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Is Apple Inc. Lowballing Guidance Again?

By Ashraf Eassa - Mar 2, 2015 at 7:15PM

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The analyst community is expecting Apple to beat the high end of its revenue guidance -- again. Is Apple getting back into its old routine of sandbagging guidance?

Last quarter, Apple (AAPL 1.92%) blew away even the most optimistic of sell-side revenue and profit estimates, bringing in a whopping $74.6 billion in sales and an eye-popping $18 billion in net profit. The company also guided to revenue in the range of $52 billion to $55 billion for the current quarter. This, according to Apple CFO Luca Maestri, "represents a very significant revenue increase" even in the face of a tough foreign exchange situation.

Interestingly enough, the current sell-side analyst consensus is calling for $55.14 billion in revenue for the current quarter (up 20.80% year over year). This, as was the case ahead of earnings last quarter, is ahead of the high end of Apple's estimate range.

On one hand, this might seem like a huge risk to Apple stock, particularly as I'd bet that the current stock price reflects investor belief that Apple will at least meet consensus. On the other hand, Apple may simply be returning to its old practice of giving overly conservative guidance.

Last quarter, Apple was supply-constrained
When Apple issued its guidance of $63.5 billion to $66.5 billion for the prior quarter, the question on investors' minds wasn't about demand but supply. It was well known that Apple had not reached supply/demand balance for the new iPhones, so the view (as so nicely outlined by fellow Fool Adam Levine-Weinberg) was that if Apple could improve iPhone 6/6 Plus supply, it could beat even the high end of its own guidance.

And that's exactly what happened.

However, according to Apple CEO Tim Cook, Apple reached supply/demand balance in January. This suggests the company's guidance might not be as conservative as the guidance for the prior quarter was, since Apple probably has a pretty good handle on what the demand looks like and how many phones it'll need to make.

This means the odds of a huge blowout in the vein of what investors saw last quarter are probably much lower.

Could the sell-side be too optimistic, or is Apple just lowballing guidance?
In the past, Apple was known to give overly conservative guidance, leading to very consistent -- and often very large -- earnings and revenue "beats." However, in early 2013, former Apple CFO Peter Oppenheimer stated that the company would stop lowballing and would provide more realistic guidance going forward.

This raises the question then of whether Apple's recent large beats have really been as surprising to Apple's management team as they have been to investors. Or could Apple be transitioning back into its "old" way of trying to be very conservative in its guidance?

If this is a deliberate attempt on Apple's part to keep expectations low and then exceed them, then perhaps the "risk" that comes from the current analyst consensus sitting above the high end of Apple's guidance isn't as large as one might think. If Apple has just been "getting lucky," then the analyst community might be setting investors up for disappointment.

Some evidence that Apple may be intentionally conservative
As I perused Apple's most recent earnings call for clues, I noticed a very interesting statement from Maestri with respect to the company's guidance:

First of all, it's a 20% year-over-year growth that we're guiding at the top end of the range. So we obviously feel good about a 20% growth.

Notice that Maestri is pointing to the top end of the company's guidance to make a point about how Apple's growth is still robust. Most companies tend to talk about the midpoints of their guidance, but the reference to the high end of the range might suggest that Apple's CFO is pretty confident that the company can hit/exceed that number.

To illustrate that Maestri didn't misspeak, he concludes his comments with respect to a question about the worse-than-seasonal sequential decline with the following: "Again, I want to point to the 20% year-over-year growth."

It'll be interesting to see what numbers Apple reports in April.

Ashraf Eassa 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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