Apple Analysts, Perpetually Clueless

Dec.21.11 | About: Apple Inc. (AAPL)

In an excellent satirical piece on Asymco, Horace Dediu tries to explain how analysts got Apple (NASDAQ:AAPL) so wrong over the years. This would be quite amusing if it were not so tragic, as Apple is priced largely using their estimates. Horace’s charts are great and the story is captivating, but the numbers he shares are tiny golden nuggets I’d been hoping to find for quite some time. I suspected the forecast versus reality would look something like this: (Click to enlarge)

Historical telecommunications forecastsClick to enlarge

While analysts’ percentage growth errors are quite impressive in Horace’s article, the bare truth of earnings forecast misses is staggering. (Click to enlarge)

AnalystsClick to enlarge

We gain more insight if we look at the same chart in logarithmic scale. With minor variations, the predictions are the same every year: Growth will slow down to a snail’s pace, starting immediately. (Click to enlarge)

AnalystsClick to enlarge

Several of us so-called indie or amateur Apple analysts have great fun beating professionals to the punch most of the time when it comes to quarterly estimates. The real story is that we as a group are more optimistic and free to express our insights. The accidental, not-so-great Apple quarter caught most of us flat-footed. The normal (but outstanding) Apple quarter baffles professionals because they aren’t trained to detect nor to predict disruption (and in any case, they are probably not allowed to put it on paper/electrons). However, looking at Dediu’s charts, one can easily see that throwing darts in the dark anywhere in the range 0-100% growth might bring a far better forecast than the analysts’ consensus.

Very few amateurs make long term predictions. I’ll take a chance and present my five-year view (I won’t attempt to justify them now; they are here to be judged at the right time). Please keep in mind that nobody dares to predict that far out in this industry, because it is virtually impossible to be accurate. So the only thing one could hope (at least for the fourth and fifth year) is to be somewhere in the ballpark. An error by a factor of less than two should be considered a success. I therefore predict EPS growth for the fiscal years 2012 to 2016 to be about 85%, 60%, 40%, 30% and respectively 25%.

My closing question is: How could one do worse in the future than professional analysts when it comes to Apple?

Update: While I was preparing this article, Horace Dediu published another take on his initial article which, after an update, contains both charts I propose above. While he tries to find explanations for the analysts’ gross forecasting errors, my take is that any serious Apple investor should completely ignore Wall Street analysts.

Disclosure: I am long AAPL.

Additional disclosure: I leverage my investments with call options.

Acknowledgment. I would like to thank John Markuson for his help with English, grammar and style of this article.