A Prediction on Wall Street Predictions for Apple's 2Q 2012

by Michael in

Now that Apple has had a record-shattering quarter, easily the best quarter of any non-oil company ever (and the 4th best quarter of any company anywhere in the history of the world), let's talk about next quarter.

Next quarter, Apple's Q2 (Apple's first fiscal quarter of the year ends on December 31, so the previous huge quarter was their fiscal Q1 of 2012), will not beat the previous one. It won't be anywhere close. There won't be a new iPhone launch, might not be a new iPad launch (and even if there is, it will be near the end), and won't be any elevated holiday season sales. This part of the year is generally the lowest in sales because people purchase less after the gift season is over. So let me repeat: Next quarter will not be anywhere near the one that just ended.

Here are my predictions for next quarter:

  • Apple will beat Q2 2011 (the same quarter in the previous year, or "year over year") by a large margin.
  • Apple will set a new record for Q2 earnings.
  • Apple will make more in Q2 than many big tech companies will all year.
  • Apple will exceed their own guidance/projections for the quarter by a healthy 10-20%.
  • There is a good chance some, possibly many, Wall Street analysts will claim Apple's quarter was disappointing.

You might look at this list and wonder where the disconnect is between the first four bullet points and the last one. There are two things at play here. The first is that I switched between predicting Apple in the first four points and predicting Wall Street in the last. The second is that I am basing my prediction of Wall Street analysts based on my assessment that Wall Street analysts are lazy, incompetent, or simply bad at their jobs. Strong statements, I know. Allow me to justify.

Apple's Q4 2011 earnings were released on October 18, 2011. In that quarter Apple posted record iPad sales, record Mac sales, and record iPhone sales for the September quarter. Apple beat its own guidance by 13.08% and set an all-time record for its Q4 fiscal quarter. What kind of press do you think Apple got for it?

Pat yourself on the back if you guessed:

and a whole lot more just like that.

If you then ask "how did Apple miss expectations if they set a record for that quarter and exceeded their own forecast?" I need to congratulate you for having a brain unlike Wall Street. You see, all those expectations people complain about Apple missing? Those were Wall Street's expectations of Apple's performance, rather than the expectations of anyone who knew anything about Apple. Wall Street's expectations are based purely on emotion and guessing based on historic stock values--not on what the company is actually doing. The quarter in September was normally a huge one and Apple has been growing at an exponential rate, meaning the Street analysts predicted the September quarter to not only grow over the previous one, but to grow at a larger rate than it did previously. This despite Apple's own guidance showing it wouldn't. Just because Apple beat its own guidance by 24% in the previous quarter (an anomalously huge margin) doesn't mean you should be expecting the company to do the same in subsequent quarters when there is no actual reason to think so. (Check here for a historical overview of Wall Street expectations vs Apple guidance vs Apple real performance. This will make it clear how absurd Wall Street's expectations were.)

So to be clear: Apple's Fiscal Q4 2011 was only disappointing to people who had bad or stupid expectations not at all based on any real-world information or theory. If Wall Street makes the same mistakes again, which is unfortunately likely, it will overshoot any sort of realistic expectations of Apple's fiscal performance for no reason at all other than the fact the company just had an immense quarter. I'm not guaranteeing Wall Street will make the same mistake again, but if April rolls around and you find yourself hearing Apple had a disappointing Q2 2012, don't take the headlines or journalists at their word. Instead, make sure the disappointment isn't based on absurdity but rather on Apple actually missing its own expectations or having little to no growth.

*Note* To be clear: Wall Street does this for all kinds of businesses. I just happen to know more about Apple than I do many other companies and Apple is much more in the public eye. You should frankly take this same approach to reading reports on financial results from any company. Always make sure the disappointment is based on actual performance rather than ill-made predictions the company itself essentially warned against. I would say the same thing if someone suddenly predicted Google would double in revenue next year and then claimed Google was a disappointment because it "only" grew a little bit faster than ever before (and beat its own projections).

Why the PS4 and next Xbox will/won't launch in 2013

by Michael in , ,

According to Examiner.com, Michael Pachter has this to say about the next generation of systems:

“I think there’s zero chance of a tease from Sony for PlayStation 4 and only a 20 percent chance from Microsoft that they’ll tease the next Xbox,” Pachter told Forbes. “Neither console is launching in 2013, so there’s no reason to tease them in 2012.”

It's a tough call. Pachter has a hit and miss track record (as does anyone who's an analyst).

The way I see it, there are 5 things Microsoft and Sony would like to do in an ideal world with their next console launches:

  1. Launch in 2013.
  2. Launch with a sizable performance leap over the current generation of consoles.
  3. Launch with bundled advanced motion controls (Kinect/Move, possibly upgraded).
  4. Launch with affordable hardware.
  5. Launch without taking an immense loss per unit.

Item 1 is desired to avoid letting Nintendo have the Wii U as the only new home console on the market for well over a year and 2 full holiday sale seasons.

Item 2 is desired to show customers obvious value. The "wow factor" can only exist if the visual leap is significant but, as I've mentioned before, it's difficult to do this when the previous generation was sold at a huge loss while prioritizing this particular aspect of the console (and this time around you have other new areas which take a large slice of the cost pie).

Item 3 is desired to not be left behind. "Regular" people now expect motion controls with a home console. The Wii was huge, the Kinect has become a significantly well known success, and the Wii U is yet another platform launching with motion controls and a new interface attached. Launching a new console without any sort of alternate control available is a nonstarter.

Item 4 is desired as a response to the trials Sony had with its exorbitant pricing at the PS3's launch. People don't want expensive consoles.

Item 5 is desired because, frankly, it's hard to make that money back. While using loss-leading strategies is still feasible, you have to manage the losses such that you don't get yourself into a hole you can't dig yourself out of. Sony has been gradually shedding features of the PS3, discarding hardware left and right, over the course of the generation because the system couldn't recoup its losses otherwise (because of the debacle addressed by item 4). You only take losses small enough that you can eventually make those up on game and accessory sales. Large enough losses will never be recouped, especially if you're trying to sell to larger groups of casual owners--who buy fewer games for their consoles than so-called "hardcore" gamers.

It is extremely difficult to do all of these things at the same time. At least one of the above items has to be sacrificed. It's my guess (and make no mistake, it's only an educated guess--I don't purport to know anything secret) that Sony and Microsoft are absolutely not going to sacrifice items 3-5.

That means the companies are left with the following decision:

  1. Launch in 2013 with systems that are noticeably but not impressively more powerful than the previous generation.
  2. Launch in 2014 with systems that can have a more substantial (and more perceptible) increase in performance but leave Nintendo's Wii U as the only new home console for well over a year and two full holiday sales seasons.

Pachter is betting on item 2. I don't have a horse in this race. He could be right, he could be wrong. Either way, the reason will almost surely be one of these two points.

→ Next Xbox coming late 2013 with Radeon 6000 GPU?

by Michael in ,

Next Xbox coming late 2013 with Radeon 6000 GPU?

Choice quote:

"Sources close to the project" are offering a ballpark figure of a six times performance increase over the Xbox 360, or 20 percent more power than the Wii U, though this doesn't really tell us anything in real terms.

It's an understatement to say "this doesn't really tell us anything in real terms". It actually doesn't tell us anything in any terms at all. We don't actually know how powerful the Wii U is for sure (though people have reasonable beginnings to guesses). What we do know, though, is that the numbers in that sentence are ridiculous.

A "six times performance increase" means the new Xbox would have 7x the performance of the Xbox 360. That's fine and dandy, though it doesn't really tell us anything that matters. "20 percent more power than the Wii U" equates to 120% the Wii U's performance, or 1.2x the Wii U. Hrumph. Let's do some simple algebra:

1.2 x Wii U = 7 x Xbox 360

Simplified:

Wii U = 7/1.2 x Xbox 360

Wii U = 5.833... x Xbox 360

Are you really trying to tell me the Wii U is nearly 6 times as powerful as the Xbox 360? Because that's a whole lot of nonsense. (Even as a very big fan of Nintendo, I can't fool myself into believing the Wii U graphical demos have illustrated anything more than a marginal increase in graphical computing power over the Xbox 360 and PS3.)

Now that we've gotten the nonsense out of the way, there is a little bit of concrete information that does tell us something if true:

IGN is reporting that the next Xbox will ship in autumn 2013, with a GPU based on AMD's 40nm Radeon 6000 architecture and allegedly offering performance akin to the Radeon HD 6670 from last year.

If true, this tells us Microsoft isn't going to put out a system nearly as graphically powerful for its time as it did with the Xbox 360. That said, there were many technical design choices in the 360 that gave it performance advantages to comparable PC hardware (10MB on-die eDRAM, unified system and graphics memory, etc.).

My guess:

Sony and Microsoft both know they can't afford to loss lead in the next generation the way they did this time around. They'll likely have to keep core architecture compatibility with their previous systems because of the enormous platforms Xbox Live and PlayStation Network (and their downloadable games) have become. If one of the companies abandons all the downloadable titles from the previous generation and the other doesn't, that'll be a huge knock.

Both Sony and Microsoft will have to improve performance affordably while keeping processing component costs down because much more of their costs will come from controller/input R&D and bundling (Kinect/Move, etc.). Nintendo changed what people expect of new consoles, for better or worse, and now Microsoft and Sony have to play this new game.

→ Who Buys All Those Google Ads?

by Michael in

Who Buys All Those Google Ads? An Infographic Breakdown

Wired.com's use of an infographic is egregious in this case. It's entirely unnecessary for the information they're presenting--completely forgoing any advantage offered by infographics in terms of visual representation of proportions.

Wired's information representation ability aside, the info is interesting. Make a note of that $37.9 Billion in 2011 revenues. My guess: Apple's Q4 revenues alone will be about the same at minimum, but probably notably higher.