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It's pretty clear that Apple's (NASDAQ: AAPL ) bewildering post-earnings 14% sell-off wasn't caused by the previous quarter. Apple reported relatively in-line with expectations, even posting some upside to expected earnings. Instead, all focus was on next quarter's guidance.
The company called for $41 billion to $43 billion in sales next quarter while analysts had been expecting a total closer to $46 billion. In and of itself, that kind of light guidance is forgivable. Apple is notorious for lowballing and easily beating guidance. As an example, in the previous quarter, Apple had guided to $52 billion in sales before ultimately posting $54.5 billion.
Instead, what spooked investors was on the earnings call, when CFO Peter Oppenheimer repeatedly insisted Apple was changing the way it gives guidance. Instead of giving a "conservative" estimate that Apple had "reasonable confidence in achieving," the company's newest guidance is given in a range of what Apple is "likely to achieve."
This might all sound like mere semantics, but it left the market truly befuddled. After lowballing guidance for years, Apple suddenly seemed very firm that investors "take their word" on their guidance. That's a huge change from how past Apple guidance was analyzed. Rapid change creates uncertainty, and uncertainty is often punished harshly in the markets.
If we take Apple's word on its guidance next quarter, its growth is slowing far more than Wall Street had expected. Over the short term, it leaves the company in a bit of a no-win situation. If Apple hits in the range it guided to next quarter, investors may still be disappointed. Even after a series of analysts trimmed their price targets, they still expect Apple to post $43.2 billion in sales next quarter, above its guided range.
If Apple ends up posting a sales figure above its range again and hits something like $44 billion in sales next quarter. It will once again lead Wall Street to put overly aggressive estimates on Apple in the following quarters, leading to a situation where Apple is set up for future disappointment.
It was always meant to end poorly
Overall, we're looking at situation deeply rooted in the past. Apple has long been giving tongue-in-cheek guidance. That's worked as the company went on one of the most impressive runs in history. The downside is it always doomed the company to more disappointment than was needed when its growth returned to "good, but not Apple good" levels.
The bitter selloff across the past two days has been largely caused by this situation. Reading the market's mind is an exercise in futility. Rumors could leak out about a new Apple product, or the company could take some action like an accelerated share buyback, which could send its shares north in the coming quarter. If Apple does surpass expectations next quarter, as I mentioned, it could still bounce skyward, but the problem would be that it leaves Wall Street to once again overlook company guidance and set overly aggressive targets for a future quarter. This is by no means a singular point to go bearish on Apple in the coming quarter.
Yet if your focus on Apple is on the short term, this situation, while already partially played out, worries me. In the longer term, it leaves a bit more uncertainty across the next couple quarters, but eventually Wall Street will settle into Apple's "new normal" on giving guidance.
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