Berger's Questionable Apple Track Record

FBR chip analyst Craig Berger, an analyst who doesn't cover Apple (AAPL), issued an interesting note today regarding iPhone production rates. He noted that according to his unqualified "checks" (whatever they may be), iPhone production rates may fall up to 40% in calendar Q4 (fiscal Q1). It's interesting that a semiconductor analyst thinks he is even in a position to be able comment on a company that he doesn't cover — a practice that seems to be the trend this year. But this wouldn't be the first time that Craig Berger has commented on Apple's production rates and it certainly wouldn't be the first time he was dead wrong. As a matter of fact, saying that Craig Berger has been "dead wrong" in his forecasts with Apple would be a gross understatement as the data below illustrates. I would even go so far as to actually view Craig Berger's projections as being extremely bullish. See for yourself.

In February 2008, nearly halfway through fiscal Q2 2008, Berger gave a very bearish outlook for Apple's production rates for several of Apple's products for Q2. Remember, this was at a time when the prevailing sentiment on Wall Street was that the United States was in a recession and that Apple's products simply couldn't withstand a "slowdown" in consumer spending. Shares of Apple had been beaten to pulp in February, much as they are today. Berger's comments in February seemed to be based more on misplaced bearish beliefs about the economy than actual channel checks. At least, that's what his defective predictions would seem to indicate to almost any observer.

Berger, in his research note, claimed that Apple would cut the sequential production rate of the iPod and iPhone by 60% in Q2. He further 'noted' that Apple cut its own build forecast on the MacBook computers from down 35% to down 50% sequentially — though he never revealed any sources nor did he mention how he claimed to know what Apple's own internal production goals were. What's interesting about his iPod production rate cut estimate is that Apple always cuts its iPod production rates by 50% for Q2 due to mere seasonality. So it doesn't take a genius to predict that Apple would cut its production rate by 50%. Yet, Berger went a step further and predicted that Apple would cut its iPod production rate by 60% — all but indicating that Apple would experience more seasonality than usual — this never happened.

But get this: Berger claimed that Apple had increased its production rates for iMac computers from flat to up 35% sequentially for Q2. So while his predictions should indicate that notebook sales should be down on the quarter, desktops should actually be up quite significantly on the quarter — according to Berger's forecast, that is. It's important to also note that production rates don't necessarily track actual sales on a 1 to 1 basis. A drop in production rate could suggest that Apple had already filled its channel inventory and thus has no need to ramp up production for this purpose.

However, production rates do track sales more closely than one would think in that if Apple's inventory runs low due to high sales, Apple would have to refill not only its own inventory, but that of its partners in the channel. So in this sense, production rates are supposed to give the investor an idea of how sales are doing. A low production rate should suggest that Apple is seeing slower sales, while a ramp-up in production should suggest that Apple is seeing business pick up. A 60% cutback in iPhone production rates and a 50% cutback in MacBook production rates would tend to suggest that sales would be down dramatically for both devices. Yet, neither seemed to materialize as Berger's "checks," whatever they might be, seemed to indicate. The table below compares Apple's Q1 2008 results, Berger's Q2 2008 production forecast and Apple's actual results for Q2 2008.

A Comparison of Apple's Quarterly Reports with Berger's Production Forecast

Line Item		Q1 2008 Actual	Berger's Q2 Forecast		Q2 2008 Actual	Sequential Growth
iPhones		2,315,000	Down 60%		1,703,000	Down 26.4%
iPods		22,121,000	Down 60%		10,644,000	Down 51.8%
Notebooks		1,342,000	Down 50%		1,433,000	UP 6.8%
Desktops		977,000	Up 35%		856,000	DOWN 12.4%
Total Comps		2,319,000	Down 30%		2,289,000	Down 1.3%

iPhone Sales versus Craig Berger's Prediction
Notice how Berger predicted that iPhone production rates would fall close to 60% in Q2 where actual sales were only down 26.4%, which was all but expected due to normal seasonality. As a matter of fact, iPhone sales in Q2 blew past analyst estimates, and showed significantly better resilience than iPods due to seasonality. Today, Berger is predicting that Apple will reduce its production rate by 40% in Q1 2009 — in a quarter where iPhone generally benefits from seasonality and in a quarter where Apple will significantly expand the number of countries that sell the iPhone. For those who are interested in following actual iPhone production rates, please see the IMEI number tracking research that has led many in the blogging community to accurately predict that Apple sold its 10 millionth iPhone in Q4. This study also helped many bloggers in the community to accurately predict total iPhone sales in Q4 2008 within a margin of only 8% where the analysts missed by an average of 72%. When analysts miss predicting iPhone sales by a margin of 72%, one really needs to question whether investors should seriously consider what those analysts  have to say. The one truism in this market is that over the years, analysts consistently get it wrong both to the upside and to the downside.

iPod Sales versus Berger's Prediction
While iPod sales fell 51.8% sequentially between Q1 and Q2, this was the result of normal seasonality — a shift from quarterly sales driven from holiday shopping to a quarter driven by normal consumer spending. In Q2 2008 for instance, iPod sales fell 49.9% on a sequential basis due to normal seasonality. The all-important holiday shopping season in Q1 normally drives up iPod sales to more than double the average sales figures seen in Q2, Q3, and Q4. Yet, Berger predicted that Apple reduced its iPod production rates from down 50% sequentially to down 60% sequentially, all but indicating that he expected Apple to have an abysmal second quarter with respect to iPod sales. Yet, such was not the case as iPod sales grew about 5% on YoY basis.

Notebook Computers versus Berger's Prediction
According to Berger, there is no way that Apple's notebook sales in Q2 should have been able to outstrip sales in Q1. Berger tried to claim that Apple cut its MacBook production by 50% in Q2 down from an expected drop of 35%. Too bad Apple's notebook sales grew at a pace of 6.8% on a sequential basis in Q2, all but indicating that Berger's prediction was off by an extreme order of magnitude. As a matter of fact, there is no way that Apple didn't increase its production rate for MacBooks in Q2. Such a miss should automatically disqualify Berger as a reliable analyst in predicting Apple's product production rates.

Desktop Computers versus Berger's Prediction
The one product line that Berger's research suggested would actually rise significantly on a sequential basis, fell 12.4%. According to Berger, Apple increased its production rate on iMac computers to a target of up 35% on a sequential basis from its initial assessment of flat growth. Yet, Apple desktop computers, which should have seen a significant boost in sales due to Berger-anticipated stronger sales from iMac computers, were down 12.4% on a sequential basis. So while Berger predicted that notebook sales would be down nearly 50% on a sequential basis, he argued that iMac sales would be up nearly 35%. Such predictions came nowhere close to actual results. As a matter of fact, the opposite was true for each.

How to Read Berger's Production Forecast
One thing that this article should clearly demonstrate is that Berger's rantings on production rates have an almost zero correlation when it comes to actual sales. The FACTS in the table above should lead investors to the conclusion that  Berger's research reports on his "speculation" about where iPhone production rates will go in Q1 should simply be ignored. His reports have had very little to no predictive value in the past, and they will likely have no predictive qualities in the future. I'll be sure to review Berger and his prediction of a 40% production rate cut for the iPhone when Apple reports nearly 9 million iPhone sales in Q1— that's a 30.59% rise in iPhone sales on a sequential basis.

Disclosure: Long AAPL, RIMM, GOOG

Comments

[Roger Knights:]

"nearly 9 million iPhone sales in Q1"

That'll squeeze a few shorts!

2008 Nov 04 02:05 AM

[Murphy Mac:]

Hopefully Berger is being investigated.

2008 Nov 04 07:48 AM

[Jack Johnson:]

the absurd thing about your post Andy is that you are confusing the analysts discussions of 'production' quantities with your expectations for 'sales' quantities. what a company builds is not necessarily what they sell, they could replenish internal or channel inventory. these checks can only give one a sense as to what is happening psychologically at the company, it gives one insight into what is going on behind the scenes. if apple built lets say 10 million iphones in 2q and 3q but only sold 7 million, then 3 million remain in inventory (in fact they said 2 million remain in channel inventory on their call). thus, if the 4q build plan was another 10 million units, plus the 3 million in inventory then apple could cut by 40% and still grow significantly in dec. versus sept. unfortunately we don't see the analysts data behind the checks so its hard to say what his intentions or 'spin' factor are but we certainly can't tell just from the analysis above. just keeping it fair and balanced.

2008 Nov 04 09:11 AM

[NomadicSunder:]

Way to be the truth squad Zaky. While we can not change the harm these "analyst" have done in the past, their future credibility has certainly been shorted.

2008 Nov 04 09:12 AM

[michiganjake:]

Well done as usual Andy. Bravo!

2008 Nov 04 10:20 AM

[michiganjake:]

Well done as usual Andy. Bravo!

2008 Nov 04 10:20 AM

[OPTIONSTHIEF:]

I'M OFFICIALLY A FAN OF YOURS.. LOL. BUT SERIOUSLY, AS STATED ABOVE, THESE analYSTS DO SOME DAMAGE TO US LITTLE GUYS. I KNOW IT'S PART OF THE GAME, BUT THE TIMING SOMETIMES IS NO FUN WHEN YOUR MONEY IS ON THE LINE. WE GET SMACKED, THEN THEY ARE ALLOWED TO COME BACK AND RE-DO THE NUMBERS, ETC, LATER.. ANYWAY, THANKS FOR PUTTING YOURSELF ON THE LINE. WE KNOW A LOT STRADDLE THE FENCE, OR LIKE SOME BROKERAGES DO, DOWNGRADE/UPGRADE A STOCK AFTER IT'S GONE UP/DOWN 3 TO 5 BUCKS.. NO DUH... I FINISHED NOW

2008 Nov 10 08:56 PM

[OPTIONSTHIEF:]

BEFORE ANYONE JUMPS ALL OVER ME, I DO KNOW ABOUT THE HEDGE FUNDS REDEMPTION ANGLE GOING ON. I ALSO WATCH THE SHORTS JUMP ON IT EVERYTIME IT BOTTOMS OUT W/ THE DOW. I KNOW THE MOMENTUM DEAL, ALSO. I GUESS I JUST GET IRRITATED WHEN SO MANY PEOPLE FOLLOW WHAT CRAMER OR SOME ANALYST SAYS W/O USING THEIR OWN HEAD. PLUS, I DO KNOW THAT IT DOESN'T MATTER WHAT I THINK IS GOING TO HAPPEN W/ A STOCK , IT'S WHAT EVERYONE ELSE THINKS IN THIS CRAZY MARKET.

P.S. TYPO FROM OTHER POST. I'M FINISHED NOW. LOL

2008 Nov 10 09:11 PM