Originally Posted by Frood
No. Their epectations sets their price. If you feel their expectations are unreasonably high, you are saying Apple is valued unreasonably high. At its peak it was valued at near the GDP of Switzerland.
Take the passions of phone companies out of it. You and I both own hot dog stands and sell the same product. People love my insanely delicious hot dogs, and I sell a ton of them, but I keep everything I do secret. You sell a pretty mean hot dog too.
Analysts are asked to value our respective hot dog companies. They predict I'm going to sell 1,000,000 and value me at $1,000,000 (just to keep it simple). They predict you are going to sell 100,000 and value you at $100,000. Neither of us has actually sold a hot dog in this quarter yet, but people would be willing to pay much more for my company because I'm expected to sell a lot more than you.
The quarter actually happens and we post our numbers. You sold 200,000 hot dogs. I sold 500,000 (a record amount for me!). Guess what? People like my product more than yours, I sold way more than twice as many hot dogs as you did, and I am doing better business than you are.
So that means my stock is going to soar, right? Buzzzzzz.... Wrong. My stock is going to plummet, and yours is going to soar. But but but.... record sales!!!!! Doesn't matter. Sold WAY more than the competition so obviously my customers love me and will be back! Doesn't matter. I was valued at a company that was supposed to sell 1,000,000 hot dogs and I "only" sold 500,000. I'm not doomed. I'm not a failure. People still like my product better than yours because they buy more. I'm just not worth the $1,000,000 that I would be if I had sold 1,000,000 hot dogs. You on the other hand, sold way fewer than I did, and your stock is soaring. It should be. You were valued at $100,000 based on expectations and you far exceeded them. I'm still worth a lot more than you are
My shareholder are now much poorer though
My shareholders and fans can cry a river that my hot dogs are better than anyone else's and that I sell more than anyone else. They are absolutely right that the analysts had it all wrong. But when they bought my shares thinking I was worth 1,000,000- the analysts had set that unreasonable expectation and they bought in to it. I was unable to deliver- I was really only worth $500,000. They can then cry that 1,000,000 was a totally unreasonable number and blame analysts for setting expectations so high- and they would be absolutely right. I never should have been valued at $1,000,000 in the first place because that was based on their unrealistic expectations.
Of course you'll also get the ones that say. He sold record numbers and way more than anyone else, but his stock tanked, and that other guy sold *way* less and his stock is soaring!!! WTF!!!! Clear sign of market manipulation!!!!!
Would you at least agree that if Apple consistently sells more phones at higher profit margins, they should be worth more than if they sell fewer phones at lower margins?
There are some analysts who do set lower expectations for Apple. But since they expect Apple to sell less of their products, they also lower their valuation and price targets for Apple. It's usually the fans that decry analysts for setting unreasonably high targets for Apple that are the same ones calling the analysts that give Apple a lower price target based on more reasonable expectations a bunch of idiots.
The best part is we're now 'done' right? I sold 500,000... you sold 200,000 so everyone has their answer and we can be 'correctly valued' easily now right? Its the start of a new quarter and we *know* how many we just sold and what our numbers are on the spot of the moment. What we don't know is how many we are going to sell this next quarter. Analysts have to come up with their best guess, again (that guess being more accurately defined as the 'net present value of all future *expected* earnings), and if people value their insights and invest accordingly, the price will again move to levels based on those analysts expectations. Rinse. Lather. Repeat. If you don't believe the analysts high valuation of any company because you think there is no way that company can meet their expected targets... you are saying that the company should have a lower valuation because you believe they are going to sell less product.