Change in accounting for iPhone sales could drive Apple revenues way up
Wall Street has a funny habit of failing to take into account obvious factors that impact the intrinsic value of companies, and this is a classic example of such a case. For Apple shareholders, the impact could be profound, with shares in the company that CEO and founder Steve Jobs rebuilt going vertical in a hurry. Shares were up nearly eight percent in the past week, a big lift for a company with a share price in the $180 range like Apple.
Cramer isn't the first guy to point this out. Several Wall Street analysts came to the same conclusion in the past week, as did gadget blog Engadget (also an AOL property). Bloggers Henry Blodgett, of Business Insider, and Eric Savitz, of Barron's, both posted a note on the topic, as well. Why the furor now? The Financial Accounting Standards Board (FASB) is considering a rule change that would allow Apple to make the switch. In the past, Apple was only allowed to recognize revenue for each iPhone sale over a 24-month period.
This may have made sense when Apple was still sharing revenues with AT&T (T) for iPhone user monthly charges. But the companies no longer share, so the accounting practice is now pointless. For his part, Cramer said the accounting change would boost Apple earnings per share for 2011 from $8 to $12 and he ramped up his price estimate from $200 per share to $264 per share.
Apple bulls have long asserted that Wall Street was low-balling Apple's true earnings potential because it is much harder to model in the effects of iPhone revenue recognition spread over 24 months as opposed to an instant jolt that comes from recognizing each iPhone sale immediately. The bulls will win this round should the FASB rule change occur. A final decision is expected within the next two months.