Sometimes it's better to expect less from a company. Keep expectations low and then dazzle investors with sensational earnings.
That's why I'm preaching blogger "restraint" when forecasting Apple's next quarter.
Apple (NASDAQ:AAPL) disappointed last quarter, missing analyst estimates, pushing share price down. For the stock to regain its leadership position and move higher, Apple must beat consensus handily next quarter. The company needs to convince the Street that its growth is far from over.
Apple guided $9.30 for the upcoming quarter. Known for its under promise over deliver approach to guidance, Apple is likely to earn more than that. The company has surpassed its outlook for the last 25 quarters.
Analyst consensus is currently $9.79. It's moved up $0.79 over the last 60 days. We already have one estimate as high as $10.74.
As a long, I want the pros to keep their forecasts as low as possible. That way, on January 18, Apple will smash their estimates and impress investors. I'd rather not see forecasts go up, challenging Apple's ability to surpass them.
For example, if Apple prints $10.50 next quarter, it could be good or it could be terrible. It all depends on how exuberant the analyst estimates are. If the analyst consensus remains at $9.79, Apple surprises and we're all pleased. On the other hand, should the magic number rise to $10.75, Apple disappoints and the stock gets crushed. All despite the hypothetical $10.50 being 63% greater than last year. Beating analyst numbers are a critical part of how the game is played.
We are starting to see very optimistic estimates coming from some very influential bloggers, estimates much higher than their professional counterparts. For instance, Andy Zaky forecasts $11.75, two dollars higher than analyst consensus. Horace Dediu, a fabulous Apple analyst, is even higher at $12.30.
I'm worried. Normally, you'd be pleased that your stock might deliver crazy-high earnings. However, I think these forecasts are too high and may also cause professional analysts to raise their own numbers.
While I believe earnings will be higher than guidance, they are unlikely too come in anywhere near $11.75.
First, while the 4S is hot, it is just being introduced to the world. In October, Apple marketed the phone in 29 countries. During November, fourteen more nations were added. Two days ago, the 4s was launched in another twenty countries. Although there is pent-up demand for this product, this quarter will miss much of the world's buying, simply because the 4S will only be available in many countries for 3 to 6 weeks. There just isn't time to sell enough iPhones to move revenues enough.
Further, Apple has begun deferring a significant portion of its revenues to cover software updates. The company is deferring $16 on each iPhone and iPad, $11 on every iPod Touch, and $22 on every Mac. In addition, Apple must contend with Thai-related disruptions in components, such as hard disc drives, complicating its quarter and possibly straining margins.
Zaky hinges his street high estimates on his observation that Apple reliably prints revenues 12 to 18% higher than its outlook and counts on that happening again next quarter. However, that has not always been the case. In 2008 and 2009, revenues averaged just 5% and 8% higher respectively than guidance. In one quarter, Apple beat its own revenue estimate by only one per cent.
It's time for self-restraint from the blogging community. The stock will remain undervalued unless Apple is given a fair opportunity to beat estimates. Let's keep expectations as low as possible. It would be awful if Apple missed forecasts, despite producing earnings that were 60% higher. Raising estimates into the stratosphere will only serve to set up Apple for a disappointment.
Disclosure: I am long AAPL.