Why Apple's in a No-Win Situation Next Quarter

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."

Huh?
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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Comments from our Foolish Readers

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  • Report this Comment On January 27, 2013, at 2:31 PM, techy46 wrote:

    Oh come on? Apple's $41-43b estimate for Q2 2013 is 7.6% better than the $39B for Q2 2012. If they book anoth $9-10b (22-23%) in profits who can say that's not a win? Apple will have $182b in cash if we extend that performance out to then end of 2013. That would be an astonishing $194 PS in cash and Apple would have to be back at the $550-600 range just due to cash per share.

  • Report this Comment On January 27, 2013, at 2:52 PM, BenKeel wrote:

    The author's name "Eric Bleeker" tells the whole Motley story folks.

    They loved US Steel at $42 and now are bearish on Apple.

    I say do the opposite of Motley FOOL, and you'll make some serious cash.

  • Report this Comment On January 27, 2013, at 2:52 PM, BenKeel wrote:

    Where was Motley's bearish outlook at Apple $700?

  • Report this Comment On January 27, 2013, at 3:34 PM, peto3 wrote:

    I realize most analysts would have little to do if they took Apple at its word about what it believes it is "likely to achieve". But just because Apple believes the range it offers is likely achievable doesn't preclude that they may end up exceeding their own forecast or similarly, I suppose, end up short. If they achieve the former then it's a pleasant surprise to Apple, as well as everyone else. If they fail to achieve their minimum forecast, then Apple would be disappointed, as would everyone else. However, whether they exceed or miss the range they forecast they're "likely to achieve" (which they offered 3 weeks into the quarter they are forecasting) they will offer an explanation for the divergence which everyone can decide is reasonable/understandable/acceptable or not. Am I stating the obvious here? So what's the problem ...

  • Report this Comment On January 27, 2013, at 5:25 PM, TimKnows wrote:

    This site advertises for Apple, how could they be honest here?

  • Report this Comment On January 28, 2013, at 12:59 AM, jackc37 wrote:

    Apple was already set up in Q1.

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