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).