Friday, April 22, 2011

Pro analysts' "lazy eye" - charted

Sorry for taking so long to post about Apple's fiscal 2Q 2011 results. By now everyone surely has all their answers, so I'll keep it short (and you can get the gritty details in the tables below). Compared to my estimates, a huge iPad miss ($1.6b) partly offset by iPhone upside ($1.1b), among lesser effects, resulted in almost $600m revenue miss. All of it was made up through lower costs hitting operating income within 0.2%, and nailing pre-tax income. Slightly lower tax rate and share dilution than expected resulted in EPS 8 cents (1.2%) higher than expected. All margin ratios were slightly better than expected. Revenue guidance roughly inline but EPS guidance significantly higher than expected, which suggests continued high margins. Here's all the details:

Products Est Act Err Err%
Units(K)     ------   ------   ------   ------
Mac           3,648    3,760     -112    -3.0%
iPod         10,133    9,017   +1,116   +12.4%
iPhone       17,652   18,647     -995    -5.3%
iPad          7,111    4,694   +2,417   +51.5%

ASP($)       ------   ------   ------   ------
Mac           1,295    1,323      -28    -2.1%
iPod            179      177       +2    +1.0%
iPhone          637      660      -23    -3.5%
iPad            626      604      +22    +3.6%

Revenue($M)  ------   ------   ------   ------
Mac           4,724    4,976     -252    -5.1%
iPod          1,815    1,600     +215   +13.4%
iPhone       11,238   12,298   -1,060    -8.6%
iPad          4,450    2,836   +1,614   +56.9%
iTunes        1,707    1,634      +73    +4.5%
Periph          571      580       -9    -1.6%
SW              760      743      +17    +2.2%

P&L($M)      ------   ------   ------   ------
Revenue      25,265   24,667     +598    +2.4%
COGS         14,996   14,449     +547    +3.8%
GM           10,268   10,218      +50    +0.5%
OpEx          2,410    2,344      +66    +2.8%
OpInc         7,858    7,874      -16    -0.2%
OI&E             45       26      +19   +72.0%
Pre-tax       7,903    7,900       +3    +0.0%
Tax           1,976    1,913      +63    +3.3%
NetInc        5,927    5,987      -60    -1.0%
Shrs.           938      936       +2     0.2%
EPS($)         6.32     6.40    -0.08    -1.2%

Ratios       ------   ------   ------   ------
GM%           40.6%    41.4%   -0.78%    -1.9%
OpInc%        31.1%    31.9%   -0.82%    -2.6%
Tax%          25.0%    24.2%   +0.78%    +3.2%
NetInc%       23.5%    24.3%   -0.81%    -3.3%

Guidance     ------   ------   ------   ------
Rev($M)      23,300   23,000     +300    +1.3%
EPS($)         4.60     5.03    -0.43    -8.5%

Although it's good to see AAPL back over $350, the continually declining P/E is a disappointment, unless we get over $400 soon.

As for the analyst smackdown, although the pros' usual bearishness allowed them to edge us bloggers in estimating iPad units (not too hard an accomplishment given our substandard 46% collective overoptimism), we still edged them in every other category and overall error, but most importantly in EPS where our average error was almost 8 times better than the pros.

PED already posted one of my tables and his one-quarter ranking based on mean average percent error (MAPE) so here I'll instead focus on what in my previous post I termed "bias" (algebraically averaging out the errors without taking the absolute value, and thus by including their signs allowing high and low estimates to cancel out and leaving just the net difference), and just for EPS and revenue, and on a cumulative basis since Q2 2008, and only discriminating those analysts participating in at least 4 quarters, the rest aggregated as groups. All of that combined into one single table and one single chart (to compensate for making my previous post so dense). Here's the table, ordered from most bullish to most bearish analyst, and the number of quarters in which they've participated in parenthesis:

Mean Bias (%)
 Revs     EPS  Analyst (#Qs)
-----  ------  ---------------
 3.39    5.99  Mihalache (4)
-0.40    1.52  Dediu (4)
-0.23    0.79  Fosberg (4)
-0.14   -0.53  Hildebrand (4)
 1.28   -2.58  Leitao (5)
-0.74   -1.75  Zaky (12)
-0.23   -3.29  Tello (12)
-0.46   -3.14  Muller (11)
 0.44   -5.25  Other Blogs (8)
-1.19   -3.91  Cabot (5)
-4.48   -9.03  Chokshi (5)
-2.20  -11.84  Cihra (4)
-5.20   -8.85  Marshall (8)
-2.81  -11.44  Abramsky (12)
-6.19  -10.90  Rakesh (5)
-3.63  -14.08  Reiner (10)
-4.91  -12.87  Sacconaghi (11)
-5.87  -12.48  Craig (10)
-4.69  -14.36  Fidacaro (8)
-4.80  -14.33  Moskowitz (6)
-5.47  -13.86  Wu (10)
-5.12  -14.22  Kumar (4)
-5.00  -14.63  Hoffman (4)
-6.47  -13.75  Gardner (9)
-6.10  -14.46  Ghai (4)
-6.91  -15.30  Whitmore (5)
-7.17  -15.16  Fearnley (5)
-7.35  -15.54  Reid (7)
-5.23  -17.80  Munster (12)
-7.17  -16.09  Um (5)
-6.85  -16.94  Huberty (11)
-7.03  -17.33  Shope (6)
-6.88  -17.56  Other Pros (34)
-6.21  -18.32  Reitzes (12)
-8.00  -17.79  Bachman (7)
-8.35  -18.47  McCourt (7)

And here's a cool chart of that, somewhat inspired from one by Alexis Cabot and published by PED here, and which at a glance explains this post's title (and the failpic above). I've singled out all the bloggers (with enough Qs under their belt) but only a few of the best and worst analysts due to space constraints. Click to enlarge:

© Daniel Tello

Update: Huffpost copies takes my scatter chart idea, but just with the latest quarter data, and pours some interactivity over it. Commenters skeptic of a one-time sample remain oblivious of data for 11 more quarters, thanks to shady outdated linkage by Huffpost.


Unknown said...

I'm bothered that the IPad actual number was 4.7 instead of something like 7 M units. Tim says they didn't have a production problem from the earth quake. So why are the numbers so low? Did sales fall off a cliff after Christmas until IPad 2 came out in march?

JavaJack said...

Hmmm, I hate to say I told you so but my comment from about 2 months ago went to the ignore category. I guess we're all such Apple cheerleaders, here, but I asked why there were such delivery problems on ipad 2. There was amazing demand but not many units were moving out the door to customers. This issue did come back to take a bite out of ipad revenue. I do love the fact that Gene Munster was 29th on the list of analysts.

Jared said...

@javajack: I think Apple was having problems ramping up production for iPad 2 even before the Japan quake hit. They can only make the devices as fast as the slowest-sourced component, right? Think about what else this means though: Apple's competitors don't stand a chance component-pricing-wise, with Apple paying billions in cash up-front for huge component deals. Apple foots the bill for Japanese companies to rebuild factories and in return Apple owns the entire component landscape. Not that Apple's competitors are having supply issues with their anemic sales.

JavaJack said...

Jared: I don't disagree with your comments but I don't think Japan was the issue. I saw supply constraints long before the tsunami and I felt it was going to have an impact on how many units Apple sold in the quarter compared to the optimistic predictions of many analysts. I thought my comment went unnoticed is all and certainly who am I to sway any analysts predictions? Otherwise I am in total agreement regarding the quality of product and the feeble efforts of others, especially Playbook, which is such a non starter. I just hope people unable to get their hands on ipad 2's didn't settle for Motorola or Samsung products.

joshdean said...

Perhaps if the iphone 4's release had followed the holiday quarter, iphone unit sales for the three months following the holidays would have been been dramatically lower. As it was, the independent analysts over-predicted q3 2010 iphone sales by 7%. New product transitions are tricky, uncharted waters.

Daniel Tello said...

javajack, no comment goes unnoticed, at least on this blog. Yours was from a month ago.

javajack said...
[...]What do you think of the continuing lines for the ipad 2? Did Apple under estimate the demand or is is the tsunami taking a toll on component supply? Apple's inability to produce enough ipad 1 units hurt the stock somewhat last fall.
March 21, 2011 12:00 PM

It's an objectively unanswerable question (unless you're Apple). No way to prove it either way. You can go with 7m units, as I did, and still have lines (unprecedented high demand), or you can guess 4m units (more normal but still high demand). Either way there's no simple way to tell one from the other.

Today you said, "There was amazing demand but not many units were moving out the door to customers." I don't know how you could tell how many units were moving out the door to customers unless you work for Apple. My only basis for estimating high sales is public information, anecdotal information, and my intuition.

I saw iPads (1s) in the wild everywhere I looked; I saw Windows diehards giddy as I've never seen them; I saw the user satisfaction -every single case so 100%; I saw elderly people, kids, office workaholics, artists, business travelers, consumer segments as varied, dissimilar and broad as I've never seen adopt a product so closely and intimately into their lives, all of them naturally swiping on their iPads as if they'd been at it for years and years, like second nature.

This is what I based my estimates on. It was no surprise to me that there were lines, that Apple couldn't ramp up within a couple of weeks to right away satisfy the eventual hundreds of millions in demand. I thought it was a testament to the product appeal that people were willing to line up in the morning every single day, behavior suggesting they just couldn't wait a month for online delivery.

Given this, I wondered if these big daily lines were actually just a minority, the tip of the demand iceberg, as it seemed much more sensible to me to order online. I thought if that was the case, then surely iPad 1s must still have healthy demand as well. It's not that big of a product gap in between, especially for this really broad and mainstream consumer segment.

So I assumed a similar sales rate for just iPad 1 as the previous quarter, which over two months suggested 5m iPad 1s. Adding 1.5-2m iPad 2s seemed conservative. I naturally extrapolated this shopping behavior as extremely high underlying demand, and Apple would certainly have seen this all of last year, and so I thought they'd plan, back in Nov-Dec, to build at least 5m more of the original and 5m of the new one, half of those built for this quarter.

It's not a question of being supply constrained or not. It was a known fact they were supply constrained, from seeing the lines. What's not immediately evident is how many units are going out the door. If you saw say 80% of people in your local store being turned back, day after day, and only half a dozen lucky ones getting iPads, maybe you had a glimpse of it. But that isn't what I read in most anecdotal accounts. I read about hundreds of people in line, most of them getting their iPads (many times 2 units) after patiently waiting for an hour or so.

The question to me was, how many could Apple have planned, and how many were then produced (considering possible disruption in the supply channels). This is what I based my estimates on, not counting boxes on one particular day and one particular store. I don't think I was being "such an Apple cheerleader" as you say. IMO it was a conservative estimate (several others were thinking 8-9m units). In hindsight, it obviously was not conservative, and I'm sorry for letting you down.

Anonymous said...


If you are suggesting that Apple experienced significant unforeseen iPad 2 production delays after issuing its fiscal Q2 guidance in January and before the tsunami you are likely mistaken. Apple beats its guidance by a fairly consistent percentage and although fiscal Q2's revenue beat wasn't quite as big as usual of late it was still within a normal range. Sure, they may have experienced some delays after issuing guidance but I don't think it was a big deal. There is very clearly crushing demand for the product. TC spelled it out pretty clearly on the call and you can see it around you everywhere you look. Q2 no longer matters. TC said they would produce a lot this quarter and I tend to think it means 9M units will be sold. Apple's guidance also suggests this will be the case. GM% is coming down a bit sequentially per PO's guidance which tells you mix is shifting toward lower margin products (e.g. iPad).

Regardless of what you think of Deagol's iPad estimate, he has been phenomenal over the years and I suspect once iPad production gets humming his estimates will be a lot more accurate.

JavaJack said...

Wow! sorry to upset everyone. Not my intention. To really simplify my position... first I said we are likely all Apple cheerleaders here, well I certainly am one myself and I wasn't referring to the author of the blog. Secondly I was simply stating that from my reading and observations I was concerned that the ipad 2 numbers from most of the analysts might be high. I received no reaction at the time. Again I was not being critical of the blog author. I bow down to Deagol and his incites and wealth of information. I check in all the time to see what he has next. I am an official follower so don't get me wrong. Certainly the most reaction I've ever received from a comment. I run a business. On an annual basis I guess wrong at lots of things but I don't post a blog so nobody to give me heat but myself. Cheers.

Daniel Tello said...

No offense taken javajack, not upset at all and apologies if my explanation seemed defensive. Just thought it'd help to share some of the thought process behind my estimates, which always carry considerable uncertainty like any other business forecasting, as you mention.

Despite the big miss in one product, Apple still ended up a few cents ahead of my bottom line. If I had estimated 5m iPads, all other things being equal, my EPS estimate would have come out at $5.93 or more than 7% below actual instead of 1%. I probably wouldn't have had the confidence to hang on through those couple of days below $326 while expecting EPS below $6, hoping to get back in near $300, and I would've missed the train.

Of course I want to see healthy unit sales in all products, and this is no doubt a temporary setback in iPads. But earnings is what should drive the stock and I'm glad I got that one right.

I know you're a big supporter, and I greatly appreciate it. This is precisely why I took the time today to throughly respond to your concerns. Please keep sharing your thoughts as such feedback is a significant input for my decision making process in coming up with my estimates.


JavaJack said...

Excellent! I was afraid to tune in again, sensing someone might be hunting my head. LOL. Really appreciate your response, Daniel. I have said before, I hate the time between Apple earning reports because there's not likely anything here to read and I always have an appetite for what you have to say. Keep up the great work and thanks again for your understanding and for your ongoing work.

Dennis Hildebrand said...

Excellent scatter chart Daniel... That's pretty cool seeing Hildebrand so close to the bullseye! This was a really tough quarter to project (as you know). It's been really challenging to be involved with this class of competition.... One thing that I can say for sure - hanging out and competing with you guys, and the AFB has made me much stronger at analyzing and picking stocks - To me that's the bottom line.. I really just want to make money in the stock market... but in participating in this event... I have to study, and in that studying... I learn, and pick up new things, and tidbits of information that I would not have otherwise.. it's the published accountability factor that makes me try that much harder...

Keep up the great work..

Roy in San Jose said...

Anybody have any thoughts on what's happening to AAPL stock price? It is sickening to see AAPL selling off steeply from already deeply undervalued prices.

It is tough to focus on products, units, revenues, etc. for the rest of the year and next year, when the stock keeps languishing, while AMZN, NFLX, OPEN, CMG, CRM, etc. continue to defy gravity at preposterous multiples.

It looks like the stock is being massively manipulated, perhaps by the hedge funds who underwrite the weekly options, as mentioned in a couple of articles recently.

Perhaps Apple should announce a 4-1 stock split or share buy back?! I cannot imagine Apple employees and executives enjoying this bumpy ride to nowhere, either.

This is unreal. I've been investing for 20+ years, and in all that time, I've never seen anything like what has been happening with AAPL for the past 7 months.

Daniel Tello said...

Roy, I feel your pain. All I can say is... be patient (I realize it may sound like false hope).

Here's a theory. As we all know, Apple's recent top and bottom line growth whups that of the P/E high flyers you mention. But what about future growth? Well, we all have our thoughts and different opinions about this but most of us with common sense acknowledge the impossibility of continuing forever with 70-90% growth. So we accept it must slow down over the next few years and settle at some sustainable rate. The optimists may say it's more like 30-40% forever, while some of us more conservative supporters see a period of about 2 years at that rate (or higher), then 3-5 years at 20-25%, and perhaps around 15% after that, even baking in more revolutionary products every 3-5 years.

That is all debatable. But in any case, we all agree a below 16x multiple is unwarranted right now with at least 5 years of strong growth still ahead (not to mention it ignores the cash at hand).

And yet, when you take a look at what WS analysts (according to Yahoo Finance) are expecting for AAPL and some of those other companies' bottom line growth next year, a pattern emerges:

Symbol, Y/y EPS growth %, P/E
AAPL, 16, 16 (!)
AMZN, 54, 81
NFLX, 46, 76
OPEN, 42, 125 (ok this one really stupid, as well as CMG and CRM)

The point is, it seems the market simply doesn't care about analyst's track record of consistently being wrong on AAPL's financial performance and insists on this silly notion that the law of large numbers must take effect right now, next year. Until analysts don't get proven wrong and start revising future growth estimates, then we're stuck at whatever silly multiple they're happy to give MSFT or ORCL or other "comparable" large caps.

They can of course continue to peg next year's growth at a safe guess of 15% forever, but they can't deny the past. So to merely maintain the 16x multiple, with each successive beating on EPS the stock would have to rise anyway (and handsomely given the size of the beats), and eventually after the slowing of growth is behind us, the multiple might reflect a fair value (my model says after 5-7 years of this and AAPL worth over $1000). Much sooner if the cash gets priced in.

Anyway, it's interesting that the current multiple is exactly the same as next year's ridiculous growth estimates. I do think WS will come to it's senses over the next quarter or two and price in closer to 20% future growth, and the multiple expansion might lag another quarter. Just my opinion, but I'd hang in there, if not add.

Roy in San Jose said...

Hi Daniel, thanks for your comments – I fully subscribe to them, of course. The stock should have been well over $1000 for the past six months. However, even with the spineless estimates from WS analysts, the average target price for AAPL is $446, which is 40% higher than where it is today.

I think there are three really important problems with this stock.

#1, amazingly, a lot of even "experienced" investors think the stock is expensive. Every time I hear some moron on CNBC say it is expensive, I feel like tearing my hair out. But the fact is, the number looks scary to a lot of people. BIDU shot up to $150 after a 10:1 stock split, but I doubt it would have gone to $1500 without a split. Mathematically meaningless, but psychologically very important, I think.

#2, there is something very artificial about the way AAPL trades. Somebody is playing the stock like a yoyo. It is not logical for AAPL to suddenly drop $10, then suddenly rally $10, as it did yesterday. Then it gapped up today, then dropped $10. Each of these swings was a $9+ billion change to the market cap, and with a stock as liquid as AAPL, it takes a lot of shares to cause a supply / demand imbalance to effect changes of such magnitudes. That takes a LOT of capital, and if those trades are all real, somebody is surely making or losing huge amounts of money.

#3, the engineering of the stock to converge to the max pain point based on the weekly options expirations. Today, for example, with RIMM falling apart, and the markets generally up, supposedly encouraging news on Greece, etc., it made no sense why AAPL would be down $5. But for this week, the max pain in terms of options expiration was at $320, which is exactly where it closed at today.

I think #2 and #3 above are enabled by #1 – manipulating a stock price becomes easier when hedge funds have a high level of confidence that in the big picture, the stock price is range bound, and isn’t going anywhere.

I have always dismissed stock splits as pointless, and I would not have believed I would be saying this, but I am now beginning to agree with the people who are calling for a 10:1 stock split. Or at least a 5:1 split. As somebody wrote in a column this morning, at $32/share and a fwd PE of 9 (net of cash), AAPL would look like a value stock.

There is always some reason to sell a stock, even indiscriminately, but buying is always a deliberate process. Right now, the problem is, AAPL is becoming a source of funds. Supply far exceeds demand because AAPL price is perceived expensive.

My biggest fear for AAPL is that it could stay stuck in a $300-350 price range for years – all one has to do is see Wal Mart stock price: it has stayed flat in the $40-60 price range for over TEN YEARS!


Roy in San Jose said...

Sorry if I am posting too much, but I could not help shake my head in disbelief at this supposed analysis devoid of any depth or comprehension.

AP pays people like this money to write material like this? Wow, I should contact them on Monday and see if I can get a job. I am capable of cranking out a couple of “articles” like this per hour, with the same level of insights.

Here’s a beauty: “For the average investor, that could mean danger ahead. Stocks already have fallen nearly 7 percent since their April peak. That's not far from the 10 percent mark that signals a correction. Suddenly gloomy analysts could push it the rest of the way.”

So, if I understand it right, this guy is telling everybody to sell now, after taking a $7 haircut on their $100, because there’s a risk they may lose $3 more. Wow. Where was he BEFORE the 7% drop?

Now here is the comment about Apple: “One stock to watch: Apple Inc. The i-everything maker is expected to report in mid-July. The stock could fall if the economy continues to slow and consumers cut spending on its products. Apple products are generally considered recession-proof. Still, after a stock climb of 22 percent in the past year, you'd think there'd be a few doubters about its ability to rise further. Not exactly. Among the 45 analysts covering the company, only one is suggesting you sell, according to FactSet.”

Amazing. It shows the complete decoupling between perception and reality. Anyone with more than a double digit IQ that follows Apple would be asking why the stock wasn’t up 50% or 75% or even 100% above its one year ago price of around $260. This guy is lamenting that after a 22% climb, there aren’t a lot of analysts with a sell recommendation on AAPL.

Has he taken a look at NFLX or AMZN?

He goes on to say: “If Apple's revenue or profits come in low, not only would that make analysts look flatfooted, it could spread jitters among investors. That, in turn, could pull other stocks down.”

Wow, can you believe this empty wisdom? The bottom 26 pro analysts in the list above (in red) missed Apple’s earnings by an average of -14.5%, a consistent pattern for at least 2-3 years now. Even if Apple were to report a 10% shortfall in EPS, it would be still be way above the average WS analyst consensus.

The poor quality of some of the stuff out there is truly appalling.

Here is the link to the full article:

Daniel Tello said...

No, you're not posting too much, rather, not enough! Although I think for now we preach to the choir, I hope through the insistence of highlighting all these unquestionable data, guys like Dediu and Leitao and Zaky and me, with the help of PED and others who've been aware of the truth for a while now, we might eventually overcome the mainstream perception that what pro analysts predict is generally expected to happen, and that our work is amateurish, or a little "experimental," or too avant-guard, for mom and pop investors' pension funds.

Yet I'd be content with having contributed to the wealth of just a few who were willing to see. I'm confident AAPL through its earnings performance will eventually rise to a fair valuation, with our help or without it. The skeptics will always say it's too expensive, even after being proved wrong time and time again. They'll just watch it pass by them, and perhaps only much later they'll want to buy AAPL at $1000 (most likely through their pension funds, not directly).

Disruption doesn't occur once the mainstream jumps on the bandwagon, but rather, despite it remaining on the sidelines.

JavaJack said...

Thanks for your post, Roy. Interesting reading and as confirmed by Deagol, post more. This blog is my touchstone for real commentary on AAPL (by the way AAPL is the license plate on my car...true story)I've commented to Daniel in the past that I wish there was more discussion between earning periods, so I crave reporting periods when I can read lively discussion about our favourite stock.