It's the job of analysts to make sure that they set reasonable parameters to their estimates based on how Apple guides. Everyone knows that Apple is conservative, but they are consistently conservative. They do offer a clear-cut range, which should be the upper and lower parameters based on the quality of the quarter. This quarter, Apple harped on the fact that this would be a transition quarter. Yet, analysts didn't seem to take the hint.
The analyst consensus for the quarter was calling for Apple to report revenue of $29.7 billion according to Thomson Financial. That is $4.7 billion above Apple's $25 billion guidance on the quarter.
Now what's interesting about this revenue consensus is that it was 18.8% above Apple's revenue guidance. That means if you exclude fiscal Q3, Apple would have missed in every single quarter since the financial crisis if analysts had modeled for that same 18.8% revenue beat in each of those quarters.
What does that say about analyst expectations this quarter? Apple beat by its usual number, but Wall Street modeled for a number that was simply unrealistic by recent historical standard. This is completely insane.
Now in defense of the analysts, Apple did report a number that was beyond the normal 12%-18% range we've seen in the past in fiscal Q3. In fiscal Q3, Apple reported a 24.22% beat. But a huge part of that beat had to do with Apple being able to get its iPad production up and running a lot faster than even Apple expected. Going into fiscal Q3, there wasn't a whole lot of clarity as to whether Apple would be able to get any traction with iPad 2 production constraints. We also had a much stronger than expected iPhone number.
We tend to see quarters like this from time to time but they tend to be the rarity. Moreover, when it comes to modeling, it's always better to be conservative and to take the conservative stance. In this sense, analysts really should have taken a hint from Apple and modeled for the same type of earnings beat that Apple has typically delivered in the past.
In the end, this miss is just a minor blip largely due to analysts simply getting a little overzealous with their estimates. If you're not convinced that Apple's miss was due to nothing more than a mistake by analysts, perhaps Apple's fiscal Q1 guidance can convince you that the growth story is still in tact.
Apple's $37 billion revenue guidance suggests that the company is going to report 60% year-over-year revenue growth and 77.7% EPS growth. Moreover, in order for Apple to report $42 billion in revenue as indicated by its guidance, the company would have to report sales of about 33 million iPhones. That is a 100% growth rate for the iPhone above the 16.235 million iPhones Apple sold in the same quarter last year.
For a company that has far eclipsed Microsoft in both revenue and EPS, doesn't it seem a little ludicrous that Apple is going to produce 77.7% EPS growth in fiscal Q1? Doesn't it seem even more ludicrous that the company trades at only five time next year's earnings if you back out cash and only eight times next year's earnings if you don't back out the cash?
Andy M. Zaky is a fund manager at Bullish Cross Asset Management and runs the financial newsletter, Bullish Cross.
