging, and has now leapfrogged IBM again in terms of market cap.  

Overall, the top 15 global IT leaders' stock market valuations are up 10% in the last two+ months. to $1.83 trillion (right chart).  What's interesting is that the average P/E ratio is actually down slightly (-3.2%), implying that there is less fluff and more substance (meaning stronger profits) in these results.

Among other industry leaders, Google had been lagging behind but has also come up in the world lately.  And even the industry's second largest company - HP, a laggard when it comes to market cap through all of 2011 - has shown some strength lately.  HP has outperformed both the Dow and its main rival - IBM - since early December (see the chart below).

The above charts reflect the market changes since Dec 1, the last time we took temperature and checked other vital sign gauges of the top IT leaders (see IBM on Cloud 9). 

Underneath the obvious market valuations, however, there are some interesting trends that are brewing under the surface.   One of them is that Wall Street seems to expect the "old guard" IT companies to stage a comeback this year.  Take a look at the above P/E Ratio Change chart.  Microsoft, Accenture, CA, Dell, Cisco and Intel are at the top.  Even HP appears better positioned than Apple, IBM, Yahoo or Google.

Of course, that's because the industry leaders have already experienced a significant appreciation in their respective market caps.  Which leaves the "old guard" look like the future up and comers.

Is Apple Killing the Goose That Laid the Golden Egg?

The actual earnings picture is slightly different.  Overall average of the top 15 global IT leaders is up 8% on an annualized basis since the last time we checked in December.  So business is good.  And in some cases, it is exceedingly good, as you can see from the charts below.

SAP and Apple are thriving, up 37% and 36% respectively. EMC, CA are also growing in double digits.  The rest, well, the rest are all BELOW average.  If we were to add to this chart the results of the telecom companies, the gap between the "have's" and the "have not's" would be MUCH greater. 

That's because while the iPhone is making Apple richer than God, it is also killing the companies that sell it - the telecoms (see Apple iPhone Success Strangles Profits At Sprint, AT&T, Verizon).  Sprint, for example, just announced a loss of $1.3 billion, widening the red ink from a year ago by a considerable margin.  AT&T and Verizon are also losing money on their best selling product. Worse, because the iPhone is a hog when it comes to data transfers, it is forcing the telephone companies to spend even more money to expand the bandwidth of their networks.

So this may be the classic case of Apple "killing the goose that laid the golden egg."  Which begs the question: How long can Apple's leadership last?  For now, the answer is as long as the phone companies have enough cash to spend and their shareholders enough patience to stomach the losses.  When either of those two run out, Apple had better be ready with a "Plan B."  Which means lowering the wholesale price at which it sells the phone to the telecoms.  Which means lower profits.  Which means lower stock prices.

Or, the phone companies will have reduce their deep discounts for iPhones which will kill the market for them. In which case everybody loses.  So this is not a likely scenario.

Get the picture?  The telecoms are Apple's boots on the ground.  In order for a business arrangement to succeed in the long run, it must be a "win-win" deal.  Currently, it is clearly a "win-lose" deal.  Apple wins.  Everybody else loses.  That is not a sustainable business model in the long run.

So no matter how many gazillions iPhones or iPads consumers are willing to buy at the current prices, something is going to have to give in the future.  And that "something" is looking like the Apple stock price.  So for those with strong stomachs, this may not be a bad time for a shorting this stock.

Click here for detailed tables and charts (Annex clients only)

Happy bargain hunting

Bob Djurdjevic

Volume XXVIII, Annex Bulletin 2012-02
February 9, 2012

Bob Djurdjevic, Editor

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