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

Apple sold more iPhones and iPads than ever, and some investors still don't think that's enough.

Jan 28, 2014 at 10:05AM

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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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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