Apple earnings: How the analysts got it so wrong
Everybody failed to predict Cupertino's blowout quarter, but some failed worse than others
Smackdown: See full spreadsheet below
"Well, that was quite embarrassing!" writes "deagol," a widely read amateur analyst whose estimate of Apple's (AAPL) fourth quarter earnings fell 16% short of the record profits the company reported Monday.
The irony is that deagol, who filed a long post-mortem mea culpa on his website Monday night, had less to be embarrassed about than 18 of the 19 Wall Street analysts we polled in advance of Apple's fiscal 2009 4Q earnings report. (See The Street awaits Apple's earnings.)
Once again, the amateurs and independents out-performed the professionals in our quarterly Apple analyst bake-off. The color-coded spreadsheet is pasted below the fold.
But first, some general comments about why everybody failed to predict that Apple's profits would grow 46% or that the company would sell a record 3 million Macs — up 17% in a quarter in which its competitors, selling cut-rate Windows boxes at razor-thin profit margins, grew an anemic 2%. (See here.)
The key misses:
- Macs. Apple was right and Microsoft's (MSFT) Laptop Hunters ad campaign was wrong. Consumers — or at least enough of them — were shopping for user experience, not low prices or spec lists.
- iPods. Although Piper Jaffray's Gene Munster dismisses the iPod as "no longer an investable theme" due to cannibalization from the iPhone, iPod touch sales were up 100%, suggesting that there may be still be life in the category.
- iPhones. A record 7.4 million sold even though Apple couldn't build them fast enough to meet demand. We won't even talk about Jim Cramer, who told his Mad Money audience that because of this, Apple's share price was going to fall — not explode as it did in after-hours trading.
- ASPs. Average selling prices actually went up a bit, rather than down as you might have expected after back-to-school sales and price cuts on iPhones and MacBooks. Deagol attributes it to 15" and 17" MacBook Pros getting "crazy popular" among college students.
- Taxes. For reasons I can't begin to explain, Apple's effective tax rate was 25.6%, not the 30% they had guided.
Without further ado, our Analyzing-the-Analysts spreadsheet, with best results highlighted in green and worst in red. Responding to reader requests, this time I've also highlighted second worst in pink and second best (and in one category third best) in light green.
Revenue in billions; earnings in dollars/share; unit sales in millions; Gross margin in %. Source: Philip Elmer-DeWitt
A tip of the hat, as Stephen Colbert might say, to Brian Marshall at Broadpoint AmTech, who scored the most greens by filing the most bullish report. And as always to our three independent analysts, who managed to stay entirely out of the red. You can read Turley Muller at Financial Alchemist, Deagol at Deagol's AAPL Model, and Andy Zaky (when he's writing) at Bullish Cross. These guys are too good not to be making a living at it.
A wag of the finger to the insufficiently bullish: BMO Capitol's Keith Bachman, Needham's Charlie Wolf and most of all Oppenheimer's Yair Reiner, whose last-minute warning of iPhone production "hiccups" sent the Mad Money in precisely the wrong direction.
See also:
- Apple's Q3: Analyzing the analysts
- Apple's Q2: Analyzing the analysts
- Apple's Q1: Analyzing the analysts
- Apple's 2008 Q4: Analyzing the analysts
[Follow Philip Elmer-DeWitt on Twitter @philiped]
"Beyond being well built, there is nothing about an Apple that is so exceptional as to justify the price."
LMAO
Aside from offering a seemless connection for one's music, video and cell phone, and the vastly superior virus protection, and the beautiful design and ease of use, I'd have to agree with this clod. Whay would justify paying a few hundred more for a product that is far superior to any piece of crap PC.
As I said, LMAO, pal.
Derek, if you haven't noticed the train has come into the station and has been go e for years! It's about strong fundamentals and growth potential. Think about it—you don't EVER get behind Billy.
Don't look now but your pants are down, Billy is behind you.
I just realized that Marshall got most of those green boxes thanks to his very high (and wrong) iPod number. Had he guessed better at iPods, then his rev, EPS, GAAP or non-GAAP would be down below with everyone else's. Kudos to him for a pretty good GM guess but in everything else he just got lucky. So, Turley and Andy would've taken the GAAP EPS bests, and perhaps me and McCourt would get second bests. Ha.
Apple is a perception company. Need proof, look no further than Man-Bear-Pig alarmist Numero uno, Al Gore who is a board member. As is the case with 'green' and Global Warming, Apple has pitched it's products with a few simple tag lines repeated over and over and over until it becomes dogma, whether or not it is true.
I meet people every day who have never even used a Mac but will tell you its better than a PC because that is the perception that has been created. The "Mac beats PC" indoctrination can certainly be seen all over this board. Nonetheless perception is a powerful thing, especially to investors in a time where a shaky market is still the only game in town beyond earning .002% per decade in a MoneyMarket.
So the Apple minions will likely find safety in their own numbers. Given the prevailing perception, investors will continue to flock to Apple when it's up, while not being to hasty to sell should it dip.
Ultimately though, I think Apple is a Trapple. Beyond being well built, there is nothing about an Apple that is so exceptional as to justify the price. If Apples had some proprietary functionality that PCs were notably missing it would be one thing. But quite to the contrary, they have big compatibility issues, and are FAR more cumbersome when it comes to performing basic tasks. You also have to accept that iTouch and iPhones' ongoing momentum has been heavily supplemented by hacks and aftermarket products that let people use these items in ways Apple was too shortsighted to plan for from the getgo. In the short term brand loyalty will keep Apple strong. But in this economy I can't see the love affair with Apple's staying this strong for too long, user friendly or not. I live here in the valley, 5 minutes from Apple's HQ, and from my vantage point, I'm just not feeling the buzz.
Last comment. I saw an interview with Bill Gates some 4 years ago, and he was already planning to usurp conventional cable's grasp on TV programming and STBs. We are currently on the cusp of Media Center HTPC's being the next wave. Sony, MS, Dell, HP, Samsung, and a host of board and chip makers have quietly launched 1st generation HTPCs. Meanwhile Apple is yet to launch a media center bundle that can compete with the generic ones that even case makers like Thermaltake are already selling. This is very scary to me looking at Apple's future. Sure, 10 years after the fact they will come out with some SUPER HTPC that everyone will claim is wayyyyy better than Microsoft's (sound familiar), but for now I fear Apple is basking in their own glory a little too much on the substance side.
Remember, in investing, if you're doing what everyone else is doing you already missed the boat. But should you choose to do it anyway, then go with the clear long term winner in this segment, Billy Gates. I won't be buying Apple.
@Norbert
Yeah, but Peter didn't have the benefit of making his prediction after the quarter was over.
Dear Editor,
Can you add a chart to Google and Yahoo earnings, we like to be entertained how wrong the analysts are.
Thanks
Wall St analysts are so used to comparing the performance of "me too" companies that they haven't a clue how to read independent thinking AAPL.
They don't understand the relationship between iPhone/iPod sales and Mac sales. They don't understand the ecosystem.
Please stop complaining about analysts…
As a consumer it is your responsibility to do your research and not for a (personally unpaid) analyst to do research for you. You should know that if you don't personally front the money for the research, that someone else did and that will skew the research in some way. If you pay for it yourself (or do it yourself) you will get your true guess at financial guidance.
Don't blame analysts for your own laziness. I'm tired of people passing the buck when it comes to bad advice. If you don't have enough money to pay for advice, you might not have enough money to be investing in the first place…
haha thanks PED!
Ok, glitches, those damn glitches! lol… So to stay consistent with the 2-digit rounding, the iPhone units should be 7.37 and the iPod units should be 10.17. That would put Abramsky and Munster with 7.50 iPhones out of the second best light green (so Andy and I get to keep it for ourselves ha!). For the iPods, it would make Fidacaro and McCourt trade colors.
But I still see a few other problems. On the non-GAAP revenue column, McCourt should get pinked for second worst and not Reitzes. On the iPod units, other than the comment above for best and second best, Marshall should get pinked for second worst and not Abramsky. In fact Abramsky's iPod number is not bad, not third nor even fourth worst (third worst after Wu and Marshall would be Reiner).
Finally, I suggest slapping Klugman with a nasty red box for not providing an EPS estimate. I mean, come on.
ex ped: I think you got McCourt and Reiner switched in the non-GAAP rev. column. Otherwise, got 'em. Thanks much.
It's not just the numbers that are off but an APPALLING lack of understanding of this marketplace. Like the analyst who was quoted as saying that "Apple defies logic." REALLY? You're really saying that it's so-so beyond your comprehension to understand? Maybe you need a bigger brain or another job. just look at their comments about a 'netbook' – that "Apple MUST get in this marketplace." really? Why? The average margins on the Pc side are 1% – great market?! They seem unwilling to comprehend that there are two markets here – people who's experience has been so tainted by the WIN personal computer experience they ONLY buy by price (as PC hunter ads so proudly claim, I'm looking for a keyboard, 17" screen and under $700 – that's ALL they care about) – conversely, there is a smaller but more profitable pool of buyers who while price is a consideration, it is not the over-riding factor (Apple has 91% of $1k retail marketshare AND the best selling Macs are NOT the lowest price Macs in each category).
But hey, this means you have to put a little more work into understanding the industry and not going into a REdmond conference room for shrimp.
This is also why WIN7 will fail as a retail product. MS WIN is the budget OS that is "free" when buying a $399 PC – they are NOT going to pay $299 to upgrade it. MS will still sell millions at $25 OEm prices but beyond that? They will sell as many as Zune's sold last year …
Here's the Jim Cramer fraud expose:
http://video.google.com/videosearch?hl=en&q=jim%20cramer%20fraud&um=1&ie=UTF-8&sa=N&tab=wv#
When will Congress pass a law to make these "analysts" financially liable for lying to the public by giving bogus estimates? The only reason these guys are so far off base is so that the hedge funds they're hired by can profit off earnings. Jim Cramer shamelessly described the illegal game these guys play in great detail on a You Tube video. Do a search for this video and you won't believe your ears. Why is this type of fraud allowed in this day and age?
Entirely missing the point… Needham's Charlie Wolf has been positive on the stock—even when it hit below $80. If you listened to Charlie, you made $$$.
What? Are you crazy or something? Do you mean that more people bought Mac laptops than PC's? I don't think so. I don't see the hard numbers in this article so as far as I'm concerned, it's junk unless you can back up the comments. I spend a lot of time at Best Buy and most people buy pc laptops, not Apple. By the way, I do own an iMac and a PC so I consider myself unbiased.
This is now a repeating story for several quarters…
You would imagine that by now the analysts would have started to take some note of what Muller and Zaky are predicting. Wouldn't you?
They don't, so they get that wrong too, it seems.
Excellent article Philip, its refreshing to excellent analysis. Thanks. Its interesting that both Turley Muller and Andy Zaky both predicted +7.30 for the iPhone catagory while others were not so inclined. Its about time to do the report again, while the iTablet is not out yet, to see where there druthers are.
Dr. Lewis
University of Colorado, Computer Science.
http://www.rorylewis.com/docs/02iPhone/10_iTablet/10_iTablet.htm
>I find it funny that more than half of the (way over-)paid analysts couldn't get within $500 million of the right number.
>How do you not get fired, and asked to return your salary, when you're that far off?
H*ll, they probably got -bonuses-….
>We won't even talk about Jim Cramer, who told his Mad Money audience that because of this, Apple's share price was going to fall — not explode as it did in after-hours trading.
Normally I don't descend into name calling, but -at least- with respect to AAPL, Cramer is an idiot. (At worst, he's an admitted stock manipulator who probably deserves some sort of appropriate action…)
Remember Will Rogers: "it's hard to make predictions, especially about the future."
Forecasting is an art, not a science. Notice that the companies forecast a range of revenues and a range of earnings for the next quarter. If they feel really lucky, they forecast for the next year, too.
It must be even more difficult in the aftermath of the recent economic collapse. So, just don't bet all of your money on forecasts.
Wow the experts were wrong! Like how we weren't in a recession… or how every month was the month it would be over… oooo how about this one if big banks fail we will all explode and die (keep in mind two huge bank failures Wachovia and WAMU came and went with a small thud, and were gobbled up by bigger ones)… haha I can go on, but there is no need, I think most know that many people in stocks don't know jack, they think they do, and tell you to invest in AIG at its hight, and pull out at its low so you don't lose all of your money… Which have you looked at the stock? I hope you bouight while it was low, because after the govt showed it won't let it fail, i bought in…. mmmmh the sweet smell of sucess! Anyway, If you want good stock advice- do tommy's birthgift (google it) DO NOT go to these deadbeat losers who shipen your money, and have not a clue about these companies. the others that appear they do say the one of two statements every month… we are heading for a recession, or we are heading for a recovery… and they are right because it happens.
So long story short, don't listen to the wanna bees, listen to yourself, don't buy the books because they predicted a finacial problem or uptick… they happen, one after the other… everytime, anytime! and please please please, if you think I am wrong, email jetsthree@yahoo.com! I like haveing disscussions!
I don't think Gartner's and IDC's numbers last week fully captured Apple's Mac gain. Probably off by quarter million.
Why were the analyst so wrong? Because they are always underestimating Apple as they have for sometime. While they spent all of their time with intrigue last year with respect to Steve Job's health causing Apples stock price to plunge, Apple was humming along under the leadership of it's excellent management team doing what they do best; Bringing terrific products to market that provide the kind of user experience that makes consumers want to buy them at a price that generates handsome profits for Apple. I fail to understand why anyone who knows this Company would bother listening to what any of the analysts have to say about it. Just drop in to an Apple retail store and spend an hour, you will leave knowing everything you need to know about Apple…
I find it funny that more than half of the (way over-)paid analysts couldn't get within $500 million of the right number.
How do you not get fired, and asked to return your salary, when you're that far off?
Analysts generally make reports that are more bearish than need be. They have to be safe. It is okay for them to be slightly more bearish and have the company overshoot their estimates. It is not okay for them to over estimate a companies performance and have it come in well under what they thought. That is a great way to lose your job as an analyst.
Did microsoft get it wrong? or is it the result of the badly damaged name Vista that really hurt MS and the ads simple dampend the blow. Plus, Apple HUDGELY benefitted from the recent changes to the accounting rules. Apple took smart phones to the next level, but will the Droid(and other android 2.0 phones,0 a new line of Blackberry's and that pesky line of WebOS phones from Palm batter the iPhone even if ATT loses its sole provider contract?
ex ped: You may be right about Vista, but those new accounting rules haven't been put into effect yet.
Anyone expecting iPodtouch has lost its market is probably wrong. Without a camera, it probably find several niche markets, which iPhone will not be allowed to enter (e.g., health care facility) and purchase them in large quantities.
The chart makes no sense, as far as I can tell you're giving closest estimations in green and worst in red. Yet in the iPhone column you list 6.50 million as a 'light green' surely 7.50 and 7.20 are much nearer the actual figure of 7.40?
ex ped: That error has been corrected.
You run some interesting stuff, but why is it always riddled with errors? Your readers should be able to read a post without also having to fact check it. Where to begin? Under "Revenue, non-GAAP" Muller and Marshall should not have second best light green boxes for their 11.33 estimates. You have correctly marked Fidacaro as second best at 11.34. Unless you think it's sufficiently close that it doesn't matter. Of course then that should apply to other categories where the numbers are close, no? Under "iPhones" Abramsky should have a second best with his 7.50 estimate (same as Munster) and Rakesh obviously not with his 6.50 estimate. Under "Gross Margin" the second best estimate is Marshall's 36.8, not Deagol's 36.2. Finally, your biggest error is not a calculation error but a misreading of the Apple press release. The 2.85 number you list under "EPS, non-GAAP" is not actually the non-GAAP earnings per share number. It's total non-GAAP net income at $2.85 billion. The non-GAAP EPS number wasn't in the text of the press release but it is included in the accompanying tables available with the 8-K filing. The non-GAAP EPS is $3.12. That is all.
ex ped: You are right. But I am in your debt. Corrections made. Where would I be without sharp-eyed readers like you?
Why did the analysts miss? Because they're looking at the wrong data or misinterpreting the data. They still have no clue as to how the Apple strategy works. So someday when that strategy fails, they'll be missing on the high side.
For example, NPD data needs more adjustment as Apple sells more product internationally, but they're not making the adjustment. And they totally misread the impact of the poorly conceived Laptop Hunter ads, which most Mac owners said was rubbish (that's an "I told you so"). (And now iPhone owners are saying the same thing about the Droid ad, but will anyone listen?)
I called Apple to $200 back in 2007. Google Beltway Greg + Apple. Why do you find picking stocks so hard? It's actually very easy but for most people what they want to happen gets in the way of what is really occurring.