How to properly use Apple's guidance to accurately forecast earnings - Page 2

It's easy. Speculators make money on speculating, since Apple doesn't give dividends. (And they shouldn't!) So they go for the low estimate, and buy in the shadow of the pessimistic figure, which depresses stock price, and then the rumors build up (and what's WSJ and CNBC but big rumor bloggers?) before an announcement, which drives up the price, and then they sell at the peak before the rumors of fatal flaws and -gates and Google propaganda start spreading post-announcement, or post-launch. "Jobs isn't there, they can't keep up this streak, the Microsoft Software Proprietorship gets Market Share," you know, the geniuses who thought that selling Mac clones would be a good way to expand the business, who got Apple in the bad times of the '90s. Apple has a different business model than stock-shilling. Don't get it for quick profits, but for long. I think it's a company that will be a fixture for a while if they stick to their guns. They make things that lots of people will buy, and will be happy with (odds are). Once they start worrying too much about their stock price, they become a bunch of bottom-liners, people who know balance sheets and not reality.

Are you an anti-Dentite?

I don't know about that... Depends on whether or not we will eventually have hyperinflation or remain in a sort of limbo, stagflation, as in the 1970s.

Yup. For the financially confused, this is one long, hard read. But so important I have printed it out and am going over it with my financial dictionary & highlighter by my side. The rule is simple; the reasoning behind the rule, damned complex.
I appreciate the effort. (Is there a sweat smiles-icon?)

Mr. Zaky kicks *** with this article. From now on, if an article uses Apple's EPS projection to predict the future, you know the author is full of ****. If, on the other hand, they focus on projected revenue, you know they've at least done their homework.

For me , the money chart is the one that shows the analysts' projections against the actual earnings, especially over the last two quarters. In Apple's FY 3rd quarter, they horribly underestimatd Apple's revenue growth, then just as horribly overestimated it in the following quarter. And, barring the analysts drastically changing their revenue forecasts for the present quarter, once again they're about to horribly underestimate Apple's revenue growth.

There's a term for this kind of behavior; a hysteresis loop. Here's a definition: http://www.merriam-webster.com/dicti...teresis%20loop

I submit that Apple's movement of the iPhone release date to its 4th fiscal quarter from its third fiscal quarter has created a hysteresis loop in the stock price. I further submit that this loop is being "amplified" by the P/E compression phenomenon that has been acting on Apple over the last few years. If I'm right, we are about to see a major compression in Apple's P/E next year with the "trough" occurring in Apple's FY 2012 3rd quarter and FY 2013 1st quarter. As result, we may see Apple hit a P/E of 10 a year from now.

To be brutally honest he lost credibility with me when he uttered the statement:

"Using simple algebra"

I do not believe there to be such a creature that exists.

The first thing any good AI member will do is glaze over after about three paragraphs. Unless you're heavily invested in Apple or you area pro trader, none of the EPS guidance means anything.

Sigh. Its amazing how opinionated those who don't invest, and don't know anything about investing, always are on forums. Its as if they think that those of us who do invest won't see right thru them.

Andy does a great job... as proven by all the negative comments on this article from people who don't know what they're talking about.

Kinda like listening to PC weenies talk about how bad macs are.

The definition of clueless.

Another funny article by an amateur financial analyst. I recall reading another one previously and that was no less entertaining.

After having a quick laugh, I was going to move on to read something just as informative and believable like an article on the fantastic growth prospects for BlackBerry, but then I saw a number of comments to this article with the authors of those comments being upfront about the fact that this is unfamiliar territory for them.

Not wanting to let them think that they just read something with any actual value, I figured I should bang out some quick comments of my own.

Let me summarize what the article says: if you take Apple's quarterly guidance and multiply out all the numbers, and add some, and substract some, and divide some, you will get summary financials that are consistent with Apple's guidance. And then as long as you add some plugs that have apparently had a sizable range over the last several quarters (years? I can only take nonsense in small doses so I started to skim...) you will get numbers that are close to what Apple came up with internally. And not only that but, also, none of the analysts on Wall Street with Harvard MBAs and base salaries exceeding $300M have ever been able to crack this mysterious, arcane, unfathomable code!!!

Well, okay, but no...

(BTW, $300M means $300 thousand -- "M" is standard banking convention for thousands and "MM" is used for millions -- for any who might want to have jumped on me for suggesting that an Associate is making $300 million...)

The author of this article, which could have been submitted for someone's high-school business class and come back with a C+, fails to demonstrate any understanding whatsoever of how the real analysts actually perfom any analysis and even less understanding of how sophisticated traders make highly profitable trades.

There is no comparative advantage to be gained -- none -- from being able to take Apple's guidance (or any company's actually), throw it into the model, and update the pro formas.

That type of model requires such great sophistication that it's typically the sort of project that a summer intern might work on for a few days.

The simplicity of identifying the types of correlates, trends, etc. that seem to comprise the remainder of the "Never Before Revealed!!!" magic in this article is something that would keep the intern busy for the rest of the week.

OK, folks, here's the real world.

The real financial analysts actually use very sophisticated models that take the guidance and churns out the obvious financial forecast in a second or two to be used as a base-case scenario. This is something that could be done standing in front of a urinal during a bio break using nothing but the calculator app on my iPhone. I will concede that I'd probably need to turn my iPhone sideways to get the really super cool functionality in the calculator app...

That base-case forecast is then used in a variety of scenario and sensitivity analyses, which would typically include forecasts around the overall economy, interest rates, commodity prices, market share, supply-chain analysis, sell-through, product introductions, consumer demand, etc. etc.

From there, the analyst might use something as simple as boilerplate worst case and best case scenarios and in comparison to the company guidance come up with a near-term view of expected financial performance.

At the more sophisticated end of the spectrum, the analyst who might have a PhD in physics from MIT in addition to her Harvard MBA could perform a Monte Carlo analysis using 10,000 simulations to come up with a 97.5% CI forecast distribution... blah... blah... blah...

The point being that there is a considerable amount of sophistication, brain power, information gathering, and highly detailed forecasting that goes into real financial analysis.

Why? Well obviously because there is a real financial return from investing the time, effort, and cost into doing a thorough analysis.

That's because the point of doing the analysis is to try to develop insights into expected or probable performance where those insights exceed the information available to anyone else.

To make real money you need to have a more accurate, greater quality, more timely, more predictive, etc. etc. perspective on the current and future performance of a particular company within the context of the entire industry, all of the other relevant competitors in that industry, the global economy, etc. etc. In other words, you need to have a competitive advantage. If you're just using the same numbers that everyone else is, that doesn't really seem like an advantage...

If you look at this purely from a trading perspective, the objective isn't to get this all figured out as precisely as possible just before the company releases it's earnings so that you can run off and make a single trade. The goal is to make a continuous series of highly profitable trades based on the best available information on a minute-by-minute basis.

Estimates that vary by 16 to 18% each quarter are of no benefit when millions of dollars are made in trades that are executed in less than a second from the time that the trading model identifies a trade, with the trading position possibly being held for seconds, and being based on bid-ask margins of a small fraction of a penny.

The author seems to think that Wall Street financial analysts don't know what they're doing because their math doesn't result in numbers matching Apple's guidance as closely as his do. They don't because they actually reflect skills and knowledge beyond algebra.


Full disclosure: I am not currently a financial analyst, banker, trader, broker, dealer, or regulator. I am not an employee of Apple or any of its competitors. (I'm also not a "journalist" for The Onion...). However, I'm highly qualified to speak intelligently on this topic.

You must have overlooked the entirely accurate criticism of Andy's forecasts for last quarter. His predictions were way off, very high. Some of us who've been fans of Andy's work in the past were put off by the fact that he (to my knowledge at least) has not made any effort to explain how he managed such a big miss. Skepticism is now rightly appropriate.

BTW, I do invest and I have a lot at stake in AAPL. Those of us who do invest are always on the lookout for analysts with good track records for accuracy in their forecasts. Not acknowledging a mistake when you make one is a tarnish. The lack of a mea culpa for last quarter makes Andy look a lot more like all those other analysts. It's a trust thing, so that's disappointing.

So come on Andy, confess. Tell us why you were so far off the mark last quarter and maybe we'll have a reason to believe you this time.

Anyone know where we can get Apple's guidance figures.  For Q3 2012 I can only find numbers for revenue and eps.

 

Also does anyone know why the article stops OI&E figures in Q1 2011?  The last few OI&E numbers are also wrong.  I checked!

 

Its quite interesting this article.  A quick and easy method perspective.... IF you can get details of Apple's guidance.

Does anyone know where you can find Apples guidance for Q3 2012?  I can only find guidance for EPS and Revenue.  The stats in this article suggest that guidance should be a lot more detailed.

 

The last 3 OI&E numbers (Q3 2010, Q4 2010 and Q1 2011) are different to those on apples statements.  Anyone know why this is, or is it just a mistake on part of the author? 

I keep coming across mistakes in this guys data... I'm checking against Apples earnings transcripts... which contain all the guidance figures. Terrible.