Missed Target

The Analysts Underestimate Apple Again

Missed Target

On 1/27/2015, Apple released a spectacular earnings report for the first quarter of its 2015 fiscal year. Once again, it smashed through the analysts’ predictions, earning $3.06 per share vs. a consensus estimate of $2.60. Powered by the newly introduced iPhone 6 and 6 Plus, the sales underlying these earnings were $74.6 billion vs. an expected $63.5 billion. The market responded by awarding Apple with a 5.6% gain in share price on the same day that the S&P 500 Index was down 1.3%. This was the fourth consecutive quarter in which the analysts underestimated Apple’s performance.

In this excellent Bloomberg article, Barry Ritholtz documents several failed predictions related to Apple and discusses how the judgment of the analysts is often clouded by their incentives. He cites a 2010 McKinsey study showing that “Analysts have been persistently over-optimistic for the past 25 years, with [earnings] estimates ranging from 10 to 12% a year, compared with actual earnings growth of 6%...On average, analysts’ forecasts have been almost 100% too high.” Clearly, the opposite has been occurring with Apple. It is not difficult to understand how the brokerage firms benefit when their clients become convinced to sell their existing holdings in order to buy the new favorites of their analysts.

Perhaps the all-time worst Apple prediction was documented by our friend Weston Wellington of Dimensional Fund Advisors in this IFA video where he discusses a Money magazine article from 4/30/2004 titled “Why iPod Can’t Save Apple.”

Needless to say, if you had bought Apple at the time that the author was warning you away from it, you would have seen your approximately $13 per share grow to about $840 as of 2/5/2015, after adjusting for the seven-to-one split.

Of course, hindsight is 20/20, and maybe it is unfair to pick on the analysts who have a difficult (or as we would argue, impossible) job. As Yoda said, “Impossible to see, the future is.” The core reason why stock price and earnings predictions are so problematic is not the inherent biases of the analysts or whether they are on the “sell-side” or the “buy-side.” Rather, it is simply that news (or new information) is the driver of future stock prices, and by definition, news is unknowable. We know that sounds facile, but sometimes the simplest truths are the ones most easily forgotten. In a highly efficient market, the best decision for most investors is to ignore the analysts and simply take an appropriate level of risk using index funds.