Apple's Q3: Analyzing the analysts
Tuesday was not a good day for professional analysts as a class — and Merrill Lynch's in particular.
Not only were most caught off guard by the strength of Apple's (AAPL) record third-quarter results — see here — but the men and women who track the company for banks and brokerage houses were bested once again by a bunch of bloggers, day traders and amateurs analysts.
In the color-coded chart excerpted above — and pasted in full below the fold — the estimates that were closest to the mark are highlighted in green and the worst highlighted in red.
The first thing to note is the number of green rectangles at the top, in the amateur's portion of the chart, and the number of reds scattered below, among the pros.
All three of our "unaffiliated" analysts did well. Deagol, a pseudonymous indie who has developed almost a cult following on the Apple investor boards, came closest on the big $8.34 billion revenue number. Andy Zaky, a day-trader who writes the Bullish Cross blog, was within a penny on EPS and on the money for the number of iPhones sold — along with several of the analysts he berates as "clueless."
But the prize this year goes to Financial Alchemist's Turley Muller, a former mortgage trading analyst who is currently unemployed and has plenty of time on his hands to create complex spreadsheets that model company performances.
Over the previous three quarters, Muller missed Apple's earnings per share number by 4 cents, 2 cents and then a penny. This quarter he hit Apple's $1.35 EPS right on the nose to score the first of his four greens.
Turley Muller on how to predict Apple's gross margins
The other three came for correctly predicting iPhone unit sales (5.2 million) and making the best estimate of both Apple's non-GAAP revenue ($9.78 billion) and non-GAAP earnings per share ($2.14), pro-forma numbers that take into account deferred revenue and costs on sales of iPhones and Apple TVs.
(GAAP stands for generally accepted accounting principles, something Apple must follow in order to comply with SEC regulations. They provide non-GAAP numbers to give analysts a better feel for what's really going on in their accounting books.)
Spotlight on Apple’s hidden revenue stream
Among the pros, Piper Jaffray's Gene Munster was a bit of a puzzle. A favorite among Apple bulls for his enthusiastic support of the company, he took at face value Apple's gross margin guidance — even though he regularly warns clients that Apple always guides conservatively — and missed the earnings number by a full 32 cents a share. He's particularly good at counting iPod sales, however, and his estimate came within 30,000 units of the number Apple reported (10.2 million).
Otherwise there is not much to praise in the work of the professional analysts. Several came within 100,000 units on the Mac sales number (2.6 million units) — but in the case of Morgan Stanley's Katy Huberty and Bernstein Research's Toni Sacconaghi that was only because they revised their estimates after Monday afternoon, when NPD reported surprisingly strong June Mac sales.
MacBooks flew off the shelves in June
Broadpoint.AmTech's Brian Marshall, inexplicably, estimated highest on iPod unit sales and lowest on Macs and was proved wrong on both counts.
But the booby prize this quarter goes to Merrill Lynch's Scott Craig, who scored a record four reds, missing Apple's GAAP revenue by $380 million and its non-GAAP revenue by nearly $1 billion. Two of his bad calls, surprisingly, came in categories he correctly predicted in January: iPhone sales and non-GAAP revenue.
In Craig's defense, he published his estimates six weeks ago, on June 8, before the launch of the iPhone and the flood of MacBook sales triggered by Apple's price cuts. He did issue a report to clients Monday after the NPD data came out noting that Mac sales seemed to have grown 5% for the quarter, as opposed to the -7% his model predicted. But he never got around to publishing revised estimates before the actual results were released.
Better luck next time.
UPDATE: With bit of 20-20 hindsight, a bunch of banks and brockerages raised their Apple price targets on Wednesday, including Morgan Stanley, Kaufman Bros., Caris & Co., UBS, Pacific Crest, AmTech, BMO Capital, Susquehanna Financial and FTN Equity Capital. Tiernan Ray has a rundown of the upgrades, with price targets, at Barron's Tech Trader Daily.
See also:
Sacto,
That analyst is an 'idiot'…anyone with any common sense can see how much room Apple can grow in both laptops, home computers, cell phones, ipods, and any new devices.
Personally I think Arends is trying to tank the stock.
Again, I think all information on a stock minus basic information, should be require to be via a subscription where you cannot 'manipulate' the markets, just the people who invest with you.
Good post. Munster and Zaky are my favorites but anyone who makes buy/sell decisions on the so-called professionals should have their heads examined, as at best these folks can suss out things like unit counts, but the qualitative stuff seems beyond them, and with Apple, it's all about the qualitative stuff, as they have never been about pure units/volume.
Those that are interested in a more thorough qualitative analysis on the LT prospects for Apple, check out my post:
Analysis: Apple June Quarter Earnings Call
http://bit.ly/vbi9q
There's good, bad and ugly in it for everyone. 
Mark
Speaking of analysts, I'm a bit ticked by the WSJ's Brett Arends this AM.
From Brett Arends, WSJ, 7/21/09 – “Despite Profits, Apple Is No Investment Opportunity”
“…if you are investor in this stock, brace yourself for a dose of reality. The shares' best days are surely behind them…But do the math…Apple is now valued at $1345billion. It's the tenth most valuable company in America and 19th worldwide. For the shares to rise at a similar rate from here would take it to $1.25 trillion by 2014. Even to grow at a more modest 20% a year would take it to $333 billion — more valuable than ExxonMobil today and twice the value of Procter & Gamble or Johnson & Johnson…Anything is possible, but that's quite a bet.”
And yet:
“According to Gartner, Apple has an 8.7% share of the U.S. market. According to IDC, that share is 7.6%.”
“Apple (AAPL) and BlackBerry maker RIM (RIMM) accounted for 3% of the world cell phone market last year, but 35% of its operating profits, Deutsche Bank analyst Brian Modoff estimates in a report summarized by the WSJ”
Do the math: Apple’s share of the U.S. market is only 7.6-8.7%, and its share of the world cell phone markets is considerably less than 3%.
So what Mr. Arends leaves out of his equation is the possibility (probability?) of a considerable growth in market share.
And that doesn't even count the potential earnings from whatever new gadgets Apple comes up with!
I think it's pretty obvious most analysts aren't that good and pretty much 'guess.'
Honestly, I don't think anyone should be allowed to comment/speculate on a stock, unless its via a private subscription.
This would stop all the idiot professionals who continue to manipulate the stock market.
Why are analysts paid, if, they are so wrong with their predictions?
Is the function of Wall Street analysts to misguide people & manipulate stock prices , or, are these people class idiots?
Turley Miller's performance was amazing. But going to Financial Alchemist blog, I see no new posts since March 5. Where do we read Mr. Miller's current work?
PED said, "Because Munster didn’t change his numbers after the NPD report."
hmm.. so this doesn't count, "According to Munster’s second note of the day, that implies sales for the entire quarter of 2.6 million units." quoted from your article on Monday.
I agree that Munster's become quite puzzling.
Major kudos to the "amateurs" this quarter. And yet, every time one of the "pros" comes out with some pronouncement regarding Apple's business, it will swing the stock wildly. Ah well.
By the way, I don't think that just labeling the "winner" and "loser" in each column really does justice to how badly the amateurs beat the pros. Might be interesting to color-grade each box according to how close it is to the actual number (with "red" calibrated to the worst number in the column)…
"A minor detail is that iPhone and *Mac* units numbers rounded to 2 decimals"
oops i meant to say iPhone and *iPod* unit numbers
Also, didn't Munster update his Mac number to 2.6M on the NPD report? How come Huberty and Sacconaghi get to update their number and win that box, but not Munster?
ex ped: Because Munster didn't change his numbers after the NPD report.
They are a bunch of anal lysts. They are paid to analyze after the fact not the future. They are just copying what apple has told them, they don't do any work at all and to think that they have huge budgets to do their work. Maybe the brokerage should hire those 3 guys instead costs less. They just have no credibility, how pathetic! Shows how those brokerage are, craps!
Thanks for the kind words PED!
Not to take anything away from Andy's excellent analysis (he came in second IMO) but the non-GAAP EPS was reported at $2.14, which would give yet another green box to Turley. Just amazing, congrats Mr. T! lol
PED said:
"(GAAP stands for generally accepted accounting principles, something which Apple departs from when recording iPhone revenue in order to comply with SEC regulations.)"
This sounds off, Apple does not depart from GAAP to comply with regulations. They stick to GAAP because of it. They report non-GAAP as a more transparent way for us analyst to peek into their performance (thanks PO).
A minor detail is that iPhone and Mac units numbers rounded to 2 decimals should be 5.21 and 10.22 million respectively. I think it doesn't change any of the colorful prizes.
Great reporting PED, keep it coming. We're all glad to have you.
ex ped: Thanks. Fixed the chart to give Mr. Muller credit. Fixing the rest.
Non-GAAP EPS wasn't $1.94, but 2.14.
I believe you took the $1.94B in Non-GAAP Income.
ex ped: Right you are. Thanks for the catch. Fixed now. More credit for Turley Muller.
Thanks for the meta-analysis.
With respect to Mac sales, I'm not surprised by yesterday's results after talking to my friends who are moving to (or buying new) Macs. I wonder if the professional analyst views on Mac sales are prejudiced by the people they talk to, who may not be a "representative sample" of consumers. (And that's before taking their Wall Street bonuses into consideration
came closest on the big $1.34 billion revenue number.
Should be $8.34
Thanks
ex ped: Got it. Thanks.
You left out the Wolfman!
Charlie Wolf of Needham has NAILED the "halo effect," the significance of growing iPhone sales, and the future of app sales.