First, let me say that I’ve never owned an Apple product. I am not necessarily anti-Apple, but I do feel that their products are overly expensive and not worth the price. However I realize that a lot of people LOVE their Apple devices and that they have fantastic customer retention in terms of brand loyalty. It is because of these traits that I believe their stock is worth owning, especially when it’s under-valued. Despite my neutral feelings towards Apple, I am deeply sympathetic towards their Investor Relations group.
Today after market close Apple reported their first quarter earnings for 2014. Within an hour of the earnings report stocks were down more than 8% in after-hours trading. Why?
Well before we get into that, let’s take a look at the guidance that Apple’s Investor Relations released back in October of 2013 during their last quarterly report:
- · revenue between $55 billion and $58 billion
- · gross margin between 36.5 percent and 37.5 percent
- · operating expenses between $4.4 billion and $4.5 billion
Even if you don’t know anything about Apple, it’s pretty safe to assume that bringing in revenue of $58,000,000,000 in three months is impressive. Of course big numbers aren’t impressive by themselves. The whole idea of this game is by setting goals for the future and trying to meet them. Getting back to today, let’s see how Apple performed:
|Revenue of $57.8 billion||In line with guidance and actually on the high end of the range|
|Gross Margin of 37.9 percent||Margins slightly exceeded their projections|
|Operating expenses of 4.38||Their operating expenses were even less than they assumed|
Apple clearly met the expectations they had set for themselves when they were attempting to look into the future just over three months ago. Yet their market capitalization just dropped by approximately $40,002,440,400.
So what gives?
Unfortunately it doesn’t matter how good Apple is at looking into their crystal ball and trying to see into the future of their business. All one needs to do is look at the business news headlines to understand the issue:
Apple Gets iPad X-Mas but Shares Drop After iPhone Sales Fall Short – Forbes
Apple’s new products not good enough – MarketWatch (Wall St Journal)
Apple shares fall as bet on iPhone 5C market leads to earnings disappointment – Financial Post
Apple IPhone Sales Trail Estimates for Holiday Quarter – Bloomberg
Apple’s iPhone sales, revenue forecast fall short; shares slide – Reuters
Apple bruised by high expectations – The Globe and Mail
The Globe and Mail hit it on the head: high expectations.
It doesn’t matter that Apple’s business drove results in line with their estimates. What matters is that Apple didn’t meet the expectations of wall street analysts.
I am frustrated by the relationship between a company’s investor relations team and the equity analysts that cover them. Apple still sold a record-breaking 51,000,000 iPhones during the last quarter, but analysts were expecting 55,000,000 and were unimpressed that their own target was missed. As you can see, this really isn’t about Apple per se. It’s about the relationship between a company’s ability to predict and communicate their own business goals vs the external expectations of analysts. The analysts almost make the company’s own goals irrelevant. What’s worse is that the stakeholders seem to get angry at the company rather than the crazy expectations set out by the analysts.
Imagine this wasn’t the stock market.
Let’s say that my new year’s resolution was to lose weight. And let’s say it wasn’t merely an abstract goal, but something that I sat down to calculate. Ambitiously I tell my friends and family that I have crunched the numbers and I believe that if I work hard, I can lose 12-15 lbs over 3 months. All I need to do is lose four to five pounds a week. Furthermore, let’s also say I hope to reduce my body fat from 13% down to 10%. And on top of all of this, I have a strict student budget that limits me.
Weeks pass by as I work every day to reach my goals: Going to the gym, eating healthy, taking the stairs etc. Three months later I am proud to report I’ve lost 13.7 lbs, 18% stronger and spent less money doing it than I imagined.
The headline would read:
“Mancuso fatter and poorer than neighbour expected, friends and family disappointed”