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Tuesday, October 20, 2009

Apple earnings: How the analysts got it so wrong

Everybody failed to predict Cupertino's blowout quarter, but some failed worse than others

Smackdown: See full spreadsheet below[Originally posted Oct. 20, 2009 on]

"Well, that was quite embarrassing!" writes "deagol," a widely read amateur analyst whose estimate of Apple's (AAPL) fourth quarter earnings fell 16% short of the record profits the company reported Monday.

The irony is that deagol, who filed a long post-mortem mea culpa on his website Monday night, had less to be embarrassed about than 18 of the 19 Wall Street analysts we polled in advance of Apple's fiscal 2009 4Q earnings report. (See The Street awaits Apple's earnings.)
Once again, the amateurs and independents out-performed the professionals in our quarterly Apple analyst bake-off. The color-coded spreadsheet is pasted below the fold.

But first, some general comments about why everybody failed to predict that Apple's profits would grow 46% or that the company would sell a record 3 million Macs -- up 17% in a quarter in which its competitors, selling cut-rate Windows boxes at razor-thin profit margins, grew an anemic 2%. (See here.)

The key misses:

  • Macs. Apple was right and Microsoft's (MSFT) Laptop Hunters ad campaign was wrong. Consumers -- or at least enough of them -- were shopping for user experience, not low prices or spec lists.
  • iPods. Although Piper Jaffray's Gene Munster dismisses the iPod as "no longer an investable theme" due to cannibalization from the iPhone, iPod touch sales were up 100%, suggesting that there may be still be life in the category.
  • iPhones. A record 7.4 million sold even though Apple couldn't build them fast enough to meet demand. We won't even talk about Jim Cramer, who told his Mad Money audience that because of this, Apple's share price was going to fall -- not explode as it did in after-hours trading.
  • ASPs. Average selling prices actually went up a bit, rather than down as you might have expected after back-to-school sales and price cuts on iPhones and MacBooks. Deagol attributes it to 15" and 17" MacBook Pros getting "crazy popular" among college students.
  • Taxes. For reasons I can't begin to explain, Apple's effective tax rate was 25.6%, not the 30% they had guided.
Without further ado, our Analyzing-the-Analysts spreadsheet, with best results highlighted in green and worst in red. Responding to reader requests, this time I've also highlighted second worst in pink and second best (and in one category third best) in light green.

Revenue in billions; earnings in dollars/share; unit sales in millions; Gross margin in %. Source: Philip Elmer-DeWitt
Click to enlarge. Revenue: billions; earnings: dollars/share; unit sales: millions; gross margin in %.
A tip of the hat, as Stephen Colbert might say, to Brian Marshall at Broadpoint AmTech, who scored the most greens by filing the most bullish report. And as always to our three independent analysts, who managed to stay entirely out of the red. You can read Turley Muller at Financial Alchemist, Deagol at Deagol's AAPL Model, and Andy Zaky (when he's writing) at Bullish Cross. These guys are too good not to be making a living at it.

A wag of the finger to the insufficiently bullish: BMO Capitol's Keith Bachman, Needham's Charlie Wolf and most of all Oppenheimer's Yair Reiner, whose last-minute warning of iPhone production "hiccups" sent the Mad Money in precisely the wrong direction.

See also:
[Follow Philip Elmer-DeWitt on Twitter @philiped]

1 comment:

  1. iPad:

    I won't consider buying an iPad until Apple installs forward and back cameras for picture taking and video conferencing.

    iPad is nice concept, but it falls short of today's communication technology.