Fast Company

Analysts Just Can't Get Apple Right, It's Too Innovative

Apple is, according to several financial analysts, on the verge of becoming the first trillion-dollar company in history. Oddly, those who predict the rise of Apple are the same analysts who were "disappointed" by Apple's most recent quarterly earnings report.

The quarter in question included a net income rise of 54% year-over-year, a 39% revenue increase, and a 21% boost in iPhone sales--Apple's flagship product. Because, among other things, Apple shifted "just" over 17 million iPhones in the quarter, versus the 20 million that analysts by consensus expected, they gave the stock lower marks--and the company experienced an immediate 7% drop in its share price. 

What's Going On Here? 

Apple is one of the world's biggest companies. Its tech dominance and influence is global in reach. When firms get to this size, the harsh statistics of large numbers, the effects of scale and other tricky market forces mean it's generally hard to deliver large percentage growth on sales or profits. Yet Apple manages to do both, as well as boosting sales of its key iPhone product, quarter after quarter. You'd expect the Street would be pleased by this.

When analysts build a prediction for a firm like Apple, they look at its past performance to see if they can identify trends or habits. And yes, we know this flies in the face of the usual "past performance cannot guarantee future performance"--that irksome warning that is quoted as share-buying advice.

They also look at context in the industry, and global trends. They make inquiries with key figures who may be able to reveal snippets of manufacturing plans that could infer growth or decline, and they do some careful number-crunching to try to predict how the target company will behave. It's an art form, with intuition and math at the core.

On top of their mathematical models, analysts may try to guess how the market (which is influenced by emotion and perception as well as fact) will react to news from the company itself, such as Steve Jobs' resignation and sadly, his death, or influential factors from outside of the company--like the price of rare earths, which would impact tech manufacturers, Apple included.

Common Sense

Many industry watchers--from the casually interested, to nearly Apple-obsessed tech writers--could and actually did predict that the growth rate of sales of Apple's iPhone last quarter would fall slightly.

We knew that Apple was going to delay its iPhone update this year, and we suspected so months before Apple's habitual early-Summer update window. That's a human factor: The likely delays wouldn't have gone unnoticed by the smartphone-coveting, Apple-following public. Numerous press reports (spurred by, just possibly, official Apple "leaks") helped spread this expectation of a delay.

We also knew that any potential iPhone buyer, considering the status of the iPhone as an expensive luxury item, would likely hold off buying one, over the last couple of months so that the same money would secure them a better, brighter, snazzier upgraded phone when Apple did get around to its launch.

But laypeople and tech press are armed with common sense from a wide variety of academic and professional backgrounds, more than financial models.

Analysts' Focus On Econ, Math

Here are some of the most-quoted Apple analysts: Gene Munster, from Piper Jaffray has a bachelor's degree in "financial managment and new venture strategies;" Sean Wu has a BSc in economics; Atlantic Equities' James Corwell, given five stars by Yahoo's finance page for his accuracy in predicting Apple's stock performance holds a first class degree in mathematics from Cambridge; Toni Sacconaghi from Sanford C. Bernstein has a bachelor of science in electrical engineering from Brown University; and RBC's Mike Abramsky, has an MSc in engineering from MIT. 

Though these weren't the only analysts whose opinion drove Apple's "rare miss" headlines this quarter, a lack of high-tech, communications and scientific degrees (or training) underscores something, here. Centering on economics and finance, many analysts seem to ignore common sense and technological aspects of Apple's business that have led the company down the path of enduring success. 

As Fortune remarked after Apple reported its quarterly figures in April--across a long list of industry analysts, data seemed to confuse them, and no consensus was reached. Their expectations, on average, fell some 13% adrift of the actual data Apple published.

Last week, again, Munster predicted Apple would sell 2 to 2.5 million iPhone 4S's on its first weekend, Abramsky suggested "nearly" 3 million would be sold, and then Apple reported actually over 4 million had gone through its sales inventory system. The over-delivery versus analyst expectations represented at least a million units. That actually eats up a massive chunk of the imaginary "underdelivery" on Apple's last quarter's sales that left the analyst industry "disappointed."

The Apple Enigma

Perhaps it's a question of Apple's secretive and unconventional business model--a system, crafted by Jobs and Cook, that's so unusual it's propelled the company even as its peers have faltered. One could assume that all the usual tricks and tropes analysts use to predict the future of a firm like, say, Toshiba, would fall over when faced with trying to work out what Apple's up to, thanks to this unconventionality.

Other Apple anomalies include the secrecy with which its supply partners, prototypes and employees are guarded; and the all-out fanaticism of Apple hardware buyers (fanbois); along with the way Apple manipulates the media, simultaneously courting and holding bloggers at bay.

Last week, Apple CEO Tim Cook took time out of the earnings call to specifically criticise media hype surrounding the expected iPhone 5 upgrade, saying that it hurt sales of the existing hardware. 

The Downgrade As Compliment

Some downgrades of Apple may have been influenced by doubts about the future of the company in a post-Steve Jobs era. That's a compliment for the company's founder.

Because the company released an upgraded iPhone 4 (the iPhone 4S) instead of a full, hotly anticipated redesigned iPhone 5, analysts are talking about Apple's recent hardware moves as more station-keeping than world-expanding. Tech press and fanbois see that as part of a bigger, long-term plan, right now. 

Could that tempt an analyst to be cautious, and to advise short- or medium-term investors, looking for returns sooner rather than later, to invest less in Apple? Sure.

But in the longer term the Apple world beyond the Street expects great things in 2012, with the rumored iPhone re-format, an iPad 3, refreshed signature Macs and, just possibly a full-blown Apple television.

Maybe It's Impossible

Perhaps there's just no way to get a read on Apple because the company is so very innovative and unpredictable in terms of its products, use of media and hype, and its Tim Cook-polished production models.

So many variables go into the mix, and so many of them are hidden from outside view behind carefully-devised screens, so that everyone from the public to media to analysts and crucially, competitors, are in the dark, and one step behind its performance.

We'll know next quarter exactly how adrfit analysis is getting, though, because Apple itself has taken a slightly new step and is predicting record growth in iPhone sales, with figures dwarfing this quarter's.

Barrons analysts, at least, suggest that Apple's share price could leap 25% over the next year. Tech and business press tends to support headlines like those from the quinetessential Apple fan, blogger and nascent VC, MG Siegler, who wrote after the earnings call: "If you sold your Apple stock today, you're an idiot."

We're pretty sure of one thing: Apple will surprise everyone, including the analysts, probably very soon.

Chat about this news with Kit Eaton on Twitter and Fast Company too.

[Image: Flickr user rickz]

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1 Comments

  • Tim Acheson

    The latest figures unambiguously demonstrate a decline in demand for Apple's increasingly dated and boring products.

    Apple's only problem is that the company is too good? Riiiight.