Why You Should Ignore Apple, Inc.'s Q4 Guidance

Apple, Inc.'s Q4 guidance came in slightly below expectations, but investors should ignore it.

Jul 23, 2014 at 1:05PM

On Tuesday afternoon, Apple, (NASDAQ:AAPL) reported solid earnings for Q3 of its 2014 fiscal year. However, investors have a tendency to look past earnings numbers for the seasonally weak June quarter, instead focusing on guidance for the upcoming quarter.

Images

Photo: The Motley Fool

On one level, this makes sense, as Apple has released new iPhones during the September quarter for the last two years -- and is expected to do so again in 2014. However, Apple's Q4 guidance is meaningless in terms of projecting demand for new products like the iPhone 6. Investors would be better off ignoring the guidance and waiting for more solid information.

Apple's guidance
Apple's Q4 guidance calls for revenue of $37 billion-$40 billion, compared to $37.5 billion in Q4 of FY13. Gross margin is expected to be 37%-38%, compared to 37% in Q4 last year. Based on the midpoints of these projections and the other parameters Apple provided, EPS would work out to approximately $1.22.

That's almost 10% below the average analyst estimate for Q4 EPS, which is $1.34. Even if all of the parameters came in at the favorable end of the guidance ranges, EPS would amount to about $1.32, still a bit shy of what analysts are expecting.

Uncertainty: the small caveat
One reason why investors shouldn't put too much stock in Apple's guidance is that Apple has not yet revealed the iPhone 6 launch timeline. (Indeed, it's possible that Apple hasn't nailed down a firm schedule internally.)

The exact timing of the iPhone launch matters a great deal. Last year, Apple sold 33.8 million iPhones during the September quarter -- of which more than 9 million were sold on the launch weekend for the iPhone 5s and iPhone 5c. Those two phones were on the market for just nine days during the September quarter, but likely accounted for about one-third of Apple's iPhone sales.

Images

Early sales of the new iPhones will depend on launch timing and supply availability (Photo: The Motley Fool),

If Apple manages to accelerate the iPhone launch by a week, it would provide a big boost to revenue and earnings this quarter. On the flip side, if the launch slips by a week, Apple would only have two days to sell the new iPhone in Q4, pushing a lot of sales into the December quarter. It's also unclear if Apple will be launching a "phablet"-type phone in the September timeframe.

Thus, Apple's revenue and earnings for this quarter depend heavily on the timing of the iPhone 6 launch, and initial inventory levels. Creating projections for Q4, therefore, involves a lot of guesswork on Apple's part.

Last year, Apple's revenue came in above the high end of the initial guidance for Q4. Gross margin reached the high end of the guidance range, while operating expenses came in somewhat below expectations. It's quite possible that the guidance Apple just provided is equally conservative.

Supply vs. demand: the big caveat
An even bigger reason to take Apple's Q4 projections with a giant grain of salt is that it doesn't provide any information about projected demand -- let alone real demand -- for Apple's products. As noted above, in recent years, new iPhones have arrived near the end of Apple's Q4, and the same is likely to be true this year.

Images

Apple's iPhone 5s was in short supply for almost 3 months (Photo: The Motley Fool).

These iPhone launches are routinely characterized by supply/demand imbalances. Last year, the iPhone 5s was in short supply as late as December. Apple is expected to introduce larger screen sizes with the iPhone 6, which many customers have wanted. This has led to widespread expectations that the iPhone 6 launch will drive an especially strong upgrade cycle.

However, Apple's September-quarter results will bear little or no relation to demand for Apple's new products. Even if demand were uncharacteristically low, Apple would still probably face shortages of its new products within a few days of the launch. Instead, supply will be the key constraint on sales this quarter.

Supply constraints won't have much of an impact on long-term sales, though. People who have waited years for a big-screen iPhone aren't likely to defect to a different brand just because they have to wait an extra month or two due to initial shortages. Apple has consistently shown in the last few years that it can boost production rapidly to meet demand within a quarter or two of a new device launch.

Thus, Apple's September quarter performance will be determined primarily by supply issues, whereas its FY15 results will depend on demand for its new products. Investors are going to have to wait a few more months to get a better sense of what these new products will be, and how well they will sell.

Foolish wrap
Apple investors are sure to pick through the company's recent guidance for hints about its future earnings trajectory. However, this is a hopeless cause. Apple faced a high level of uncertainty in putting together a Q4 forecast, because so much depends on the timing of the iPhone 6 launch, and initial supply.

Most importantly, Apple's Q4 sales will be heavily determined by supply constraints, whereas demand will be the main determinant of sales in the following year. As a result, investors will need to be patient, and wait for more information to understand how Apple's new products will impact its financial results.

Could this be Apple's next big thing? (Warning, it may shock you!)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Adam Levine-Weinberg is long January 2016 $80 calls on Apple. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers