Rebel Traders - Stock Market and Economic Analysis

Apple, the famed Iphone and Ipod maker has been on a rip ever since the apparition of the Iphone 3GS, rising to never-expected levels in a recession. Now, it has received a great helping hand from the FASB, the accounting institution of the US, which allowed it basically, to book as actual the revenue to be received from an Iphone subscription upfront.

Until now, Apple distributed the revenue from a subscription over 8 quarters (the typical duration of an Iphone subscription), instead of accounting for it upfront (which makes sense if  you think that the funds will come in over eight quarters). Now, under this change of accounting rules, Apple could recognize up to 95 % of the value of the Iphone upfront. Not indifferently, the Cuppertino firm lobbied hard for this rule, even if in accounting principles, it does not make sense in my view, in counting in your income revenues that have still to be perceived.

The estimation of MS’ analyst, Kathryn Huberty is that this could boost further the stock price of Apple, based on the recognition of a lower P/E than originally expected. What does this teach us? Never short a “cult” stock based on TA! There will always be ways for it to surprise you on fundamentals.

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):

1. 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);
2. 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.