Apple Inc. Proves Many Investors Don't Know What They're Doing

Only on Wall Street. Only here could a massively profitable company that has revolutionized its own industry and many others, that increases sales year over year, refines its current products to keep people purchasing... still sees investors drop its stock because it didn't meet analysts expectations.

At some point some investors started taking analyst estimates as the gospel truth – the standard a company must meet in order for its stock price to continue going up. When, in fact, they are just estimates. Just estimates. Estimates. Let's say it one more time, estimates.


Apple sold a total of 51 million of these and the 5c, but apparently that wasn't enough. Source: Apple.

Apple's (NASDAQ: AAPL  ) numbers for this quarter missed some analysts' estimates and the Street responded with a 7.8% drop in after hours trading. Amazingly, this came after Apple managed to sell 7% more iPhones in fiscal Q1 2014 than it did the same time a year ago. It sold 51 million iPhones, an "all-time quarterly record," but that wasn't as high as the people who don't work for the company said it would be. They said Apple should have sold 55 million. So the stock went down.

On top of that, Apple sold 26 million iPads, the most it's ever sold in a quarter, up from the 22.9 million it sold the same time a year ago. That counts for something right?! Nope. Terrible quarter. Sell it. Sell it all.

The Macs though, they dropped right? That's a reason to sell. Wrong. Apple sold 4.8 million Macs, up from 4.1 million year over year -- all while the PC market is contracting. Still though, investors sold.

It appears some investors are using analyst projections as an investing recommendation. Beat estimates, invest more. Miss estimates, sell stock. If that's how investing worked, we'd all be rich.

For fiscal Q1 2014, revenue was $57.6 billion with a net profit of $13.1 billion and $14.50 per diluted share. This compares to $54.5 billion in revenue and $13.1 billion in net profit with $13.81 per diluted share year over year .

To be fair, all of Apple's news wasn't rosy. The company's gross margin fell from 38.6% to 37.9% year over year. Apple also expects revenue to be between $42 billion to $44 billion in the current quarter . The expected revenue drop from Q1 to Q2 is somewhat to be expected though, considering Apple's fiscal Q1 included the holiday shopping season and new iPhone and iPad launches.

Foolish thoughts
It's hard not to see that some investors were disappointed with Apple's earnings because it didn't match up with what analysts had projected. Sometimes it's hard not to take estimates as a true predictor of the future, but Foolish investors look at the facts, and make decisions based on long-term goals. While it's OK to look at analyst estimates as a rough guide, basing investing decisions solely on them isn't a great strategy. If you don't give estimates more influence than they should have, you won't have to panic when they're wrong.

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Read/Post Comments (13) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On January 28, 2014, at 10:11 AM, Mathman6577 wrote:

    Great article. I think we are in a parallel investing universe now. Pie in the sky estimates and expectations now rule over actual numbers. This is why the retail investor is being driven out of the market.

  • Report this Comment On January 28, 2014, at 10:18 AM, GaryDMN wrote:

    Trading on emotion. Watch the contradiction when Google announces. Their smartphone sales are falling even with significant discounting and their cost per click revenue have fallen for 7-8 quarters in a row. Google has a P/E over 30 and faces more lawsuits against them and legal costs than all their competitors combined. I would not be surprised if Google ends up paying out the largest patent violation settlement total in history of any company.

  • Report this Comment On January 28, 2014, at 10:24 AM, iknoerle wrote:

    That's not true! Investors had expectations that were NOT met. Maybe foolishly, but everyone that owns stock gets to vote. The Analyst Estimates are best guesses that investors look at.

    And just because Apple had record sales and profit doesn't mean anything without expectations! Expectations are how each investor defines the value. Otherwise Apple could be trading at $10,000 per share and as long as they have record profit and sales they should go up - THAT WOULD BE INVESTORS NOT KNOWING WHAT THEY ARE DOING.

  • Report this Comment On January 28, 2014, at 10:24 AM, Mathman6577 wrote:

    Amazon is another company that gets a free pass for the most part from "analysts", who use the same old tired line that the company is "plowing back profits into the business". Apple by far outspends Amazon and Google in R & D and still has lots of cash left over for buybacks, dividends, and the bank.

  • Report this Comment On January 28, 2014, at 10:28 AM, stockloverinc wrote:

    It is the author of this article that don't know what he is talking about. Wall Street has been placing this game of missing and blowing past estimates since the game started. Now that the author's friends and families got slammed by Apple stock prices going down, he decided to write this article? What would happened if the Apple had blown past estimates and the stock went up? Would he have written the same article? Are you kidding me? Stop being so naive and write like a real investor.

  • Report this Comment On January 28, 2014, at 10:37 AM, TMFNewsie wrote:

    stockloverinc,

    "Now that the author's friends and families got slammed by Apple stock prices going down, he decided to write this article?"

    Most of my friends and family don't own stock in Apple, that I know of.

    The point of the article is that making investing decisions to buy/sell Apple, or any other stock, based on estimates is not the correct approach. I think too many investors rely too heavily on these estimates and then panic when the results don't match predictions.

  • Report this Comment On January 28, 2014, at 10:45 AM, Hoptopia wrote:

    The short sighted flakes of Wall street strike again. What about Apple's financials warrant these fluctuations?

  • Report this Comment On January 28, 2014, at 10:46 AM, aeosfool wrote:

    I agree with the point this article is making, however, there are inaccuracies. First, Apple earned more than the average analyst estimated and Apples revenues exceeded the average estimate also. Ipad

    sales also exceeded estimates, but the iphone sales did not but the average price of an iphone rose! But as far as the important numbers, Apple beat in overall sales revenue and profit...but hey who cares about profits. Profits would have actually been even higher but Apple, unlike any other company that I know, defers some profits...this will benefit them in coming quarters.

    An area where Apple fell short is their estimate of revenue for the coming quarter...but Apple almost always beats or at least comes out at the high end of that guidance.

    New products are coming this year, Tim Cook guaranteed it yesterday...and that should make the most profitable company on earth even more profitable.

  • Report this Comment On January 28, 2014, at 10:51 AM, TMFNewsie wrote:

    aeosfool,

    Fair point, my focus was meant to be on the amount iPhone sales vs. estimates.

  • Report this Comment On January 28, 2014, at 10:57 AM, jdmeck wrote:

    It's called stock manipulation. I would love to know how many of those ANALysts are buying this morning.

    This is the only story I read today that makes any sense at all. Good job.

  • Report this Comment On January 28, 2014, at 11:04 AM, Mathman6577 wrote:

    Expectations going forward are actually estimates too (and is usually even more inaccurate than looking at the past -- the company knows a lot more than the "analysts", who are not marketing majors).

    Also, most of the "analysts" are tech people. Since Apple is becoming a consumer products "rule maker" (not an innovative tech "rule breaker" like in the past) they do not understand how to evaluate the stock anymore.

    My recommendation is for "analysts" and the investors who take their cue from them need to lower expectations --- from the previous huge numbers (>25% per year) into the slower growth 5% to 7% per year range (much like a Procter & Gamble).

  • Report this Comment On January 28, 2014, at 11:56 AM, rydechus wrote:

    Just remember we are in it for the long haul. Not just the daily up and downs. Still a great company.

  • Report this Comment On January 28, 2014, at 4:33 PM, mapslacker wrote:

    I own Apple stock and I despise trading based on Analyst's opinions.

    That being said, I think it's fair to say that Apple missing estimates AND the fact that they have not come out with a new product in quite some time is telling.

    If they had met expectations with their stagnant product line, that would have been impressive, but the iphone 5s is not new. The iphone 6 will not be new. The iPad mini.... not new. There has not been a step change in their products in a long time. Adding a bio-metric screener to unlock the phone or moving the headphone jack to the bottom hardly earns them the title "innovative."

    Their products no longer offer users a simpler way of doing things that all of the other competing products don't already offer. In some instances they are playing catch up with their competitors.

    Maybe earnings will pick up with the China deal, but the days of coasting on the fanboy consumers might just be coming to an end.

    Apple needs another game changing product and they need it soon.

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