Analyst: iPhone Expectations Got Out of Hand

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Apple's Cloudy Crystal Ball
Apple turned in a rare miss for its September quarter’s results, but Sterne Agee said that miss wasn’t about Apple’s business being bad, but rather, “because iPhone expectations simply got out of hand.” In a research note obtained by The Mac Observer, Mr. Wu told clients that Wall Street lost sight of the fact that an expected product transition would dampen iPhone sales.

“We are not proud modeling 18.5 million iPhones which turned out higher than actual 17 million shipments,” Mr. Wu wrote, “but we were materially below consensus of 20 million, not to mention some analysts who assumed as high as 23 million units.

He added that, “It turned out that a concern we raised in our [September 21st] earnings preview that [Wall Street] didn’t factor in enough of a ‘product transition’ that [Apple] talked about was valid (which turned out to be iPhone 4S launching in October).”

On the positive side, Mr. Wu looked at Apple’s aggressive guidance of US$37 billion in revenue and earnings per share (EPS) of $9.30 for the December quarter as a good sign. That guidance was actually higher than Wall Street’s own estimates of $36.6 billion in revenue and EPS of $8.98 for the December quarter.

“This is also rare as AAPL usually offers conservative guidance,” Mr. Wu noted. “We believe the company did this to express confidence in its strong pipeline of business, particularly with its new iPhone 4S and iPad still relatively early in its adoption curve.”

In light of Apple’s higher guidance, Mr. Wu raised his own estimates for Apple to $37.1 billion in revenue for the December quarter and EPS of $9.52. For fiscal 2012, he is now estimating $132.3 billion in revenue and and $34.00 in EPS, and that’s only modestly up from revenue of $131.3 billion and $33.10 in EPS. Consensus is currently at revenue of $135.3 billion and $33.05 in EPS.

Mr. Wu maintained his price target for Apple’s stock at $500 with a “Buy” rating.

He wrote, “We could raise our price target based on our higher estimates and higher cash balance but we are opting to leave our price target intact at $500 based on a conservative 12x multiple on our calendar 2012 estimates of EPS of $35.44 plus $87 per share in net cash.

The markets punished Apple during Wednesday’s trading session. As of this writing, AAPL is trading at $399.27, down $22.97 (-5.44%), on heavy volume.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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17 Comments Leave Your Own

mhikl

Bryan wrote: Apple turned in a rare miss for its September quarter?s results, but Sterne Agee said that miss wasn?t about Apple?s business being bad, but rather, ?because iPhone expectations simply got out of hand.?

Agreed. Spankings, or at least self-flagelations are in order for all predictors, estimators, assumers who write Apple guestimates when there?s not much news in other quarters. Not Apple?s fault. It isn?t up to Apple to stand to attention every time any speculative reporter gets carried away with its own sense as an Apple seer, not that Apple doesn?t mind the free publicity and that Android makers wouldn?t like some speculation on their modus horrendi. Now that would be funny.

Bosco (Brad Hutchings)

One independent (i.e. hobbyist) analyst warned of this issue in early September. But he didn’t think it was a product transition issue as much as a competitiveness issue. One Apple making one current phone can’t possibly meet the needs of a whole market better than multiple manufacturers making multiple models and churning routinely.

iPhone has lost to Android phone for market dominance. With price cuts, Apple will dominate less in profit share. To me, this competition isn’t even terribly interesting anymore. The one I think is interesting for 2012 is whether Apple can stave off Windows Phone. Microsoft will have the multiple manufacturers and multiple models. And they can pretty much leverage the hardware that already runs Android. As both platforms embrace zero physical buttons, I wouldn’t be surprised to see dual-boot phones.

Nemo

Manipulating expectations to the purpose of moving a stock’s price for the benefit of their company or of some client’s trading position is the principal purpose in life for the vast majority of analysts.

Nemo

Dear Bosco:  If it was simply the case that analysts missed the obvious explanation that people were waiting for the new iPhone 4S, which is something that they’ve missed before, we will see it in this quarter’s sales numbers, and at 4 million iPhone 4S actually sold over the weekend, it looks like a shift forward in sales is exactly what happened.

Bryan Chaffin

Brad, you have been wrong in every single prediction you have made when it comes to Apple’s supposed demise in the smartphone and tablet markets. Every time, mate.

I not at all humbly suggest you will be wrong this time, too. Apple will have its highest market share of all time during the December quarter, and I’m willing to wager with you on that.

Bryan Chaffin

mhikl, I strongly disagree. Apple is completely at fault for estimates being out of whack because Apple has been playing a game with its own guidance for many, many years. What we saw this last quarter with Wall Street’s expectations getting out of line with Apple’s actual results was inevitable. With Apple offering artificially conservative guidance quarter after quarter, it was only a matter of time before we saw things “get out of hand,” as Shaw Wu put it.

mhikl

What anger spills from the souls of trolls
When Apple solstice roars once more
And quality rules its state of affairs
No updates to crap in plastic bears.

Nelson is giving any riotous laugh.

mhikl

Bryan, an article on this would make for an interesting read. I don?t think their estimates were far off the track this quarter, and I don?t remember outlandishly low estimates before. And was Apple to over estimate, even slightly, would it not be taken to task quite fiercely?

Bosco (Brad Hutchings)

Well, if you’re counting Android surpassing Apple in both sales share and installed base in phones because I was late by a quarter or so on both, sure. Or maybe you’re talking about the Verizon Unicorn helping iPhone tread marketshare water? OK, whatever.

mhikl

Another idea or two, Bryan. With a new Android phone every other week, planned obsolesce is to be expected. But Apple has a longer plan and supports its products. Turnover, therefore, is not happening at the rate of droid to the dump and therefore does that make predictions easier or more trying. And Horace D is writing a column in parts on his miscues. The phone business is so volatile he finds it the most difficult section to evaluate. Horace, it seems, does his research.

Lee Dronick

What we saw this last quarter with Wall Street?s expectations getting out of line with Apple?s actual results was inevitable. With Apple offering artificially conservative guidance quarter after quarter, it was only a matter of time before we saw things ?get out of hand,? as Shaw Wu put it.

Yes, it was only a matter of time, but it seems that it took Wall Street a lot more time than it took others to figure it out.

Lancashire-Witch

But Apple has a longer plan and supports its products.

Up until I got an iPhone I never got more than 2 years out of any mobile phone - going back to 1996.  My expectation, based on Mac experience, was that the 3G iPhone would serve me well for many years. Well, the hardware is fine, but the software is stuck on iOS 4.2.1 It’s just over 3 years old. Pity.

nealg

The fact is that Apple has become a more difficult company to predict earnings on. 10 years ago, it was Mac and iPod revenues just starting to come in with a little bit of other stuff. Then there was iTunes. Then iPhone with the App store the following year and now the iPad as well. Significant growth also gets harder the larger Apple gets as well. A company that grows from 50 billion to 100 billion has 100% growth but even if it grows another 50 billion, its growth has slowed to 50%. Still good for any company and it continues to get harder the larger the company gets which may be part of what is happening at Apple.

Apple is also secretive, in part, in order to make the product transitions easier so sales don’t drop off a cliff. In comparing yoy for phone sales, Apple last year had their brand new phone just released and this year got caught in a transition. Not a reason to jump off the bridge at this time, especially since Apple selling 4 million phones the first weekend shows that there is pent up demand. I agree with Wu that the estimates were just too aggressive.

Neal

mhikl

but the software is stuck on iOS 4.2.1 It?s just over 3 years old. Pity.

My 2nd gen iPt can?t be updated, either. I believe hardware restrictions cause the prob for updates. Still, three years for an Apple product is not a long time, durability wise, so why not some modified iOS update? OS does it well.

My lesson: next time buy newest; don?t save bucks on mid-life products.

nealg wrote: The fact is that Apple has become a more difficult company to predict earnings on.

Spot on, nealg.

wab95

Apple is completely at fault for estimates being out of whack because Apple has been playing a game with its own guidance for many, many years. What we saw this last quarter with Wall Street?s expectations getting out of line with Apple?s actual results was inevitable. With Apple offering artificially conservative guidance quarter after quarter, it was only a matter of time before we saw things ?get out of hand,? as Shaw Wu put it.


In this case, though, I think the ‘miss’ is not so cut and dry, but resulted from the interplay between the Street’s somewhat aggressive overcompensation for Apple’s conservative guidance, on the one hand, and the longer-than-expected interval between the anticipated vs the actual iPhone release date, on the other. That interval was a relative and overly long dead space in terms of sales, as potential iPhone purchasers held off of upgrades and put a drag on product movement, and hence, a missed projected target.

In any case, to analysts’ credit, and despite short investor behaviour, there seems to be a consensus that Apple’s momentum (or in Bajoran speak, Apple’s Pa’) remains strong.

skipaq

Brad, you have been wrong in every single prediction you have made when it comes to Apple?s supposed demise in the smartphone and tablet markets. Every time, mate.

Well, you think so! I’m still waiting for iPhone to become the “seers” fulfilled “shrinking niche market.”

iPhone sales are doing just fine and will continue to do so. The miss was not that big and due to over predicting what was coming. It was just too long a period for this update to show.

Lancashire-Witch

Lancashire-Witch said:

but the software is stuck on iOS 4.2.1 It?s just over 3 years old. Pity.

My 2nd gen iPt can?t be updated, either. I believe hardware restrictions cause the prob for updates. Still, three years for an Apple product is not a long time, durability wise, so why not some modified iOS update? OS does it well.

My lesson: next time buy newest; don?t save bucks on mid-life products.

When I got my 3G iPh it was the newest. The 3GS didn’t appear until a year later. Software updates for the 3G stopped after 30 months. That’s an expensive short-lived experience.

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