Why Apple's guidance is still conservative

Posted:
in AAPL Investors edited January 2014
Apple's guidance strategy has not changed, despite a newfound belief on Wall Street that Apple has scrapped its conservative guidance for a more "realistic" approach.



The main reason that many on Wall Street believe Apple has changed its guidance practices to a more "realistic" approach for fiscal Q1 is due to the fact that Apple gave very strong revenue guidance that was a full $1.6 billion above the consensus.



Because there has been so much press over the years about how Apple is comically conservative with its guidance, this concept has become so deeply ingrained in the collective thinking of Wall Street that everyone blindly accepts it as the truth. I mean, it's obvious, right? Apple is very conservative with its guidance. Everyone knows this, right?



Thus, upon seeing Apple guide above Wall Street on revenue by such a massive margin as $1.6 billion, it has lead many to conclude that Apple must have shifted to a more aggressive stance with its guidance. Since Apple is so conservative, it must mean that Apple never guides above the Street, right?



What if I were to tell you that Apple isn't as conservative as everyone might think? What if I were to tell you that this isn't the first time that Apple has guided above the Street on revenue? Indeed, what if I were to tell you that the assumption that Apple sandbags the street with conservative guidance is entirely false? What if Apple has been aggressive all along, but every quarter that goes by you are told that Apple's guiding above the Street was just another outlier? What if the fact that Apple consistently guides above the Street on revenue and by a very significant margin has fallen out of the collective memory of investors? What if it has fallen out of the collective memory of Wall Street?



Believe it or not, Apple has guided above the Street on revenue in six out of the last eight quarters since it underwent a major accounting change that allowed the company to finally include iPhone revenue as part of its total sales. Ever since Apple shifted away from subscription accounting, the company has guided above the Wall Street consensus in six out of the last eight quarters.



This has been largely the result of Wall Street simply being unable to comprehend how a company of Apple's size can continue to grow by such a dramatic fashion. It is no secret that Wall Street simply does not understand Apple.



For example, as we headed into Apple's 2011 fiscal year last September (2010), the Wall Street consensus for Apple's 2011 earnings was extremely low. The Street was looking for Apple to report 2011 EPS of $17.43 on revenues of about $70 billion. Apple ended up reporting $27.68 in EPS (58.8 percent higher) on $108 billion in revenue (54.2 percent higher). Wall Street is doing the very same thing this year. Even though Apple's fiscal Q1 guidance pretty much indicates that the company is going to report about $44.00 in EPS on $160 billion in revenue in 2012, the Wall Street consensus is looking for $34.76 in EPS on $140 billion in revenue.



Every single year Wall Street expectations for Apple are almost 50 percent lower than what Apple ends up reporting. Unfortunately for Apple investors, Apple trades on future expectations. Thus, every year that goes by, investors ignore the fact that Apple just beat the consensus by 50 percent and then trades on flawed forward expectations. The real problem is that this cycle continues into perpetuity. So while Apple might very well deliver $44.00 in EPS in 2012, that won't matter at all because by the time Apple demonstrates that expectations are too low, it is already trading on the next set of flawed expectations. There hasn't been a year since 2006 where the initial consensus heading into the next year wasn't beaten by at least 50 percent, including 2011. That's a big reason why Apple is the most undervalued large-cap stock in America.



Getting back to the point at hand: In four out of the last six quarters including this one, Apple has guided about $1 billion or more above the street on revenue. And yet even after guiding so heavily above the street in four out of the last six quarters, Apple has still managed to blowout expectations.



As you can see from the chart below, aside from this quarter, Apple guided $1.4 billion above the street for fiscal Q2 2011, it guided $800 million above the Street for fiscal Q1 (last year) and $1 billion above the street in fiscal Q4.







This directly contradicts the assumption that Apple "regularly" sandbags the Street. Since fiscal Q1 2010, Apple has only ever guided below the Wall Street consensus on revenue twice. Once was in fiscal Q3 2011 and the other was in fiscal Q4 2011. Notice that in fiscal Q4 2011, Apple guided a full $2.7 billion below the Street on revenue and everyone dismissed it ? including myself ? as being overly conservative. This ended up leading to the earning's miss in fiscal Q4.



But the point here is this: One cannot conclude that Apple has become "more aggressive" with its guidance for fiscal Q1 solely based on the idea that Apple guided $1.6 billion above the Street on revenue. Apple has guided by $1 billion+ above the Street on three other recent occasions. So that goes out the window entirely.



On top of that, what really kills the argument that Apple has become more aggressive with its guidance is the fact that nothing in Apple's recent reporting would suggest such a conclusion. If you look at the past two years as exhibited in this chart below, Apple has consistently beaten its revenue guidance by 12-18 percent every quarter. That means regardless of whatever Wall Street is doing or thinking, Apple continues to deliver the same type of beat on its guidance. Whether Apple meets or beats Wall Street expectations doesn't really figure into Apple's thought process. The chart below clearly demonstrates this statement.







Now what's very interesting about this chart above is that when Apple first reported its fiscal Q4 earnings which fell short of Wall Street expectations, many tried to argue that it must mean that either Apple's sales were slowing or that Apple got overly aggressive with its guidance. No one stopped to think that it wasn't Apple's fault at all.



This chart above clearly demonstrates that Apple knew exactly what it was doing when it gave revenue guidance that was $2.7 billion below the street going into fiscal Q4. All analysts ?- both Wall Street and independents (including myself) ?- completely ignored the warning signs. Everyone blew-off Apple's very serious guidance as being just "merely conservative." I will tell you this: That will be the very last time I ever question the validity of Apple's guidance. When Apple guides above the street, they mean it. When they guide below the street, they really mean it. That's the way to interpret the new era for Apple. You must accept the warning signs when Apple gives them to you or you're going to be very disappointed. That was the lesson in fiscal Q4.







Another piece of significant evidence which suggests that Apple hasn't changed anything with respect to its guidance, and that the fiscal Q4 anomaly was merely the result of analyst error, is demonstrated in variations in the consensus.



Before Apple's recently reported fiscal Q4, the Wall Street consensus estimate for Apple's revenue over the past two years has tended to range between 5 percent and 7 percent in the typical quarter. This gave Apple plenty of room to beat on the upside given that Apple tends to beat its own revenue guidance by between 12-18 percent.



Yet, because things got so out of hand in fiscal Q4 as a result of the huge beat in fiscal Q3, the Wall Street consensus on revenue was 20 percent above Apple's guidance by the time the company reported earnings. That consensus estimate was so high that it would have amounted to an earnings miss by Apple in a whopping 7 out the last 8 quarters. This suggests that Apple was basically set-up to miss Wall Street expectations in fiscal Q4, and couldn't have done anything about it. Apple's fiscal Q3 blowout, basically sealed Apple's fate for fiscal Q4. This chart below clearly demonstrates that to be the case.







And to be honest, it was just an unfortunate series of events that lead Wall Street analysts to hold such high expectations. If Apple hadn't absolutely decimating expectations in fiscal Q3, Wall Street wouldn't have ignored Apple's warnings with its fiscal Q4 guidance and we wouldn't have had this miss. The fact that everyone accepted the belief that Apple is always conservative with its guidance also played a massive role in the fiscal Q4 earnings miss. Hopefully this article will help correct that viewpoint with respect to Apple's guidance.



But what this should demonstrate is that Apple doesn't try to play games. They guide where they believe they can reasonable beat expectations. If that means guiding $2.7 billion below the Street, then by golly they will guide $2.7 billion below the Street. If it means guiding $1.6 billion above the Street, then so be it. Apple has no problem guiding $1.4 billion above the Street and in fact when it did so in fiscal Q2, it was offering a more aggressive guidance than it is this quarter. Yet, as aggressive as that guidance was in fiscal Q2, Apple still beat its revenue guidance by the same old 12-18 percent range notwithstanding.



That tells you that what Apple is doing with its revenue guidance is it's trying to set the right type of expectations. Here that means telling the Street that the company internally believes that Apple will report anywhere from $41.6 billion to $43.7 billion in fiscal Q1 2012. That $2 billion range is how the company has done it in the past. Pretty much every quarter since Q1 2010 has fallen within that $2 billion range. The determination of where Apple's earnings will ultimately fall within that $2 billion range will largely depend on the analysis of research data.



Remember that $2 billion is merely the difference between 3.3 million iOS Devices i.e. iPhones + iPads. So for example, if Apple reports sales of 32 million iPhones and 13.5 million iPads, that would amount to $42 billion in revenue all else being equal. But suppose Apple were to sell 35 million iPhones and 13.8 million iPads. That would result in Apple reporting a revenue number in the upper end of its range. Doesn't this sound kind of ridiculous?



Who is going to really know for sure whether Apple sells an extra 3.3 million iOS devices? No one. That's the best anyone can hope to do without insider information. Apple has told us that it will report between 32 million and 35 million iPhones or 13.5 to 14.5 million iPads. How much more specificity do we really need in our forecasting? Bullish Cross holds an expectation that Apple will report $42 billion in revenue on 32 million iPhones and 13.5 million iPads. The reason? We don't really care to risk missing. We're fine with our forecast. If Apple beats us and reports a few more million iPhones, then so be it. But we take comfort in knowing that our forecast will be within a 5 percent margin of error.



Andy M. Zaky is a fund manager at Bullish Cross Capital and the editor of the Bullish Cross Financial Newsletter. Bullish Cross Capital owns a significant long position in Apple, Inc.
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Comments

  • Reply 1 of 44
    irelandireland Posts: 17,743member
    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.
  • Reply 2 of 44
    normmnormm Posts: 634member
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    His arguments stand or fall on their own merits. I would say his graphs are convincing.
  • Reply 3 of 44
    jrobjrob Posts: 49member
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    Actually, I tend to take him much more seriously because of that. He is putting his money where his mouth is. He has also forecast shorter-term drops in the stock in the past (and sold his holdings), so don't just assume he is always bullish.



    I believe in evaluating the data myself and deciding whether it matches an author's conclusions. I have found that I agree with Andy's conclusions almost all of the time, and I definitely agree with him on this issue.
  • Reply 4 of 44
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    I've never understood this, and perhaps you can explain: what's the necessary conflict of interest that arises when you own a stock and recommend others buy it? Especially if you've done the fundamental analysis, believe in that analysis, believe it's undervalued, and put your analysis out there so that investors can judge for themselves?
  • Reply 5 of 44
    jragostajragosta Posts: 10,473member
    Quote:
    Originally Posted by AppleInsider View Post


    For example, as we headed into Apple's 2011 fiscal year last September (2010), the Wall Street consensus for Apple's 2011 earnings was extremely low. The Street was looking for Apple to report 2011 EPS of $17.43 on revenues of about $70 billion. Apple ended up reporting $27.68 in EPS (58.8 percent higher) on $108 billion in revenue (54.2 percent higher). Wall Street is doing the very same thing this year. Even though Apple's fiscal Q1 guidance pretty much indicates that the company is going to report about $44.00 in EPS on $160 billion in revenue in 2012, the Wall Street consensus is looking for $34.76 in EPS on $140 billion in revenue.



    Every single year Wall Street expectations for Apple are almost 50 percent lower than what Apple ends up reporting. Unfortunately for Apple investors, Apple trades on future expectations. Thus, every year that goes by, investors ignore the fact that Apple just beat the consensus by 50 percent and then trades on flawed forward expectations. The real problem is that this cycle continues into perpetuity. So while Apple might very well deliver $44.00 in EPS in 2012, that won't matter at all because by the time Apple demonstrates that expectations are too low, it is already trading on the next set of flawed expectations. There hasn't been a year since 2006 where the initial consensus heading into the next year wasn't beaten by at least 50 percent, including 2011. That's a big reason why Apple is the most undervalued large-cap stock in America.



    Reminds me of the old SPA (Software Publisher Association) days. Every quarter, they would issue a big press release stating that Macintosh software sales were declining based on preliminary estimates. When the final numbers came in, it almost always turned out that Macintosh software sales were actually increasing - but they never published a retraction. By the time the final numbers were out, they were already issuing their next "Macintosh software sales are declining" press release based on the following quarter's preliminary results.





    However, I disagree with the author's conclusion in this case. Look at the final chart. Apple's actual revenues have exceeded guidance by between 12 and 24% EVERY SINGLE QUARTER. For a major corporation, guidance is usually within a few percent of the final result. It's really hard to miss by 15 or 20%. So Apple is clearly guiding low.
  • Reply 6 of 44
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    I think his article is stated to logically support his beliefs (which I do believe). For those that don't believe that apple is going higher, that is fine as I value all opinions, as long as the reasons are support by facts.
  • Reply 7 of 44
    2oh12oh1 Posts: 503member
    Quote:
    Originally Posted by AppleInsider View Post


    I mean, it's obvious, right?

    Everyone knows this, right?

    it must mean that Apple never guides above the Street, right?



    Like, OMG and stuff. Was this written by a kid?



    Quote:
    Originally Posted by AppleInsider View Post


    What if I were to tell you

    What if I

    Indeed, what if I



    Andy M. Zaky sure likes himself, doesn't he? Sheesh.
  • Reply 8 of 44
    mhiklmhikl Posts: 471member
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    That is why our species is different from all the others. We study and learn and make guided analysis. Each to his own.
  • Reply 9 of 44
    sricesrice Posts: 115member
    Quote:
    Originally Posted by 2oh1 View Post


    Like, OMG and stuff. Was this written by a kid?



    I believe he dumbs it down for his audience.



    /me looks at you.
  • Reply 10 of 44
    I'm Apple-long since 2004 and have no intentions of dumping Apple.



    What does it matter whether Andy Zaky is right or not. He can convince fellow Apple bulls to believe anything. The main problem is he can't convince the people that really matter. That's potential investors. Two years ago he was spouting the same income growth story about Apple. He was also saying that Apple isn't understood by Wall Street but someday they will see the light. Guess what? Wall Street still doesn't understand Apple and they still haven't seen the light. Accounting changes have come and gone. Steve Jobs has come and gone. Nothing much has changed for Apple investors. Long-term Apple investors still have slightly better than average gains, but nothing compared to where Andy Zaky feels they should be.



    What is the point to all the graphs and tables if none of it really matters to Wall Street? Apple is making money at at awesome rate compared to its peers. Wall Street doesn't care. Apple is disrupting at least two industries. Wall Street doesn't care. Apple is getting fat and rich and shareholders are getting only a tiny return. So, if Wall Street doesn't care no matter what Apple does or how much money it makes and the stock stays flat, why bother to invest in the company at all? Any small miss will send Apple stock plummeting and no newcomer shareholder needs that in their portfolio.



    Apple is being constantly maligned as a bubble stock and that it sits on the brink of doom. I feel a lot of potential investors believe just that. Andy's numbers and explanations never reaches them so he's basically the dude standing on the proverbial soapbox, shouting about the coming of Christ while pedestrians pass by ignoring him or thinking he's a little bit out of his head. My theory is that Wall Street would love to see Apple fail so they can go back to the Microsoft way of doing things. Apple stock is what it is and that's how it will remain (into perpetuity). A solid company that give investors slightly better than average gains over the course of a year and no monster quarters. I hope it will remain so for at least a few more years.
  • Reply 11 of 44
    Quote:
    Originally Posted by jragosta View Post


    However, I disagree with the author's conclusion in this case. Look at the final chart. Apple's actual revenues have exceeded guidance by between 12 and 24% EVERY SINGLE QUARTER. For a major corporation, guidance is usually within a few percent of the final result. It's really hard to miss by 15 or 20%. So Apple is clearly guiding low.



    I expect Apple guides at the low end of a confidence interval. I don't know, and Zak seems not to know what that confidence interval is and what measures go into it. It's not hard to miss by 15 or 20%.



    Say, Apple internally divides their revenue and net margin estimates into quartiles. They report the low end of the 2nd quartile. If their guidance is low by 15 or 20%, their guidance still remains within the 2nd quartile of the confidence interval.
  • Reply 12 of 44
    Quote:
    Originally Posted by Constable Odo View Post


    Wall Street still doesn't understand Apple and they still haven't seen the light.



    You got it all wrong. Wall Street is not in business to understand Apple. Wall Street is in business to manipulate the market to make money.



    Don't get me wrong. I think Apple is going to do very well in the years to come. I'm just not too sure about AAPL.
  • Reply 13 of 44
    where does he get actuals for Q1 2012!?? this quarter hasn't even ended yet... the charts should really state that these are estimates. sloppy reporting.
  • Reply 14 of 44
    Quote:
    Originally Posted by Constable Odo View Post


    What does it matter whether Andy Zaky is right or not. He can convince fellow Apple bulls to believe anything. The main problem is he can't convince the people that really matter. That's potential investors.



    Interestingly, that is starting to change. Not specifically because of Andy, but it does help to have alternative viewpoints like his published. The bottom line is that people look at Apple's performance compared to their portfolio, their 401k, or some index, and say humm... I'd be better off putting all my money in Apple.



    Two of my co-workers did that just yesterday. This type of change should slowly ripple through the market, especially as money that has been on the sidelines since late 2008 slowly filters back in.



    Me... I'd really like to see AAPL at $450 on January 5th before I have to take some out to buy a house.
  • Reply 15 of 44
    ash471ash471 Posts: 705member
    I think the chart shows that Apple guides low. Apple is astonishingly consistent at hitting between 12-18% above guidance. Therefore, they could increase their guidance by 10% and not miss. The fact that they don't shows that they guide low.



    However, I see nothing wrong with guiding low. They can do it because Wall Street is a bunch of idiots. Wall Street misses by so far (usually on the low side) that Apple has plenty of room to come in ahead of Wall Street and still guide low. That is an enviable position for any company to be in. The few times that Apple guided low, Wall Street missed it by so far that it wouldn't have matter what Apple did unless it just ignored the facts. That was also convenient for Apple because it knew Wall street was wrong and even though Apple missed, they were closer to the mark than Wall Street. It just goes to show that we don't need wall street to value Apple.
  • Reply 16 of 44
    ash471ash471 Posts: 705member
    Quote:
    Originally Posted by anantksundaram View Post


    I've never understood this, and perhaps you can explain: what's the necessary conflict of interest that arises when you own a stock and recommend others buy it? Especially if you've done the fundamental analysis, believe in that analysis, believe it's undervalued, and put your analysis out there so that investors can judge for themselves?



    Completely agree. Why would Zacky spend the time to understand the value in Apple and then not buy it. The point of doing the analysis was for him to determine whether to buy. If his analysis is correct (which I think it is) he would be a fool not to buy it.
  • Reply 17 of 44
    ash471ash471 Posts: 705member
    Quote:
    Originally Posted by Ireland View Post


    This guy owns Apple stock. So do I, I'm just saying it's hard to take serious someone where there's an obvious conflict of interest.



    Duh, there is no conflict. It is ridiculous, idiotic, moronic, and "f'ing" stupid to think that Zacky published this article to cause a price change in Apple stock. Yes, there are some people that hype micro stocks just to sell them. However, APPL is not a micro-cap stock. Its a 361 Billion dollar company. There is no way the readers of Appleinsider are going to move Apple stock by even 1 penny in response to Zacky's analysis of historical earnings guidance. I just don't know how else to say it, but your "conflict of interest" idea is just plain wrong and stupid.



    If I had to guess, Zacky published this Article because (i) he thought of it (ii) he found it interesting, and (iii) he likes sharing and discussing interesting stuff. Keep bringing it Zacky!
  • Reply 18 of 44
    jragostajragosta Posts: 10,473member
    Quote:
    Originally Posted by waldobushman View Post


    I expect Apple guides at the low end of a confidence interval. I don't know, and Zak seems not to know what that confidence interval is and what measures go into it. It's not hard to miss by 15 or 20%.



    Say, Apple internally divides their revenue and net margin estimates into quartiles. They report the low end of the 2nd quartile. If their guidance is low by 15 or 20%, their guidance still remains within the 2nd quartile of the confidence interval.



    You're missing the point. For a company this size, the confidence interval is much smaller than that. Even with a small company, we almost always hit our target within about 5% - and it's harder with a small company than a large one.



    If +/- 15-20% is at the lower end of the 2nd quartile, that would mean that their confidence interval is +/- 40% which is absolutely ridiculous.



    Quote:
    Originally Posted by ash471 View Post


    I think the chart shows that Apple guides low. Apple is astonishingly consistent at hitting between 12-18% above guidance. Therefore, they could increase their guidance by 10% and not miss. The fact that they don't shows that they guide low.



    Exactly.



    Quote:
    Originally Posted by ash471 View Post


    However, I see nothing wrong with guiding low. They can do it because Wall Street is a bunch of idiots. Wall Street misses by so far (usually on the low side) that Apple has plenty of room to come in ahead of Wall Street and still guide low. That is an enviable position for any company to be in. The few times that Apple guided low, Wall Street missed it by so far that it wouldn't have matter what Apple did unless it just ignored the facts. That was also convenient for Apple because it knew Wall street was wrong and even though Apple missed, they were closer to the mark than Wall Street. It just goes to show that we don't need wall street to value Apple.



    I agree. It's bad enough when Apple exceeds their own guidance but falls short of some idiot analyst who must have been doing drugs when he issued his forecast. If Apple fell short of their own guidance even once, the doom-and-gloom crowd would go absolutely nuts.
  • Reply 19 of 44
    freerangefreerange Posts: 1,590member
    Quote:
    Originally Posted by Srice View Post


    I believe he dumbs it down for his audience.



    /me looks at you.



    LOL - nice retort!
  • Reply 20 of 44
    freerangefreerange Posts: 1,590member
    Quote:
    Originally Posted by jragosta View Post


    Reminds me of the old SPA (Software Publisher Association) days. Every quarter, they would issue a big press release stating that Macintosh software sales were declining based on preliminary estimates. When the final numbers came in, it almost always turned out that Macintosh software sales were actually increasing - but they never published a retraction. By the time the final numbers were out, they were already issuing their next "Macintosh software sales are declining" press release based on the following quarter's preliminary results.





    However, I disagree with the author's conclusion in this case. Look at the final chart. Apple's actual revenues have exceeded guidance by between 12 and 24% EVERY SINGLE QUARTER. For a major corporation, guidance is usually within a few percent of the final result. It's really hard to miss by 15 or 20%. So Apple is clearly guiding low.



    What? Its not hard to miss by 15 - 20% at all when you are growing like Apple. When your business is pretty steady, yes its easy to forecast. But Apple is not your average company, by far! The target is moving so fast that its hard to keep up, especially on a global basis. Apple is truly a phenomenon the likes of which we have never seen before.
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