I’m not going to discuss differences between how the companies have been run, the dramatically different arcs each has taken in recent years, or the products each has gotten into. I am instead going to talk about something many might find a bit odd on my blog. I’m going to talk about stock prices. More specifically, stock valuations in relation to quarterly earnings reports. Large companies typically provide “guidance” on quarterly revenues. This represents their estimate on what revenue will be in a subsequent quarter. It is supposed to be used to gauge the possible performance of the company for investors. Wall Street analysts, however, typically offer their own guidance. So depending on who you listen to and how different the analyst expectations are from the business’ expectations, investors may have quite a different reaction to results.
Rewarding Success With Disdain
By any measure, Apple’s Q4 2011 results are spectacular. They posted their second best quarter ever at $28.27 billion in revenue, which was second only to the quarter immediately prior which clocked in at $28.57 billion. This in spite of the fact that this past quarter would have included the lull leading up to the release of the iPhone 4S, a period of time where users considering a new device typically hold off until the latest gadget is out and available. Apple also mentioned this was their first $100+ billion fiscal year in terms of revenue. In fact, so sure is Apple that they’re doing well, they have indicated they expect to have $30 billion in the next quarter, which would include the holiday season. You would expect, therefore, that this sort of performance, something any company would be absolutely pleased by, would warrant an increase in stock price, wouldn’t you? Not so fast. Apple typically sandbags their estimates, indicating lower revenue guidance on a quarterly basis and always exceeding the mark. This time around Wall Street apparently took this into account and pushed their expectations higher than Apple’s. Apple’s guidance had been $25 billion. Wall Street expected $29 billion. The final total of $28.27 billion was well over the Apple numbers but didn’t quite reach Wall Street’s much loftier mark. The result? Apple was trading 6% lower in after hours trading last night.
So let’s recap. Apple says they expect to make $25 billion. Wall Street figures they are wrong and expects $29 which is technically higher than any quarter in the company’s history. Apple almost makes the mark but misses, coming in at $28.27 and posting the second best quarterly results in the company’s history, but still exceeding their own guidance. Wall Street responds to this sort of success by trading at reduced prices.
Rewarding Failure With Interest
Now let’s consider Yahoo. Yahoo also posted their results yesterday. Their earnings fell 26%. Their ad business is in decline. They have had a turbulent time at the executive level, with questionable leadership moves. Their search share is diminishing. I’ve written on Yahoo’s decline and missteps on multiple occasions. Analyst predictions, however, were lower than the announced results. You would expect that perhaps with Yahoo not doing so well, in spite of what the analysts predicted, the share price might still be on the decline. (I think you know where this is going) Nope. Yahoo traded up in after hours activity.
I imagine that analysts would say they are doing the public a service by trying to see through the manipulation that companies attempt by announcing estimates that are too high or too low in an attempt to alter public perception. The problem is that the analysts have almost as much to gain by altering what people expect. What’s worse is that you end up with real results which are ignored in favor of propped up numbers which have no bearing on what is actually happening.
What about the future of Yahoo visible to the trading public warrants an increase in stock price, especially based on the numbers they released? What about the future of Apple visible to the trading public warrants a decrease? The answer to both is “nothing”.
I suppose I should be thankful though. As should anyone who believes Apple is a strong healthy company with plenty to look forward to. It seems like Wall Street salivates over the notion of Apple falling on their faces. The more that view becomes pervasive, the more buying opportunities become available to those who see the numbers for what they are.