Weekend Reading

29 April 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Apple released their earnings this week. Here are a couple articles we found particularly interesting: 

Apple’s Watch Outpaced the iPhone in First Year (Daisuke Wakabayashi, WSJ)

The anniversary of the Apple Watch was this past Sunday (4/24/16). While the functionality and benefits of the Watch are still being developed, first-year sales are estimated to be between 12-13 million units. This is twice as many units as the iPhone sold in its first year of production. Apple continues to expand the user base by reducing the price point by $50 and marketing to fashion conscious consumers.

Picking apart Apple’s Q2 2016 numbers (Jason Snell, Six Colors)

Since the earnings call on Tuesday (4/26/16), the media has been focused on the first year-over-year decline in iPhone sales. This was the first negative growth rate in that product line. Contrarily, this article starts by saying, “So that’s what a bad quarterly result looks like for Apple.” He puts Apple’s Q2 2016 numbers into context with historical charts of some key data points. While growth rates relative to last year have declined, the absolute numbers posted by Apple continue to be staggering.

Below are a couple other thought provoking articles:

Fantasy Math Is Helping Companies Spin Losses Into Profits (Gretchen Morgenson, NYT)

Adjusting financial statements to reflect reality has long been the task for analysts and investors. The Analyst’s Accounting Observer conducted a study of 90% of the companies in the S&P 500. One noteworthy point from the study showed that year-over-year non-GAAP net income growth in 2015 was 6.6%; compared to a decline of 11% using GAAP earnings for the same companies and time period. A common expense companies often use to adjust GAAP earnings is the treatment of stock compensation. We agree with the publisher of The Analyst’s Accounting Observer, “’Selectively ignoring facts can lead to investor carelessness in evaluating a company’s performance and lead to sloppy investment decisions,’ he wrote. More important, he added, when investors ignore costs related to acquisitions or stock-based compensation, they are ‘giving managers a free pass on their effectiveness in managing all shareholder resources.'”

Learning Larry Page’s Alphabet (Fast Company Staff)

The corporate restructuring of Google into Alphabet has many wondering what this means for the company and why they did it. This article does a great job explaining these questions. Google, the organizer of data, analyzes it too. They learned from past companies that got large and lethargic, such as Microsoft in the early 2000’s. Page aptly said,  “We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.” The article goes on to draw additional comparisons to other companies, from Nike to GE. The main take-away from the restructuring is “The new conglomerate is theoretically designed to make change happen faster…..He [Page] knew that traditional corporate structure limits innovation at the pace he wants and needs. He broke his business into smaller pieces to make them simpler and focused them more narrowly to discourage drift and distraction, while trying to maintain the advantages of scale and resources and a compelling culture to recruit talent.”

Ensemble Capital’s clients own shares of Apple (AAPL) and Google (GOOGL).

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