Seeking Alpha contributor Bill Maurer gave a very interesting argument that Apple (AAPL 0.27%) may be a "victim of its own success." In particular, Maurer writes that, as analysts become increasingly positive on Apple stock, "at some point, this bullish parade may be too much, and Apple will become a victim of its own success."
Indeed, Maurer points out that analyst revenue estimates now top the high-end of the revenue guidance range that Apple itself gave for the current quarter. "It's obvious that the chance of Apple missing increases exponentially if this revenue average continues to rise as this report [scheduled for January 27, 2015] approaches."
I think there's a lot that can be learned by exploring the importance of analyst estimates.
What are analyst expectations and where do they come from?
The first thing that investors need to understand is that analyst expectations don't usually come out of thin air. Many companies -- particularly tech companies -- tend to give earnings guidance for the following quarter in addition to results for the most recent quarter.
Generally speaking, this guidance comes in the form of a range in terms of revenue, margins, earnings per share, and so on. Then, analysts publish their estimates for the coming quarter based on their research/opinions, as well as for several quarters beyond that.
Some companies that operate in relatively mature industries with good visibility will actually give guidance for the coming year, while others -- particularly those that operate in less-predictable industries -- will only guide a quarter out. Apple is one of those companies that guides a quarter out.
When a company has given guidance for a period, analyst estimates tend to be within that range. A bullish analyst will expect revenue/profit near, at, or even above the high-end of a guidance range, while a bearish one might expect near, at, or below the low-end of the range.
For many companies, these analyst ranges tend to lead to an average or "consensus" that's within spitting distance of the midpoint of the guidance that the company itself gave.
What's going on with Apple estimates?
The point that Maurer made in his article is that it seems that the analysts who cover Apple now appear to be unanimously bullish. Indeed, Apple guided to sales of between $63.5 billion and $66.5 billion for the quarter. The range of estimates from analysts covering the stock (per Yahoo Finance) is $64.38 billion at the low-end to $72.82 billion at the high-end.
Apparently, not a single analyst thinks Apple will hit the low-end of its range, let alone go below it. There is, however, at least one analyst who expects Apple will deliver $6.32 billion more revenue than the high-end of its own guidance. That would be a substantial beat for a company with a revenue base the size of Apple's.
What about fiscal second-quarter estimates?
Another item to watch closely will be the guidance that Apple gives for its fiscal second quarter. Right now, analysts are modeling $53.55 billion in revenue. Lower revenues compared to the first fiscal quarter are expected due to seasonality, but it would actually represent an acceleration to 17.30% year-over-year growth from 15.90% year-over-year growth expected in the first fiscal quarter.
Maurer writes that, "even if Apple blows out the numbers when it reports in a few weeks, what happens if guidance disappoints?"
He goes on to note that the expected sequential decline based on current consensus is 19.8%; but Maurer writes that, in the prior two years, this decline has tended to be "over 20%." It's clear that analysts have high expectations for the coming quarter, as well.
I'd be uncomfortable buying ahead of earnings
While there is a chance that Apple beats even these optimistic estimates for the current quarter and for the coming quarter, I wouldn't feel comfortable buying shares with expectations so elevated ahead of earnings. That said, should Apple come out with a "disappointing" report and the stock dives, as long as the core long-term investment thesis is intact, it could represent a good opportunity for long-term investors to buy in.
