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Outsized expectations bite Apple

July 24, 2012|By Jon Healey
  • Apple Chief Executive Tim Cook, speaking at the World Wide Developers Conference in June.
Apple Chief Executive Tim Cook, speaking at the World Wide Developers Conference… (Justin Sullivan / Getty…)

Here's one aspect of Steve Jobs' legacy that Tim Cook, his successor at the helm of Apple, must be hating Wednesday: the company's reputation for lowballing its sales and profit estimates.

The company found itself in the odd position of reporting better results than it had projected -- and, more objectively, higher quarterly sales and profits than the year before -- yet having its stock hammered in after-hours trading. Why? Because analysts had predicted much higher sales and profits, and thus were surprised and disappointed.

Investors tend to base their decisions on the projections rather than waiting for the official earnings release, so if the actual numbers come out lower, the stock can suddenly seem overvalued. That's what causes a quick sell-off, as Apple experienced Tuesday.

The company had predicted $34 billion in revenue and $8.68 in earnings per share, which was less than it actually reported: $35 billion in revenue and $9.32 in earnings per share. So why did so many analysts -- all 42 who track Apple's stock -- disregard the guidance Apple offered in its previous earnings call?

Because under Jobs, the company was notorious for giving guidance that was so low, its actual results would look sensational. It consistently outdid its projections and typically blew by Wall Street's expectations as well. 

One might argue that the villain here is analysts' demand for any kind of guidance. But I can think of at least one reason for providing it: to have share prices reflect company performance accurately day in and day out, not just when earnings are reported. And Apple's habit of providing "comically low" guidance has finally come back to bite the company, despite its remarkable ability to create and sell smart devices.

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