Apple loses round in Wall St.'s expectations game

October 20, 2011 By MICHAEL LIEDTKE , AP Technology Writer

Call it the curse of great expectations. Apple did just about everything right in its latest quarter. The company increased its profit by more than 50 percent and boosted revenue by nearly 40 percent over the same quarter last year.

It was the second best three-month period ever posted by the revered maker of the , and iPod. Even more impressively, pulled it off against a backdrop of and fears of another . But by the sometimes absurd logic of Wall Street, it was a disaster.

Apple Inc.'s shareholders awoke on Wednesday morning to headlines like "Apple Loses Some of Its Shine", and then proceeded to lose about $22 billion on paper, as their stock dropped by more than 5 percent -all because Apple failed to manage the that can make or break a stock.

Apple's numbers didn't surpass the high bar set by roughly 50 securities analysts who follow the company's stock. It's another reminder of how difficult it can be for even the most prosperous companies to please Wall Street quarter after quarter.

"It's a rough game," said BGC Financial analyst Colin Gillis. "Apple has been so well for so long that it has gotten itself into a position where it has to set a new (earnings) record every quarter. Now, some of the momentum has been broken."

The backlash to Apple's fiscal fourth-quarter report, released late Tuesday, could very well turn out to be a gross . If so, this is a prime buying opportunity for investors willing to go against grain.

Apple suggested as much as by issuing a jolly outlook for the current quarter, which includes the season. The projections call for earnings and revenue above analyst estimates, an anomaly for a company that makes a habit of lowballing its quarterly predictions. Analysts have caught on to Apple's tactics, so they deliberately set their estimates above the company's forecast. Gillis' rule of thumb, for instance, is to expect Apple's quarterly revenue to be about 20 percent above the company's publicly-stated target and for earnings to be about 40 percent higher.

The Oct. 5 death of Apple co-founder and CEO Steve Jobs throws a new twist into the equation.

Now that Tim Cook is chief executive, analysts must now figure out whether the rules of Apple's expectations game have changed. ISI analyst Brian Marshall thinks that's unlikely because Peter Oppenheimer, Apple's chief financial officer for the past seven years, remains in charge of the numbers. What's more, Cook has promised not to mess with the "magic" that has increased Apple's market value by nearly $300 billion during the past decade and established it as technology's most valuable company.

Trying to figure out how much money a company is going to make every three months is a little like pulling a rabbit out of a hat. Most major companies provide some guidance to help analysts because it helps keep their stock prices relatively stable. Big drops, in particular, are unwelcome because they can raise anxiety among customers and business partners. For technology companies that offer employees stock in lieu of lavish salaries, those dips can affect morale.

Some companies, though, refuse to dance to Wall Street's tune. Internet search leader Google Inc., for instance, has never provided guidance during any of its 29 quarters as a publicly-held company because founders Larry Page and Sergey Brin don't want business decisions to be influenced by a short-sighted number determined by a group of outsiders.

This refusal has been a bit of a double-edged sword for Google. The company has exceeded analyst estimates in most quarters, helping to boost its stock price after the quarterly numbers, but there have been a handful of letdowns that might have been avoided if management had been more transparent.

Apple's big mistake in its latest quarter centered on the impact the Phone 4S - already a hit in the current quarter- would have on its revenue in the just-completed quarter. As word got out that the next generation of the iPhone would be hitting the market in the fall, more shoppers decided to hold off on buying the version already in the stores during the summer.

The result: Apple sold 17.1 million iPhones from July through September, below the 20 million units that analysts had factored into their projections. That left the company, which is based in Cupertino, Calif., with earnings per share of $7.07 on revenue of $28.3 billion instead of the earnings per share of $7.28 per share on revenue of $29.4 billion projected by analysts.

Missing the mark inevitably led to some second guessing, particularly now that Jobs is no longer around. Cook had been running Apple since Jobs went on medical leave in January, but he didn't take the CEO job until Aug. 24 with about five weeks left in the company's fiscal fourth quarter.

Apple could have avoided the problem that caused the quarterly earnings miss by releasing the iPhone 4 in the middle of the reporting period, Gillis said. That's a strategy that Jobs had sometimes adopted when Apple was preparing to release a hotly anticipated device that threatened to cannibalize sale of an earlier product.

If the iPhone 4S had been in stores just during the final week of September, the sales would have been enough for Apple to meet analyst expectations. That's based on Apple's sales of 4 million units of the iPhone 4S since its Oct. 14 release.

"The lesson to be learned here is to be careful when you have a new product coming out," Marshall said. "Even in a tough economy, people still want the latest and greatest device and they are willing to keep some money in their back pocket to buy it."

Marshall, by the way, expects Apple to more than make up for its shortfall in the latest quarter: he foresees nearly 27 million iPhones being sold in the current quarter and expects the company's stock price to hit $500 within the next year. Apple shares fell $23.62 Wednesday to close at $398.62.

Explore further: In rare miss, Apple 4Q earnings disappoint (Update)


Related Stories

Apple fiscal 3Q net income jumps 78 percent

July 20, 2010

(AP) -- Apple Inc. blew past expectations with its latest quarterly report on Tuesday, selling almost as many of its new iPad tablets as it sold Mac computers.

Apple 2Q profit gains 15 percent, beats Street

April 22, 2009

(AP) -- Strong sales of the iPhone helped Apple Inc. lift its quarterly profit 15 percent, well ahead of Wall Street's expectations Wednesday despite the global economic downturn.

Recommended for you

New technique spots warning signs of extreme events

September 22, 2017

Many extreme events—from a rogue wave that rises up from calm waters, to an instability inside a gas turbine, to the sudden extinction of a previously hardy wildlife species—seem to occur without warning. It's often impossible ...


Adjust slider to filter visible comments by rank

Display comments: newest first

5 / 5 (1) Oct 20, 2011
"The lesson to be learned here is to be careful when you have a new product coming out..."

Really? How about the lesson is that financial analysts are handicapped by both their incomplete information regarding the company in question and their inability to predict consumer trends.

While I hate to admit that nobody can touch Apple (I'm tangentially in competition) they don't have any real competitors in their current markets. Only cheap also-rans. The new records already being set by the 4S highlight the shortsightedness of these analyses.

Losing $22B on paper because of incomplete, disjointed analysis is absurd. OWS may be extremely naive in many of its assumptions, but market occurrences such as this underscore the dysfunction of the system they want to bring down
5 / 5 (1) Oct 20, 2011
goes to show that stocks are full of hot air
not rated yet Oct 21, 2011
If I only hear Wall Street and analyst, I could become crazy.

Without any realistic background they expect astronomic (unrealistic) business results, which leads to enthusiasm and the shares are rising.

Then these forecasts will not be exceeded. Then they find absurd arguments against a company to justify their own incompetency, and the shares are falling.

Finally the looser, anyhow, is the small investor (99% of the people).

In my opinion that is not because of incomplete information. They simply don't make their job thoroughly, not to say ignorant against real business.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.