Financial analysts and their asses

Wall Street declared Apple’s latest quarter a miss, even though the company reported some great quarterly numbers.

Consider this. Apple posted quarterly revenue of $36 billion and quarterly net profit of $8.2 billion. Since Wall Street said the quarter was a miss, these numbers must be lower than last year, right? No, these results compare to revenue of $28.3 billion and net profit of $6.6 billion — an increase of about $8 billion in revenue and $2 billion in profit over the year-ago quarter.

Well then if it’s not cash, surely Apple missed on product sales. Let’s take a look.

Apple sold 26.9 million iPhones in the quarter, representing 58 percent unit growth over the year-ago quarter. Apple also sold 14.0 million iPads during the quarter, a 26 percent unit increase over the year-ago quarter.

So, they made a significantly more money and sold quite a few more products.

In what screwed up world do all of these numbers count as a miss? Only in a world where we allow financial analysts to pull numbers out of their ass and say they expected more. At what point can we say the analysts missed — I think we’re there.



  • Where is the like button.

  • tylernol

    I would be fine with analysts setting ridiculous expectations on Apple if they did it with everyone else, namely Amazon — their P/E is 3000 something right now.

    • alextheukrainian

      It’s very true. I think the only rationale is this – can we answer the question “Who will eat their lunch?” about a company? If Apple stumbles, that question can be answered with “Google + Microsoft + Amazon + Samsung + Nokia + PC vendors”. When Amazon stumbles, who’ll eat their lunch? No one. They have no competition right now on that scale. So really the only thing that matters is “Is Apple growing their share and increasing dominance or is competition catching up and squeezing Apple?” B/c if competition is catching up and Apple gets squeezed, stock price won’t hold. And no one holds Apple shares for the dividend – it’s not a great dividend by any measure. So when long-term future is threatened at all, price drops. Nothing threatens Amazon future – in fact it keeps getting better.

      • tylernol

        Amazon has huge scale for selling hard goods at very low margins, neither Apple nor Google want to play in that space. That scale does not give Amazon any advantage in the digital content realm. Amazon is playing the “razor blade” model here with their tablets, which only works if they get an exclusive lock on the content. That seems quite unlikely.

      • “Nothing threatens Amazon future – in fact it keeps getting better.” Save that they have to actually make a profit sometime to justify their ridiculous P/E. Profit over the last year over each quarter has been dropping ending with last quarters loss.

    • stsk

      Asymco has examined this question better than most, many times at length, but it’s still a mystery…

      http://www.asymco.com/2012/01/31/pricing-paradox/

  • Analysts can make or break a company, more often than not they break a company. Analsysts don’t know jack.

  • Yeah, we call “analysts” people who have never managed anything larger than a hot dog vendor cart, let alone design a product, and they are supposed to make accurate predictions. Fascinating.

  • They are not “analysts.” Try “anal cysts.” Much mpre fitting.

  • Canucker

    Anal-ysts. Say no more.

  • AngleSideSide

    Stocks trade on expectations, not past performance. In what kind of screwed up world would tomorrow’s share price be set by last year’s sales numbers?

    Investors in AAPL have decided to build a certain amount of growth into the price they’re willing to pay. In other words, today’s share price of about $605 has a lower growth assumption built into it b/c analysts have revised future expectations downward.

    There’ no sense getting mad about this “miss”…the staggering 20+% YoY growth was already factored into the price.

    • stsk

      …and Jim’s point is that analysts have a hand in setting those expectations. You make a vain attempt to rationalize the completely irrational. There is no way AAPL’s realistic growth expectation is factored into share price, at least if you compare that expectation to other tech stocks… Compare P/E’s and ANTICIPATED P/E to other tech stocks, Apple’s fundamentals do not justify their currently low share price, nor have they for a very long time.

      • AngleSideSide

        Then buy some shares.

        • stsk

          …which is equivalent to telling someone to place a larger bet when they point out that the roulette wheel is broken.

          • AngleSideSide

            …if you believe the stock market works by a combination of random chance and manipulation, then yes. If you believe the stock market works like a market where things are openly traded between counter parties, then no.

            I’m up around 60% in 12 months with AAPL because of the market continually underestimating how much they can continue to grow. If you think the trend will continue, these “misses” present great buying opportunities.

    • stsk

      Think so? According to P/E, Apple had a higher expectation for growth BEFORE THE INTRODUCTION OF THE iPHONE… which completely disrupted a market and now produces the majority of Apple’s revenue and earnings. Check out this graph from Horace Dediu:

      http://www.asymco.com/wp-content/uploads/2012/01/Screen-Shot-2012-01-31-at-1-31-11.10.09-AM.png

  • Glenn

    Mr. Dalrymple, You’re confusing “doing well” and “meeting expectations.” Analysts make predictions and the stock market reacts. If those predictions aren’t met, even if they are great in all other respects, then the company didn’t meet expectations.

    An example…. your team might win the game but fail to cover the line. So Apple is winning, but they didn’t cover their line.

    • @holaMau

      The problem is that their “predictions” are being pulled from their asses. Most analysts’ predictions are so far off and go above and beyond what the actual company’s guidance is. In short, they will never be happy with any past results, even when it meets the expectations of the shareholders by going over the company’s own expectations.

      Apple did meet their own expectations.

      • AngleSideSide

        You’re missing the point. The “predictions pulled from their asses” are what the stock trades on for months…then gets adjusted as the company releases quarterly statements. It’s been going like this with AAPL for the last few years: 1) Analysts make huge sales assumptions 2) Stock trades up 3) Analysts revise assumptions even higher 4) Stock trades up even higher 5) Apple releases quarterly earnings either higher or lower than those expectations 6) Stock trades up or down depending on the magnitude of the beat/miss 7) Rinse 8) Repeat To only focus on step 6 ignores the massive gains made by the stock in steps 2 and 4.

        • Jay Martin

          You’re missing the point. What rational people are complaining about is the fact that #1 and #3 are made with no apparent logic and that #6 happens because of irrationality in #1 and #3. What most investors want (and I am one) is not wildly fluctuating stock prices but rather the reality of the situation.

          And as for the logic that all the huge sales assumptions are already factored into the stock price – bullish*t. If you look at APPL fundamentals as compared to other tech companies, they’re actually trading significantly lower. So, the stock price is being manipulated since it doesn’t appear to be based on the facts.

          It’s my feeling that many “analysts” are actually playing a game of ups and downs (a la day traders) so they seem to like to cause these huge fluctuations. It’s not really a problem for Apple at the moment, but like a juggler that keeps 10 things in the air, eventually he’ll make a mistake and things will come crashing down. IMO, this is not unlike the banks making all of those bad loans – we gave them way too much power and it all came tumbling down.

        • stsk

          Your (massive gains) point would be true if Apple’s shares traded anywhere near typical multiples for a company with Apple’s growth history AND expected growth. Apple has revenues like a mature blue chip but growth like a startup with margins which are like a software company. Most analysts don’t understand this, but it’s why Apple used some of its cash to offer a dividend – to allow institutional investors to play as if it were a blue chip.

          Andy Zaky has a nice refutation of the bears: http://bullishcross.com/2012/10/apple-1000-why-doug-kass-will-miss-the-next-50-move/

    • stsk

      “meeting expectations” is why companies issue guidance for coming quarters. If analysts choose to pull their expectations out of their butts and ignore guidance, the onus is on the expectation, not the company.

      • To be fair, Apple’s guidance is usually pretty conservative, so analysts have to estimate somewhere above it.

        • stsk

          But this is a complete “damned if you do, damned if you don’t” situation. Smart companies (not just Apple), issue conservative guidance because the market punishes missing guidance numbers. (ask RIM). If analysts game the guidance by massively overcompensating in their fabricated estimates and then punish the company for missing the “out of the butt” estimate, shareholders suffer – not the analysts. This asymmetry works only because there is not yet a disincentive for analysts to blow their estimates and the market hasn’t yet learned to disregard “consensus”.

        • “Apple’s guidance is usually pretty conservative,” Which they beat. Every. Single. Time. The analysts to the over-promising for Apple as Apple won’t.

  • honyant

    The stock market seems to me to be a bit like the race track where people, instead of betting on which horse is better, bet on whether or not some handicapper can get all the horses to cross the line at the same time and if not which one has he miss calculated the most. The handicapper and the analyst seem to have similar roles.

  • Zeatrix

    You obviously have misunderstood what analysts are actually doing. No one is denying that Apple is doing great, but that has no bearing on when analysts make predictions.

    • Occam

      Then what are analysts doing here? Graphing Apple’s revenues and profits along a function? But why does blame fall to the company that still posts records? Why isn’t it the analyst’s fault, and the appropriate response to say “we overestimated.” If Apple expected to have a profit of $10 billion, that would be a miss. If Apple had a profit of a measly $2 billion, that would also be a miss. But neither of these things happened.

      • Zeatrix

        First of all you are missing the point. No one is blaming anyone. The analysts are just saying: Apple did not match what we predicted. There doesn’t have to be blame or finger pointing in that statement.

        Secondly: How many in this thread ACTUALLY know what an analyst does? How many have sat down with one and asked them? I can promise you one thing, they don’t “pull it out of their asses”.

        And why is it even mentioned on tech blogs? It should only interest investors and investors only. They get too much attention in my view.

        • stsk

          Actually, I have spent plenty of time with analysts. Some have been my friends. They vary widely in their abilities, attention spans and intelligence. The reason this is an issue for tech blogs (like this one) is that some of them understand the company and its market more clearly than many analysts. While there may be many factors at work, I can assure you – compared to the information that companies have which informs their guidance numbers, many analysts actually do “pull it out of their asses”, then create a rationalization for it. If the market were only influenced by good analysts this would not be an issue.

  • I think your criticism of Wall Street is mostly wrong here, but so what? Apple has so much money that it doesn’t need to care what Wall Street thinks.

    It cares what Main Street thinks and that particular bunch of folks is very much declaring the latest quarter a huge win.

    At the moment, Apple stock is a financial game, the only bearing it has on the company itself is when employees come to sell their options.

  • ecarr

    I think iPad growth is the main area folks are worried about and I think most have focused purely on the sales vs sell-through for the quarter. Since Apple was ramping up for a new iPad launch, they were targeting to reduce channel inventory in front of that launch. So if investors look at actual iPad sell-through during the quarter, there is less to be concerned about Apple’s #s.

    Positive is asymco picked this up and pointed it out early:

    http://www.asymco.com/2012/10/27/ipad-sales-grew-44-percent-in-q3/

    Fortune also did a piece over the weekend highlighting the difference between sales and sell-through:

    http://tech.fortune.cnn.com/2012/10/27/did-ipad-unit-sales-grow-by-26-or-44-last-quarter/

    iPad #s IMO were really the most “concerning” # from what Apple reported given the critical importance of the tablet space and seems like daily forecasts of how Apple is losing share in this key space. However, when you actually take into consideration sell-through vs. sales, they did pretty well. (I do no think any of the market share estimating firms do consider sell-through, independent of how poor most do in terms of actual #s anyway since hard #s from the tablet manufacturers is tough, except for Apple).

    • Even the sell through number isn’t amazing, compared to previous growth.

      The question really is, why should Apple care? They are making great products and reaping the rewards. Why change their release plans to maximise shareholder value? Shareholders have already gotten rich from AAPL’s growth, so they’re hardly likely to call for Tim’s head because he ruined a single quarter of iPad sales by draining inventory.

  • th3rdh

    The current stock price is based off analyst expectations. If analysts were perfect the price would have been lower prior to the earnings call and there would have been no change afterwards, but unfortunately nobody is perfect and the analysts has to adjust their valuation models based on actual performance, in effect lowering the stock price so the market can correct itself.