Before I begin, two points:
1) I do not own any Apple stock. I have absolutely no interest in whether the stock goes up or down.
2) One can make an argument that there may be other reasons to sell Apple’s stock now (namely, uncertainty following the passing of Steve Jobs), I’m simply arguing that the stock’s collapse today due to yesterday’s earnings is laughable.
Watching the stock market following Apple’s Q4 earnings yesterday and into today, I’m reminded of a famous Steve Jobs quote. “If you see a stylus, they blew it.” Reworked, the quote today would be: “If you’re investing based on Apple analysts, you blew it.”
Apple’s stock dropped 23.62 points today — over 5.5 percent. It went from an all-time closing high of $422 a share, to under $400 a share. Why? Again, the earnings announced yesterday. For the first time in something like 9 years, Apple failed to beat Wall Street’s expectations.
But here’s the thing: those expectations were ridiculous and flawed and once again show that analysts have no idea what they’re talking about when it comes to Apple.
Over the past decade, Apple has routinely made analysts look foolish by destroying their estimates each and every quarter. Apple sets them up for this by giving often comically low guidance, which analysts go up a bit from, then demolishing both sets of numbers. Perhaps because of this history of foolishness, this past quarter, analysts got a bit more bullish than usual. But they didn’t take into account one very key factor. And it came back to bite them in the ass.
Actually, it came back to bite Apple’s stock in the ass. That’s the ridiculous thing. The stock is being punished after a record September quarter for the company — their second best quarter ever — because the analysts were caught snoozing. But because analysts are never held accountable for anything — be it the laughable rumors they create by doing “checks” or the ridiculous thoughts on the company they spread and others pick up simply because they’re labeled “experts” and well paid — Apple takes the blame.
Here’s what really happened.
Apple sold fewer iPhones in Q4 than analysts were projecting. They were expecting something between 20 and 22 million, and Apple actually sold 17.07 million. Since the iPhone is Apple’s largest source of revenue and profit, this dragged down both of those numbers as well. That’s the entire reason for the “miss” — it really is that simple.
Apple selling 20 to 22 million iPhones in Q4 would have been a new all-time record for the company. Analysts were undoubtedly looking for this because Apple was coming off of a record 20.24 million iPhones sold in Q3. Typically, Q3 is a weak quarter for Apple in terms of iPhone sales, but again, this Q3 saw a record. So Q4 was going to be gangbusters, right?
Wrong.
The problem is that Apple typically refreshes the iPhone in June or July. That’s been the case since the device first launched in 2007. This year, that did not happen. This means that normally weaker Q3 numbers remained strong because there was no new iPhone on the horizon. Inventory and sales remained high. Instead, the iPhone 4S was announced and launched in October. This means that for this year at least, the Q3 down cycle actually occurred in Q4.
Further, because previous new iPhones had been launched in June or July, Q4 (Apple’s fiscal quarter, not the calendar one) has traditionally been a very strong quarter for iPhone sales. Again, that was not the case this year — in fact, it was the opposite because of the aforementioned down cycle before the upgraded model hit. Somehow analysts missed badly on this and this alone.
On one hand, you want to cut them some slack because it is Apple and it’s hard to know much of anything about when and what they’re going to release. Plus they were sort of tricked by Apple breaking the typical iPhone launch tradition. But come on, this is their jobs! Everyone who follows Apple closely knew months ago that there was no new iPhone hardware coming this summer, and that it would instead launch in the fall.
Then again, even those who are actually good at this forecasting screwed the pooch too. Because analysts have been so horrible with Apple throughout the years, it has given rise to amateurs (I mean that in a good way) like Horace Dediu. Dediu is normally very, very good when it comes to Apple analysis. But he screwed up badly this quarter as well.
Dediu’s reasoning — which he explains himself here — is essentially the same thing I laid out above. His main problem was that because he screwed up last quarter, it tricked him into trying to correct for this quarter and led to another huge miss. He should have stuck to the simple notion that this year is a weird one for Apple because of the atypical iPhone release cycle.
Okay, so that’s why everyone screwed up. But again, the big issue here is that these screw ups led to Apple’s stock collapsing today for essentially no real reason. Yes, Apple had a weaker quarter than last quarter, but that should have been expected. The fact that it was still their second-best quarter ever and saw record iPad and Mac sales is actually pretty amazing.
More importantly, this “miss” led to Apple’s executives getting a bit ballsy during their earnings call yesterday and more or less promising record iPhone and iPad sale numbers in the Q1 holiday quarter. They’re actually forecasting a $37 billion quarter, which would be the company’s biggest quarter by almost $10 billion. And remember, those estimates are always comically low. It’s certainly possible that Apple could have a $40 billion quarter next quarter. That was the most important thing revealed yesterday.
And that reveal should have led to the stock surging. Instead the opposite happened. And that’s why you’re an idiot if you sold your Apple stock today.
