JJ Cramer was on CNBC talking about how Apple’s stock is going to skyrocket because of a recent accounting change. Under the new rules, when Apple gets $100 for an iphone, they can record most of that $100 as profit right away; whereas under the old rules, they got the $100 cash upfront but had to “spread it out” for accounting reasons (IE, instead of recording $100 profit today, they recorded it as $25 profit this quarter, plus $25 profit next quarter, etc). Either way, they still have that $100 sitting in a bank, it’s just a question of how they do the accounting. I understand that under the new rules, Apple’s profits will appear much higher this quarter (although at the cost of lower profit next quarter, since that money is being moved forward into this quarter).
But this is COMPLETELY a paper-only accounting change. Either way, Apple sells the exact same number of Iphones at the exact same price with the exact same cost to manufacture and gets the cash deposited in their bank account at the exact same time. NONE OF THE FUNDAMENTALS CHANGED! So for JJ Cramer to claim Apple’s stock is about to skyrocket because some accountant decided to juggle the numbers around…well, it sounds a bit Enron-esque, no?
In a rational world, is there any truth to Cramer’s claim that this rule change should make Apple’s stock worth more?
One: Many stock traders analyze numbers through brute force to come to their conclusions. Basically, they go through a database looking for companies with high profit, large cash reserves, growth in particular areas, etc. This change is going to make Apple show up on some of those searches when it wouldn’t have before. Because it’s virtually impossible for traders to analyze each company in detail, there are certainly some people who will buy who might not have before.
Two: The point of deferring income in the financial is to represent when it is “earned” and that’s not meant to be a paper concept. For example, if you promise to pay me $1000 in rent for the next 12 months, I haven’t earned $12,000 yet. You might skip out after the third month. Instead, you record $1,000 each month. Apple’s situation was very similar (due to AT&T’s 2-year contracts, I believe). So moving the money to current revenue should represent a more secure legal claim to the assets.
That said… I did some research on Apple during some accounting classes two years ago. Apple’s stock price made sense only if most investors were already factoring those future revenues into the price. I think Cramer is doing what he usually does - taking a small bit of truth and exaggerating it.