Wall Street Eats Their Own Dog Food

October 20th, 2011

Consider that, year after year, so-called financial experts have underestimated Apple’s sales. It is so predictable, I can use the same canned headline each and every time to describe the the end results. Unfortunately, it appears that these same “experts” became inebriated with their expectations, and ignored reality to predict how Apple did in the September quarter (their final quarter of the fiscal year). Thus they overshot the mark.

The end result was that Apple appeared to “miss” those artificial estimates, thus causing a fairly large dip in their previously soaring stock price. The knee-jerk reaction is that Apple somehow screwed up, that maybe they are no longer going to grow as fast as they used to. It’s time to face reality. Steve Jobs is gone, and Apple is on the decline, or at least that’s what’s going to be suggested by some of the less-informed pundits.

Of course the reality is that Apple’s financial results were actually 13 percent above their initial guidance, which is typical, since they typically report numbers that are 12 to 18 percent above the guidance. Yes, the company is typically conservative, so you have to expect they are going to do better, but sometimes reality goes out the window when those analysts use their calculators.

So let’s look at the reality. Apple sells over 20 million iPhones in the June quarter, so they “must” do better the next three months. Unfortunately, there’s no new iPhone in the mix; the current model is getting long in the tooth. But over August and September, there’s more and more published speculation that the next iPhone will arrive in October. Predictably, and this was confirmed by Apple, sales begin to dip. Potential customers decided to hold back a little longer, rather than buy a model that’s due to be replaced.

This makes perfect sense, right? It does to me, and I’m sure it will to you too. So that takes us to the next chapter in our little tale.

In reporting over four million iPhone sales through the first weekend the iPhone 4s was on sale, Apple blew away expectations, most of which ran in the two to three million dollar range. Oh yes, one analyst did hit the mark. But it’s fair to say that many of those sales were probably made to people who might have otherwise bought a new iPhone in the previous quarter had the iPhone 4s appeared earlier. That pretty much matches the difference between expected sales and actual sales.

More to the point, regular people don’t buy gadgets because somebody on Wall Street expects them to. This is pretty much what Apple told financial analysts during the quarterly conference call Tuesday afternoon. Of course, you can also take that as corporate spin, but since it makes so much sense, I’m inclined to take it seriously.

Just as interesting is Apple’s guidance for the current quarter, with revenue expected to total $37 billion. If this estimate is as conservative as previous ones, actual sales will total over $41 billion. With the quarter already underway, Apple clearly has an early indication of the direction sales will take. What’s more, even though Steve Jobs is no longer here to run the company, the same financial experts are still on the job. I would assume they are also using the same techniques to develop those number, and, based on past performance, you have to take them seriously.

Unfortunately, it’s not as if there’s a state or federal test to validate the competence of a financial analyst. At least, a lawyer has to pass the bar exam, but maybe that’s not a good example. The point is that I can hang out a shingle on my front lawn, call myself a financial guru, and begin to pump out silly knee-jerk guesses, and if people are willing to pay for my consulting services, carve out a great living for myself. That wouldn’t mean I knew what I was doing, but if I can get people to take me seriously, and get quoted in a few key publications, does it really matter?

Or maybe I’d do better calling myself a psychic. After all, I am host of a paranormal radio show, and that ought to give me some credibility.

Meantime, Apple’s apparent miss of analyst estimates not only dragged down their stock price Wednesday, but that of the entire tech industry. I expect it’ll take a few days for Wall Street to grow a spine and begin to act sensibly. Meantime, some industry analysts are calling for reason, explaining that the lower iPhone sales were, as Apple states, really due to people sitting on the sidelines and waiting for the next model.

This also argues in favor of Apple’s marketing stance, not to talk of future products until the release date is here or near. Clearly, loyal customers will wait if they know that the new product is on the horizon. Sales of current models will drag. How could it be otherwise?

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5 Responses to “Wall Street Eats Their Own Dog Food”

  1. Ken K says:

    Wall Street estimate means exactly what the word says, “estimate”. How about we estimate Wall Street will estimate Apple (AAPL) correctly, and if they over estimate or under estimate, we call Wall Street estimate is off the mark we set. How is that for the taste of their own medicine.

  2. Peter says:

    Those estimates are what has Apple’s stock price so high. They get baked in. Which means that if those estimates turn out to be wrong, then the price should go down to more realistic levels.

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