Analyst Estimates Are Very Overrated

by: Michael Anderson

It drives me crazy how much emphasis is put into analyst estimates. Aren't the fundamentals, growth, and future prospects of a company more important? The projection that is much more vital to me are the company estimates for well established companies or whether they enhance or downgrade their guidance and how well the guidance is met. I understand analyst estimates as they have a purpose, but they should not be held in such high regard to determine the direction of a company's stock price. It is unfortunate that investors focus so much on if a company will hit the analyst's target.

When you have top quality companies having excellent quarters, and excellent future expectations, but miss analyst estimates and the stock goes down, something is incredibly wrong. What got me furious about this initially, is when Apple (AAPL) missed analyst estimates last quarter, and then seeing Google (GOOG) miss estimates, it made me even more frustrated, more annoyed, that the price would drop on great earnings. Let's just take a quick glimpse of Apple's last quarter and Google's current quarterly announcement.

Apple Misses Q4 2011 Estimates, But Wait:

Q4 2010 Net Income: $4.3 Billion
Q4 2011 Net Income: $6.62 Billion

Growth: 54.6%

Q4 2010 Revenue: $20.3 Billion
Q4 2011 Revenue: $28.27 Billion

Growth: 39.4%

How can you tell me that is not an excellent quarter that should be applauded and praised? To make the situation even more interesting, Apple guided higher for Q1 2012, which is expected to be their best yet. Tell me why analyst estimates matter here? It is not like this great quarter was an irregular occurrence for Apple as they have been putting out amazing results time after time. This last quarter was no different. The stock is up nicely since, but it dropped off from about $400 per share near $360 per share after missing analyst estimates.

Google Misses! But Again, Wait:

Q4 2010 Net Income: $2.54 Billion
Q4 2011 Net Income: $2.71 Billion

Growth: 6.69%

Q4 2010 Revenue: $8.44 Billion
Q4 2011 Revenue: $10.58 Billion

Growth: 25.36%

Sure, not their most amazing quarter nor is it even comparable to the Apple quarter presented, but still, a nice quarter in terms of sales growth. The concern should not be the analyst estimates in this case, but the growth of the net income. In no way did it deserve a sell off of 10% after hours Thursday. With both companies, we know there is going to be forward progress with both and it is not if growth is just going to become obsolete with either and we know of the many catalysts of both as well. It was nice to see Apple rebound and I would suggest after a sell off of Google that it will also rebound as their future is looking very bright.

Yes, there is more than just revenue and net income to look at when going into the financials and the overall success of a year or quarter, but it is easy to see that both had quality 4th quarters, especially Apple.

With the overall situation of analyst estimates being overrated, it is what it is, and for investors, we need to know what moves a stock price and use that to make the correct decisions. It also goes for those that beat estimates too; just look at Microsoft MSFT Thursday as a perfect example. I think it also helps show that analyst estimates should not hold as much weight as they do.

Microsoft Beats, Shares Rise, But Why?

Q2 2011 Net Income: $6.63 Billion
Q2 2012 Net Income: $6.62 Billion

Decline: .15%

Q2 2011 Revenue: $19.95 Billion
Q2 2012 Revenue: $20.90 Billion

Growth: 4.76%

Yet, shares were up almost 3% after hours on a report that beat estimates by .01 and had a quarter that was less than stellar. Does this type of quarter deserve a nice rise in share price and the quarters demonstrated for Apple and Google, deserve a decline in share price?


Of course, there are many more examples that can be shown to show the dynamic that analyst estimates have, but probably should not. Excellent quarters get shunned and lackluster quarters get praised just because of analyst estimates. For small growth stocks, it may make more sense as there may not be a real feel or consistency on a particular company, or even many things getting pushed back and so forth, but not for these well established companies. Focus on the price of these types of stocks should be in a completely different direction than the use of analyst estimates, but do we just have to submit defeat to this? It appears so, but it can provide opportunities to either buy on these certain dips and sell on the certain rises, but does not mean it is right.

I mentioned certain things that should help and hurt a stock, such as growth, overall fundamentals, upcoming catalysts, company error and successes. A company should get penalized for downgrading their earnings, a company should get praised for having an excellent quarter in terms of growth and even raising the next quarter's estimates, etc. Look at First Solar (NASDAQ:FSLR) for perfect reasons as to why the stock plummeted, a CEO resigning, downgrading their own future sales, rising accounts receivable. Those are adequate reasons.

Another, Netflix (NFLX), raised prices by an incredible amount, no major positive additions were added, rising costs shown early on in the year by Rocco Pendola in an article from April 2011, and basically hurting investor confidence, it dropped and rightfully so. It kind of makes sense if a company is incredibly off on expected estimates, but the overall focus should be much more than that for what has an effect on the price per share.

I have stressed this repetitively throughout the article, but analyst estimates should be on the backburner compared to many other important factors and hopefully, but doubtfully it will shift away from that and as investors, we will most likely have to just use it as a part of our investment strategy, but also realize that they do not always have a lasting effect either as Apple is a perfect example as the analyst "miss" was just a small blip for a great company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: Earnings
Problem with this article? Please tell us. Disagree with this article? .