Are Apple Analysts Scaring Off Investors?

| About: Apple Inc. (AAPL)

When it comes to Apple (NASDAQ:AAPL), I sometimes get tired of all the negativity. Last quarter, when the major phone carriers reported activation numbers that were down big from the previous quarter, panic ensued over whether Apple would miss iPhone sales expectations. Analysts got extremely negative going into earnings, and they were all wrong. I ended up being conservative as well, but I hit their revenue number dead on. Apple sold more than 35 million iPhones, blowing away expectations. In fact, most of the "professional" analysts were well below that number, according to a table of analysts estimates. My thanks to fellow SA contributor Stefan Sidahmed, who included that table in his Apple article around earnings time.

Now, a big fear is that this quarter and next will be slow for iPhone sales as customers hold back purchases, waiting for the new version to come out in September or October. We saw this happen in fiscal Q4 last year, and it was a wake-up call for many. Now, we have heard this discussion with other products, including the Mac and iPad. Yes, people are going to wait to buy the newer versions, but sometimes analysts are taking it to the extreme.

So we're still a month plus away from Apple earnings, and I'm already hearing more pessimism from the analyst community. We've already heard a few analysts who have either issued very low forecasts or taken down their numbers. Let's look at some of the forecasts:

  • Sterne Agee analyst Shaw Wu said supplier checks showed that iPhone production may have fallen 20-25% quarter over quarter. Mr Wu said that fact indicates iPhone sales may come in a range of 26 to 28 million for the quarter. That is well below the 30-31 million roughly expected by the street currently. But don't forget, Mr. Wu had called for just 29.5 million last quarter, and Apple sold over 35 million.
  • Canaccord's Mike Walkley is projecting just 27 million iPhones this quarter, and less than that the following quarter. But again, Mr. Walkley was at just 32.6 million in the prior quarter, about 2.5 million below the actual number.
  • Jefferies' Peter Misek said demand remains strong, and reiterated his Q3 estimates of 30 million iPhones. Now, Mr. Misek was one of the more positive names when it came to Q2 predictions, but even then, he was at just 33.2 million.

So what am I getting at? Well, I'm trying to make the argument that you shouldn't be afraid of these analysts being so negative. Last quarter, all three were a bit conservative in their iPhone estimates, which led to them being very conservative in their revenue estimates. With the overall street estimate at $36.63 billion, Mr. Wu was at $36.78 billion, Mr. Walkley was at $37.83 billion, and Mr. Misek was at $38.4 billion. Apple reported revenues of $39.186 billion.

Before I tell you about some reasons not to worry about Apple this quarter, let me provide some other information that is relevant to the Apple discussion going forward.

  • Apple close to Baidu (NASDAQ:BIDU) deal for iPhone search - The long awaited deal for Apple to add Baidu's search engine on iPhones in China, could come sometime this week. Baidu handles about 80 percent of internet search queries in China, and this move would only add to Apple's arsenal of web tools. The move would also be a shot at Google (NASDAQ:GOOG), which fights Baidu in the China search business. An Apple-Baidu combination could make the iPhone even stronger in China, a market that has the potential to sell hundreds of millions of iPhones in the next decade.
  • Google's deal with Apple - Strangely enough, Apple is really reaping the benefits of searches. Macquarie analyst Ben Schacter estimates that Google is paying between 50% and 60% to Apple as a revenue sharing deal for searches done through the Safari search box. That means that if there is $1 billion in search revenues from iPads, iPhones, and the like, Apple could get up to $600 million, while Google might only receive $400 million. Don't worry Google fans, Google chrome is coming to iOS.
  • What about the BlackBerry? - If you completely missed it, Research in Motion (RIMM) issued a "business update", which basically turned out to be a warning. The company stated that the competitive environment is taking a toll on their sales, and that the company would potentially report an operating loss for the quarter when it reports in late June. Gee, I wonder why? Obviously, the iPhone is killing the Blackberry right now, and until Research in Motion gets the BB10 stuff out, there is going to be no contest. RIMM shares recently hit single digits.

So there is no doubt that Apple is in a great position in the marketplace right now, and will continue to be so going forward. The iPhone and iPad are selling well right now, Apple is expected to increase revenues this fiscal year at a 50% clip, with earnings per share expected to rise by nearly 70%. Don't forget, Apple will also start purchasing shares soon, to negate the impacts of executive option dilution. That will help earnings per share over time as well.

In terms of this current quarter, which is Apple's fiscal third quarter, the average analyst estimate is for $37.39 billion in revenues? That sounds good, right, compared to last year's $28.57 billion? Sure, but again, analysts are being extremely conservative. How do I know? Well, when it comes to Apple, I'd prefer to rely on the guidance given by the company. Why? Look at the following table, which shows Apple's given guidance to their actual for the quarter. You can look at past results and guidance on Apple's earnings releases page.

Quarter Guidance Actual Difference*
Q3 2010 $13.0-$13.4 Billion $15.7 Billion 18.94%
Q4 2010 $18 billion $20.34 Billion 13.00%
Q1 2011 $23 Billion $26.74 Billion 16.26%
Q2 2011 $22 Billion $24.67 Billion 12.14%
Q3 2011 $23 Billion $28.57 Billion 24.22%
Q4 2011 $25 Billion $28.27 Billion 12.88%
Q1 2012 $37 Billion $46.33 Billion 25.22%
Q2 2012 $32.5 Billion $39.19 Billion 20.57%
Click to enlarge

Over the last two years, Apple has beaten its own guidance by an average of 17.9%. In the past year, the average is 20.72%. So I'd rather look at Apple's provided guidance for the quarter, which came in at $34 billion. If they beat by the two-year average, they'd come in at around $40.09 billion, well ahead of analyst estimates. The average analyst guidance I gave above would be just a 10% beat. Even their worst beat above was 12.88%. Apple should beat again, unless they really have an absolutely terrible quarter. I don't see that happening.

The same can be said when looking at earnings per share, and I've provided that table below.

Quarter Guidance Actual Difference*
Q3 2010 $2.28-$2.39 $3.51 50.32%
Q4 2010 $3.44 $4.64 34.88%
Q1 2011 $4.80 $6.43 33.96%
Q2 2011 $4.90 $6.40 30.61%
Q3 2011 $5.03 $7.79 54.87%
Q4 2011 $5.50 $7.05 28.18%
Q1 2012 $9.30 $13.87 49.14%
Q2 2012 $8.50 $12.30 44.71%
Click to enlarge

The two-year average comes in at 40.83% and the past year average comes in at 44.22%. Yes, even Q4 of 2011, where Apple missed analyst expectations, they still beat their own guidance by 28.18%. Apple guided to this quarter to earnings of at least $8.68. Analysts are currently predicting $10.33 in earnings per share, and a 20% beat comes in at $10.42. So basically, don't be surprised if they come in around $12. You can see all of my initial Apple Q3 predictions here.

My lesson here is to realize that analysts are fairly conservative when they produce their estimates. It would be no fun if they all came out expecting way too much each quarter, because then companies would miss all the time. What's the point of that? So when you hear these analysts taking down their expectations, or starting iPhone numbers way below what Apple sold last quarter, you may want to take these numbers with a grain of salt. Just look at what happened last quarter. Many worried after the carriers reported poor activation numbers. Apple still crushed expectations, and I look forward to them doing so again this quarter.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.