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The Skeptical Way to Look at Apple’s Guidance

By Motley Fool Staff – Nov 9, 2016 at 2:20PM

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Apple reported earnings in late October, and we look at the major segments, digest the guidance the company offered up, and discuss some issues analysts raised during the conference call.

Investors didn't react very favorably to Apple's (AAPL -0.01%) latest earnings release, and it's likely that guidance for the coming quarter failed to impress.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and Evan Niu, CFA, discuss the bigger picture and how to interpret the company's forecast.

A full transcript follows the video.

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This podcast was recorded on Oct. 28, 2016.

Dylan Lewis: In my eyes, pretty solid quarter. They met expectations, they set guidance that put them back on to at least some sort of growth, for at least the next quarter. We had a listener tweet, and I think this is something that probably a lot of people are wondering, you say, "OK, they checked the boxes in a lot of ways. Why are they down 2.5% since they reported?" The initial reaction when you saw iPhone units was positive, and pretty much after that they've fallen off and haven't really recovered. Two and a half percent is nothing to go crazy panicked over, but I think it's a valid question, and it's something a lot of people are wondering. What do you think?

Evan Niu: I think it was just kind of in line with expectations. It's always hard to know how the market is going to react. It's not always just about with the actual consensus number is, it's also about the whispered number, which is this abstract concept of what people actually think. That's the way that analysts work. Investors talk up this whispered number, "Oh, this is what I have on my official estimates, but I think they'll probably go lower, or higher." So, it's always hard to gauge what's actually going to happen. Two percent is not a killer move in either direction. I think it was more of just a lack of being impressed, if that makes sense. We talked about the gross margin guide wasn't super great. People just have to start accepting that Apple is just not a growth machine anymore, and that's OK. But some people have trouble with that just because it's kind of boring, for it to not be a growth machine.

Lewis: Yeah. And, in fairness, this is a company that has, historically, provided relatively conservative guidance. You almost never see them miss their own guidance marks. They typically meet it or are surprised pretty comfortably. So, to show them projecting growth means they must be pretty confident that that's going to happen. They do have some nice tailwinds to support that, like I said, they have one of the biggest competitors off the market, and they also benefit this quarter from a 14-week Q1 instead of a 13-week Q1. So, that should help them out a little bit, a couple extra selling days there. But, by and large, there's nothing in this report from my end, that really changes my thesis on this company.

Niu: They do pretty much always get within their guidance. It's not like the old days, when they would put out this laughably low guidance number, a lowball that you could basically ignore. A few years ago, they changed to really be more honest, to actually give a range that they're pretty confident they'll get within. And, for the most part, they have, every quarter, more or less. I definitely take their guidance at face value these days versus the old days, when you could basically just laugh it off because it was a joke. I think maybe that's another reason why they weren't as impressed. Maybe, like you mentioned, there's an extra week in this quarter. If the revenue growth is because you get an extra week, that doesn't really inspire a lot of confidence in the business. Again, it's not like it's a terrible business. But if you're looking skeptically, you could say, "Oh, you're only going to grow because you had more days to sell in the quarter." Maybe that's another thing people were disappointed in.

Lewis: Even then, returning to a flat quarter, in my eyes, is great. We've seen this down trend for such a long time that seeing them get back to, whether it's zero or positive growth, it's pretty fantastic.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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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